MNI INTERVIEW: Weakening China To Weigh On RBA Board

China’s slowing and uncertain economy and the knock-on effects on Australia's growth outlook by lowering bulk commodity prices will add pressure on the Reserve Bank of Australia to keep rates steady at its 5-6 August Board meeting, a former RBA economist has told MNI.

Martin Eftimoski, a former RBA China specialist, said many market economists failed to understand China’s importance in the RBA’s thinking.

The proportion of Australia’s GDP that is dependent on China – the world's second largest economy buys almost a third of Australia exports – differentiated it from other developed countries and would drive divergence between its economy and other developed peers, he said, for whom market and other economists focused heavily on interest and exchange-rate differentials, particularly as other countries contemplated easing.

IRON ORE TROUBLE

Iron ore and coal prices are likely to fall, even if Beijing undertakes significant stimulus, due to China’s large stockpile of bulk commodities, according to Eftimoski.

The Australian Treasury in May predicted iron ore prices would fall to USD60-70 a tonne by March 2025. The commodity closed at USD106.59 on Monday, down from USD113 recorded in early July.

“Iron ore looks like it's got a lot of headwinds in terms of supply and demand and coal also looks like it has structural headwinds,” he said, noting elevated prices reflected the market’s belief that China may commit to greater stimulus.

However, the conclusion of Beijing’s recent Third Plenum is thought to have fallen short of delivering significant fiscal support. (See MNI: Further Easing To Boost Property After China’s 3rd Plenum)

Eftimoski, who is head of research and acquisitions at property development and construction company Eternal Homes Projects, maintained that China’s bulk commodity buying, which had propped up prices, was unsustainable. “We may have seen the best of that go through,” he added. “That general weakness will weigh on the RBA decision, independent of what the CPI print actually says.”

RBA JAWBONING

The Australian Bureau of Statistics published Q2 CPI on Wednesday, which printed in line with expectations at 3.8% y/y. A strong print could have forced the RBA board to hike the 4.35% cash rate a further 25bp, according to some former staffers. (See MNI: RBA Risks Credibility, Next Rate Call Unclear-Ex Staffers)

While the RBA board has placed a lot of focus on the CPI print, they are likely to opt to stand pat next week, Eftimoski underlined. “People overestimate the probability of a hike and really underestimate how much China's weighing on the Bank," he argued. "[Australia]’s situation is rapidly diverging from the U.S. because of our China exposure and a lot of the commentary here is underestimating how much China weakening is dragging on the RBA decision.”

How the RBA presents terms-of-trade or exchange-rate concerns within its communications next week will illustrate its view on China, Eftimoski pointed out. “[The] base case is that the Bank will hold and jawbone a bit more, and ultimately end up with delayed cuts into next year,” he added. “If the Bank raises, it is probably going to end up being a policy mistake.”