Watching China from Australia

 | Nov 07, 2011 | 11:00 AM EST  | Comments
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When market mavens discuss China's economy, they tend to use the terms "hard landing" and "soft landing." At first, I went along with the cool crowd in thinking I knew the precise definition these terms as they were applied to potential outcomes of the communist country's economic growth.

"Hard landing" conjures up mental images of a plane going from an altitude of 20,000 feet to nose-diving and causing a fiery mess two seconds later. As for "soft landing," I have tended to visualize a feather falling from the sky and gently resting on the grass for a child to pick up and excitedly present to Mom. Hey, after the equivalent of 63 dog years in the market, nobody said I was playing with a full deck!

Really, though, in the economic realm, these terms means nothing, for there is no precise definition. In hindsight, I feel foolish for even uttering the terms "hard landing" or "soft landing," because they have no beneficial value to clients who need clear, actionable information to base their investment decisions upon.

Does a China economic hard landing equate to a swing in its GDP growth rate from the current 9% plus a quarter to 5% by the second quarter of 2012? That outcome would satisfy the mental vision I noted earlier, but in real life it is unrealistic in that type of short time span. Does a soft landing imply China's economic growth rate shedding 0.1% per quarter into 2012? Also, what time horizons are being assumed here for these occurrences? When could we confidently return to saying that China is growing, without the use of the "landing" buzzwords?

Since I lack any answers to most of these questions, and I am a reasonably smart fella, it's important for investors to pay careful attention to the economic clues arising from countries that are tightly correlated with China's well-being. In this case, I reference Australia, where the market will receive reads on bank lending, business confidence and unemployment this week that should help to shed light on China, and on the country's dealings with the troubled European Union.

After the Australian central bank's reduction in the benchmark interest rate last week for the first time in two and a half years, data from Australia are now front and center. Remember, Australia was ahead of the curve on hiking rates in 2009, correctly predicting that inflation would return as the global economy sharply recovered from the financial crisis.

Now, however, the Australian central bank not only hinted at a de facto easing cycle but stated that "downside risks" are prevalent in an economy that is slated to expand by a "normal" 4% into mid-2012. Since exports to China represent 25% of Australia's total exports (and exports to Japan around 19%), surely the interest rate chop comes at an interesting point.  Economic clues on Australia have begun to trend into the worrying column, as job notices have fallen for four straight months, unemployment is projected to rise to 5.5% by mid-2012 (the highest level since late 2009), and the construction sector has weakened.

Although Australia's September retail sales were generally embraced by economists, as they were in line with consensus, in my view the print may constitute a short-term peak, given other macro variables. By most accounts, the very important mining sector in Australia has held firm in the second-half 2011 global growth slowdown story, but murmurs of a bust have intensified, and the ASX index is still off nicely from its apex this year.

It's not enough for you the investor to whip out nerd-developed economic terms and toss them about with reckless abandon. We need underlying definitions that aid in the development of a macro thesis. A balance sheet is clearly defined -- ditto an income statement. No-go on "hard landing" or "soft landing," so do me and your portfolio a favor by jotting down notes on Australia's economic data this week. By doing so, the odds are in favor of avoiding any "crikey!" moments down the line.

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