Chinese data points hint at growth recovery, how does it impact Australia?

Summary

• China’s economic recovery gained momentum as retail sales rose 0.5% in August, the first time in 2020, with improvement in investment, exports, and industry.
• China’s unemployment rate declined to 5.6% in August from 5.7% in July, but pressure on employment remains high, given a large number of fresh graduates in China.
• Trade tensions between China and Australia have been rising with China being persistent in attacking Australia by targeting the country’s exports.
• Positive Chinese retail sales and industrial production data propelled AUD/USD to trade at USD 0.7338, increasing by 0.50%, at the time of writing, which could be hampered due to rising trade disputes between the 2 countries.

Retail sales of China rose for the first time in 2020 in August as consumers increased spending. The recovery process of the Chinese economy has been gaining momentum amid revived demand, resilient exports, and rapid government stimulus measures after suffering from the coronavirus jolt.

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The Retail Sales numbers released by China’s National Bureau of Statistics (NBS) on 15 September showed improvement in retail, industrial output and investment as the country continued its efforts to take step towards recovery.

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The data revealed that retail sales increased by 0.5% in August compared to last year and stood at US$495 billion.

Some of the highlights of China’s statistics for August shows the following:

• Retail sales went down 8.6% for the first 8 months of this year compared to a year ago, while online retail sales of physical goods increased by 15.8% during the same period.
• Sales of communication equipment and autos grew 25.1% and 11.8% respectively, versus one year ago.
• Private-sector fixed-asset management dropped by 2.8% between January-August, versus a 5.7% fall in the first 7 months.
• Property investment increased at the highest level in the past 16 months in August.
• The decline in fixed-asset investment decelerated in August, dropping by 0.3% in January-August of 2020 from last year, compared to a bigger 1.6% fall in the first 7 months of 2020.
• Industrial production grew 5.6% year-on-year during August, up from 4.8% noted in July.

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China has also been putting extra efforts to urge its exporters to aim for its huge domestic market as the global demand is likely to stay gloomy, as its major trading partners continue to struggle to contain the virus.

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Louis Kuijs, Economist at Oxford Economics, stated that the economic recovery of China holds a solid base now and must persist in Q4 2020 and 2021, with robust growth in investment, steadily rising consumption, and buoyant exports.

However, Fu Linghui, NBS spokesperson, noted that a large number of fresh university graduates of China are still a reason to worry about. He also added that the employment and business stability are a cause of concern amid growing uncertain environment, globally along with noticeable domestic structural problems.

The surveyed urban unemployment rate dropped to 5.6% in August, a fall of 0.1 percentage points from July.

However, as per analysts, the unemployment rate does not depict the accurate employment scenario as it covers only a certain segment of the urban population. The actual unemployment level is likely to be much higher with the major coronavirus induced blow borne by smaller businesses.

Escalating trade tensions between China and Australia

Tensions between Australia and China started when Australian Prime Minister called for an international inquiry into the origins and early handling of Beijing’s coronavirus outbreak in April and suspended extradition treaty with Hong Kong in response to national security law imposed by China.

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China began the trade dispute by banning beef from 4 firms and imposed a steep 80% tariff on Australian barley based on the allegation that Australia subsidised its farmers and sold barley below the cost of output.

In July, the Chinese government also issued a travel warning for students and tourists stating that Chinese citizens must take extra care of the local security risks and be careful about travelling to Australia in the upcoming period.

TO KNOW MORE, DO READ: How can Australia be impacted by China’s ban on Australia’s biggest grain exporter?

Later, China’s Commerce Ministry initiated a 12-month investigation into wine exports of Australia in August amid allegations that Australian producers have been dumping into the Chinese market at unnaturally low prices.

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On 31 August, Beijing raised the stakes in attacking Australian exports by a move to defer purchases of barley from Australia’s largest grain exporter, CBH Group. The dispute was further fuelled recently, when China’s General Administration of Customs levied greater inspection measures on export of Australian wheat.

AUD gains amid positive economic data of China

On 16 September 2020, at the time of writing, AUD/USD was trading at USD 0.7338, up by 0.50% due to better than anticipated Chinese retail sales data and industrial production figures for August.

China is one of the key trading partners of Australia that buys the majority of Australia’s commodity products. The deteriorating relations between the 2 countries could dampen the overall effect of positive economic data on Australian currency.

Further, the demand for iron ore, Australia’s most valuable export commodity, in China has bounced back strongly since April as mills increased steel output boosted by government’s push towards infrastructure-led stimulus actions. This could further help the Australian dollar to gain.

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However, a fall in demand for iron ore and any retaliatory actions taken by Australia could obstruct the performance of the currency.