Yesterday, you’ll recall, we set out a clear path toward a year-end ASX/200 close of 7,000. Granted, it was a bit vague and we omitted some details. So after clicking the “send” button, we dug into some research about the actual composition of earnings on the local market. The conclusions are surprising.
But first, we may have jumped the gun and forgotten the complete havoc that results from volatility emanating out of China. The Chinese economy red-lined it in the first quarter, growing at nearly 11.1%. “This economy has not landed—it has refueled in mid-flight and his flying higher again,” quipped Stephen Green of Standard Chartered Bank in Shanghai, via today’s Financial Times.
These numbers did not reassure markets that Chinese resource demand would carry global economic growth for the rest of the year. Instead, they alarmed markets that Chinese authorities would take more steps to slow down growth before it gets well and truly out of control. The idea that Chinese officials are actually controlling the growth of an USD$700 billion economy with pinpoint precision is, of course, retarded. Chinese officials are riding the tiger, and barely holding on.
Chinese inflation ran at 3.3%…in the month of March alone. Authorities have already tried raising interest rates and reserve requirements at banks to quell the economy’s growth rate. But it’s like a run away red flu has gripped the Middle Kingdom. But then, that’s what happens in a “Melt Up,” isn’t it?
Markets sold off on the fear that credit conditions would tighten. At least that’s what we read. We don’t really believe a word of it. China has been gunning it since 2003. Cooling off periods are more like speed bumps in the road that the Chinese economy rumbles over at break-neck speed. Occasionally, passengers lacking a firm grip will be ejected from the vehicle, likely suffering severe capital injuries or badly frayed nerves. But Aussie resource companies are not less attractive when China’s economy grows at 11% in one quarter.
The Daily Reckoning Australia