August 21, 2023

(AUSTRALIA WEIGHED DOWN BY A FALTERING CHINESE ECONOMY)

August 21, 2023

Hello everyone,

The Australian Dollar has been tumbling recently –down from 68.8 U.S. on June 15 to 64 U.S. last week - and this is a direct reflection of growing anxiety about the global economy and the financial markets.

These concerns are primarily centered around the health of the world’s largest economy, China. New construction starts (or new buildings) fell 24.5% in the first seven months of the year.
Property prices in some areas have “crashed”, down by 25% from their October 2021 highs.
Prices are falling as demand slides, and that’s weighed against enormous levels of debt held by property developers and asset managers.

Asset manager Zhongzi and property developers Country Garden and Evergrande are all showing signs of financial stress. Evergrande filed for Chapter 15 Bankruptcy in New York on Friday, - this move protects its U.S. assets while it seeks to negotiate with its creditors.

On Friday, last week, China’s central bank intervened to support the local currency, the Yuan – a move to stabilise its economy. According to Westpac senior currency strategist, Sean Callow, China’s central bank allows the yuan to trade +/- 2% each day either side of its fixing rate.

The Chinese economy is looking the weakest it’s been since COVID, including slipping into deflation. The Australian dollar is out of favour as global investors buy up the U.S. dollar.

U.S. interest rates, China’s fragile property market and the RBA’s comments on inflation are weighing on the Australian dollar. We could see 0.62 in the Australian dollar before this slide is over.

An uncontained financial crisis in China has the potential to sideswipe the capacity of both the government and asset-rich Australians to spend. It would also obliterate Australia’s export sector. If this happens, a deep local recession is a possibility.

The next few months see shares at high risk of a correction given high recession and earnings risk, as well as the risk of still more hikes from central banks and poor seasonality out to September/October.

The health of China’s economy could determine whether a recession is on the cards.

Have a good week.

Cheers,
Jacquie

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