China leaves Australia at the coal face

Two main stories are dominating the headlines in Asia this morning. Firstly, China appears to have verbally enacted a ban on Australian coal imports. Second, China’s Balance of Trade collapsed to USD37.0 billion in September, driven by an enormous spike in imports in US dollar terms. That said, Asian markets are cautiously subdued today, with continued wariness about presidential tweet risk after a powerful overnight session on Wall Street. Note that Hong Kong markets are closed this morning due to a tropical cyclone and could remain closed for the rest of the day.

Regarding the alleged coal export ban from Australia, this is not China’s first time using this tactic. Verbally banning coal imports and not putting it in writing conveniently avoids a trip to the WTO. China has used this tactic before to protect domestic prices and the local industry. As Reuters is reporting, China’s primary source of overseas coal is Indonesia, and it has been paring back imports from there also in recent times. It is, therefore, too soon to assume that this is a new front being opened by China in their ongoing diplomatic spat with Australia. That will only reveal itself in the coming months.

China is a massive customer for Australian coal grades, around 20%. But from a GDP perspective, coal makes up only 0.70% of Australia’s GDP. About the same amount as education and agriculture. Other Asian nations are equally rapacious consumers, so this is not the end of the world for Australia, and likely explains its non-impact on local financial markets today. Australia’s two main exports, iron ore and liquified natural gas (LNG), remain untouched and the formal, in particular, is not replaceable by China. Today’s news, therefore, represents a skirmish and an artillery exchange against a backdrop of ongoing tension.

China’s September Balance of Trade in US dollar terms has raised eyebrows this morning. The September surplus fell to USD37 billion from USD60 billion expected. Exports rose by 9.90% YoY in September, but it was import numbers that shocked. Imports rose by 13.20% YoY in September versus market forecasts of just a 0.50% rise. A stronger yuan versus the greenback has played its part, but most of the jump appears to be due to massive increases in iron ore, copper ore and oil imports.

Low oil prices have likely encouraged Chinese buyers to buy stocks for storage. Conversely, high iron and copper ore prices have made those imports more expensive in US dollar terms perhaps skewing the data. But the headline imports still show a massive jump in tonnage imported on both. Either the Chinese are very optimistic about the domestic and growth outlook for next year, or they are stockpiling for reasons that are known only to them, but probably aren’t good. Either way, it suggests that China is not escalating Australia tensions into a full trade war yet, as Australia is a crucial ore supplier. Markets seem to have taken the data at face value to show that China’s expansion remains on track despite the global Covid-19 pandemic. Like coal, only time will tell if there is a deeper meaning behind today’s data release.

The drama and intrigue are not over for Asia today though. The Bank of Indonesia (BI) announces its latest interest rate decision this afternoon. With one of Asia’s worst-performing currencies and an economy that keeps suffering Covid-19 blows, the BI’s room to manoeuvre is small to non-existent. We expect rates to remain unchanged at 4.0%, with USD/IDR trading at 14,750.00 today, uncomfortably close to BI’s line in the sane at 15,000.00. Only a fall by USD/IDR below 14,000.00 will give the BI room to cut modestly, as maintaining international investor confidence takes priority over domestic needs.

Asia’s own Game of Thrones, Malaysian politics, looks set to throw a potential end of season surprise on regional markets today. Malaysian opposition leader Anwar Ibrahim is apparently scheduled to hold a press conference at around 1400 SGT today, after meeting the Malaysian King about forming a new government. USD/MYR has risen to 4.1530, and KLCI has eased into negative territory. Whether Mr Ibrahim has a majority or not, or whether the King will choose to accept that, or send it to a vote in parliament, I know not. Malaysian markets are likely to remain under pressure, although in the longer-term, fiscal constraints mean the government, whoever it is, has little room to indulge in hair-brained policies.

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