China Boom Mark II, and the Rising Australian Dollar

China Boom Mark II, and the Rising Australian Dollar, by Greg Canavan.

Wow! Iron ore staged its biggest rally ever yesterday evening. The priced surged nearly 20% to around US$64 per tonne. That is incredible! What caused the rally?

Well, you can put it down to China doing what every other nation is doing. That is, opting for the same old growth policies that got it into trouble in the first place, at the expense of difficult but necessary reforms.

China is going to manufacture new money, by lowering interest rates and whatever else it takes, to stimulate growth of the economy. The side effect will be debt, because money is created as debt — a new bank loan creates new money, and matching debt.

In other words, China will go for growth at any cost. It will continue to accumulate debt to do so, and continue to create financial system risks in the process.

Chinese debt levels are already very high:

But, whichever way you cut it, at some point high debt levels will catch up with you. China seems to think it can grow out of its debt problems. That assumption will be put to the test in the next few years. In my view, it’s already in too deep.

And for Australia, Chinese growth means more steel production, which pushed up the price of iron ore, which is responsible for the current surge in the value of the Australian dollar.

The rising price takes pressure off the [Australian Federal] budget and the persistent decline in national income.