China's hunger for our commodities eases


CHINA'S weakening demand for commodities could affect Australian Treasury forecasts.
The latest data shows import growth -- including iron ore -- is falling back, with exports predicted to soften in the second half of the year.
China's global trade surplus rose to $US28.7 billion ($31.4bn) in July, from $US20.02bn in June, surpassing economists' expectations of a $US19.6bn surplus, the highest since January last year, when it was $US39.11bn.
The nation's imports rose 22.7 per cent compared with last year, down dramatically from June's 34.1 per cent increase and well below market expectations of a 30.2 per cent rise, while exports grew 38.1 per cent, exceeding expectations but slower than June's 43.9 per cent.
Iron ore imports were down 12 per cent compared to the previous year, with copper down 16 per cent, aluminium falling 70 per cent and oil 3 per cent lower, as auto sales slowed and the government announced plans to close 2000 heavy industry plants by the end of the year.
"For Australia, the key data from today's Chinese trade statistics is the 12 per cent over-the-year decline in iron ore import volume," Stephen Joske, head of the Economist Intelligence Unit in Beijing, told The Australian.
"The figure is a little better than it looks as we are coming off the sugar rush of China's massive stimulus in 2009, but there is no doubt the Chinese economy is slowing mildly and this is being reflected in weaker growth and weaker demand for Australian commodities in particular.
"This trend is likely to develop in coming months and be reinforced by poor growth figures in most major economies. So there is considerable downside risk to commodity prices now."
A further worrying sign for resources producers was that the moderation in car sales continued to ease off, rising 14 per cent year-on-year in July to 1.2 million, down from 19.4 per cent on-year growth in June. According to the China Association of Automobile Manufacturers, month-on-month sales were down 11.9 per cent from June, with 10.3 million units sold so far this year in the world's biggest auto market.
"Commodity imports are broadly slowing on weaker demand and inventory adjustment," Royal Bank of Scotland economist Ben Simpfendorfer said. "Non-commodity imports are slowing on softer export processing. The trends are echoed in weaker imports from both commodity and non-commodity producers.
"The seasonal rise in the trade surplus during the remainder of the year, and expected slowing in year-ago export growth is unhelpful for foreign exchange policy. The two . . . will add to Washington's insistence on a stronger yuan and Beijing's resistance."


Federal Reserve keeps stimulus tap running

THE Federal Reserve has moved to prevent its huge balance sheet from shrinking, in an attempt to spur the US recovery and avoid deflation.
At the end of a policy-meeting today, Fed officials said they would reinvest the proceeds from expiring mortgage-backed securities into longer-term US Treasuries.
In the closely watched statement that followed the meeting, US central bank officials acknowledged that the pace of the recovery had slowed in recent months.
While the Federal Open Market Committee expects the gradual improvement in the economy to continue, officials said the "pace of the economic recovery is likely to be more modest in the near term than had been anticipated".
Since Fed officials last met on June 22-23, signs have been growing that the one-year-old recovery from the worst recession in decades is losing momentum.
The economy shed jobs for the second month in a row in July amid a small rise in private-sector employment. The unemployment rate remains painfully high, providing little hope that Americans will boost shopping again any time soon.
With unemployment still so high, some officials had started to worry the economy runs the risk of falling into a Japan-like deflationary environment if no action was taken.
The latest move by the US central bank represents just a tweak in its strategy for managing its huge portfolio. But it's a significant one since it could be a step towards new large purchases of both government bonds and mortgage-backed securities.
Currently, the proceeds of expiring mortgage bonds are not being reinvested, with the result that the Fed's balance sheet would have slowly shrunk over time. This amounted to a slight tightening bias in the policy stance.
Michael Feroli, economist at JP Morgan Chase, said the Fed's latest move indicates the central bank is "very concerned about the sustainability of the recovery".
The Fed's decision to purchase longer-maturity Treasuries as opposed to shorter-maturity debt indicates the central bank is comfortable with a larger balance sheet for longer, said Dan Greenhaus, economist at Miller Tabak & Co.
Some Fed officials have reservations about restarting full-blown asset purchases because they're not sure they can drive down long-term rates further from already-low levels. Average rates for a 30-year mortgage fell last week to 4.49%, according to Freddie Mac, the lowest rate since the 1950s. Holding many more securities could also cause problems further down the road.
In response to the economic crisis, the Fed bought roughly $US1.7 trillion ($1.9 trillion) in mortgage and Treasury debt in 2009 and earlier this year. The program is estimated to have cut long-term rates by around half a percentage point, although Fed officials are divided on its effect.
The Fed had an incentive to move early because deflation is harder to fight than inflation, especially now that short-term interest rates are already close to zero. When there's inflation, a central bank can at least raise rates as high as needed to counter rising prices.
A new Wall Street Journal survey found that by a two-to-one margin, Wall Street economists see deflation as a bigger threat to the US economy over the next three years than inflation.
The previous April survey found economists were split 50/50 over whether inflation or disinflation posed the bigger risk over the next year.
The Fed also reiterated that it expects the benchmark short-term interest rate it uses to steer the economy to remain close to zero for an extended period due to low inflation and high unemployment.
Kansas City Fed President Thomas H. Hoenig was once again the only dissenter out of the 10 voters at the Federal Open Market Committee meeting.
He voted against the central bank's decision for the fifth time this year, arguing that the economy is recovering modestly and that the pledge to keep rates near zero for an extended period limits policy flexibility.
Fed vice-chairman Donald L. Kohn participated in what is likely to be his last FOMC meeting. He's been the second-highest-ranking Fed official since June 2006 and has been working at US central bank for some 40 years.
Mr Kohn is due to be replaced by San Francisco Fed president Janet Yellen, who was nominated by the White House but is awaiting confirmation from the Senate, along with two other Fed board members.