Oz growth — riding on China’s back: The trade figures for December confirm another bout of red ink in the month, with imports topping exports by $2.25 billion, but the most interesting story was to be found on page 27 of the Australian Bureau of Statistics release because it’s there that you find the truth of all those assertions that we are riding on the back of China’s expansion (but not its halting attempts to tighten monetary policy).

The market expectation was for a deficit of $2.4 billion. During the month, exports were up 4% in adjusted terms to $19.76 billion, while imports rose 6% to just over $22 billion.

But those bald figures hide the significant change that happened in the half year ending December 31. The ABS figures show that of all our major export markets, including Japan, South Korea and India, China was the only one where our exports rose in the six months ending December 2009 from the lower six months of the quarter ending December 2008.

The falls are influenced by the impact of the high iron ore, coking and steaming coal prices in the December half year in 2008 and their fall from April 1 last year.

But while that had an impact in shipments to Japan and South Korea, it had no impact on exports to China (except to trim prices in the early months of the half year).

Exports to China rose from $17.53 billion in the last half of 2008 to $20.54 billion in the six months to December 2009. That was a rise of 16.5%.

It was the surge in imports of iron ore and also various coals that helped push up exports to China, along with a surge in spot market prices for these commodities, especially iron ore from October onwards as Chinese buying stoked the market.

Interestingly, imports from China slipped 6% to $19.15 billion from $20.41 billion, meaning that our trade position with China moved more heavily in our favour.

Exports to Japan slumped to just on $17.4 billion in the back half of 2009, from more than $31.9 billion a year earlier. The fall in prices for iron ore, coal, LNG and oil helped push export values down, but unlike China, there was no surge in volumes to make up for the drop.

Exports to South Korea fell to $7.4 billion from more than 411.1 billion, while the growth in shipments to India stopped. Exports there fell to $7.39 billion in the six months to last December, from $8.38 billion.

Overall, our exports fell from $127.6 billion in the six months to December 2008, to %92.8 billion in the period ending December 31 last.

Exports to China in December were $3.8 billion, $1 billion more than our import bill for the month.

Strange but true. Everybody got the rate rise wrong, including all 20 economists surveyed by Bloomberg.

Explanations after the announcement were many and varied, but centred on the fact that the RBA seems to be punting on the rate increases banks have levied (around 1%) on top of RBA’s rate movements over the past year or so. That has the whiff of rationalisation but, as the RBA knows, there’s always the next month to play catch up.

Perhaps the most novel reason for the RBA doing nothing yesterday came from the Lex column of the Financial Times, which of course is based in London, the capital of the newly discovered high debt emerging market called Britain (the new Greece?)

“Kevin Rudd, as every schoolboy knows, is the only Mandarin-speaking premier outside Beijing. Less well understood is Australia’s growing affinity with China’s monetary policy. The Reserve Bank of Australia navigated the slump by shadowing the steep rate cuts of the Federal Reserve; it is emerging tracking closely the tightening efforts of the People’s Bank of China,” wrote Lex.

“Trade and economic linkages are one thing. China takes one-quarter of Australia’s exports, up from one-twentieth a decade ago. The correlation between equities in Shanghai and Sydney has strengthened every year since 2004. But rarely has that monetary co-dependence been stated as explicitly as it was on Tuesday, when governor Glenn Stevens explained the RBA’s first rate decision of the year. Chinese authorities’ efforts to ‘reduce the degree of stimulus to their economy’ are one of the main reasons Australia can leave its target cash rate where it is, for now.

“That all 20 economists surveyed by Bloomberg predicted a rise says more about the power of groupthink than about any misdirection from the RBA. The bank’s minutes made it clear that the decision to raise rates in December for an unprecedented third month in a row was finely balanced.

“Still, relying on China’s credit curbs to cool Australia’s economy is a high-risk strategy. Three uses of the word “strong” within a single paragraph, in relation to general conditions, labour markets and investment in resources, suggested hike rather than hold. Core inflation for the December quarter rose 3.4 per cent, year-on-year – above the RBA’s comfort zone of 2-3 per cent for the ninth straight quarter. House prices were up an average 14 per cent, almost double China’s own rise of 7.8 per cent in December. Next week the RBA hosts a central bankers’ jamboree to commemorate its 50th anniversary; expect more than the usual deference for People’s Bank of China governor Zhou Xiaochuan.”

Interesting view except for one thing: if we were “tracking closely” the monetary policy tightening efforts of the People’s Bank of China, wouldn’t they have three rate rises on the scoreboard, as the RBA already has?

At last look China has had two moves upwards in short term rates, but not official rates. That was because the central bank guided dealing rates higher; there’s also been an increase in reserve asset ratios and directions to some banks not to make loans for the last 10 days of January. All that happened in the back half of last month. The RBA has been raising rates since October. A small but significant difference. In terms of explanations, this one is an outlier.

Rare bird sighted in Pyongyang. North Korean leader Kim Jong Il seems to have ‘got’ capitalism, according to a report in Bloomberg, doubling the number of trips he has made to factories and power stations in recent months “signaling his regime’s growing efforts to prop up a failing economy hit by United Nations sanctions.”

Half of the 20 visits Kim made in January were to economic projects, more than double the four economy-related trips he made a year earlier, according to South Korea’s Unification Ministry. Kim made a total of 13 outings in January 2009.

“Kim, 68, braved temperatures of minus 30 degrees Celsius (minus 22 degrees Fahrenheit) to tour a power station under construction in Huichon, North Korea’s official Korean Central News Agency said on Jan. 3 in reporting his first trip of the year. He visited a flour-processing factory in Pyongyang and ordered that machinery be modernized to increase production of bread, biscuits and noodles, KCNA said Jan. 23,” reports Bloomberg.

“Kim makes what his regime calls “field guidance” trips to military units, factories and farms to demonstrate his leadership. The Unification Ministry in Seoul tallies Kim’s public appearances by monitoring North Korean media reports.”

The mind boggles, especially as he’s never up for re-election, but he is still a politician so why shouldn’t the Dear Leader visit power stations and flour mills to urge his starving people to make herculean efforts to produce more?

Default proofing. A novel idea for helping Iceland out of its deep crevasse comes from US economist, David Hale — re-open the American airbase closed a decade or more ago. With it comes the quite telling fact (according to Dr Hale), that no country hosting an American military establishment has defaulted: “The American people do not want any suspected terrorists in their backyard. There are less fortunate countries that would accept Guantánamo prisoners in return for cash. Iceland is ideal to play such a role because it was the closure of a US military base that allowed its financial collapse. Iceland could escape from default and depression if the base were to reopen.” So could Greece.

The French connection. It is perhaps the worst corporate scandal in Europe for years. Not bankers pay or bonuses, but the suicide of nearly three dozen employees at France Telecom. This week saw the 27% Government-owned telco’s CEO and chairman, Didier Lombard, announce that he would step aside as chief executive next month in response to a rising tide of criticism.

“In an interview published today, Mr Lombard admits underestimating the malaise at France Télécom as the old state monopoly, privatised in 2004, tried to adapt to its change of status in a rapidly developing market. “I should have acted sooner. But on these very sensitive human issues, it is very difficult to evaluate the depth of things.” Quite.

France Telecom revealed late last year that it had set aside one billion euros to try and ease the pressures of constant restructuring that seem to have contributed mightily to the spate of deaths. Last October the estimate was 24 suicides since 2008, this week the number had grown to an incredible 35.

France Télécom is reported to have set aside €1 billion as part of a plan to end the suicides by offering older workers the chance to go part time. But what about younger employees? But that’s palliative at best. Absent from most of the commentary has been anything about the role of the French Government and the very nervy President Nicolas Sarkozy. He and his government have insisted that companies like France Telecom develop themselves into international champions, but without cutting French jobs. So the cost cutting was endless and remorseless, existing employees had to work longer and harder and do more tasks. No wonder that something gave in the company’s culture.

Banking on America. Since the start of 2007, a total of 173 US banks have failed, some large (Washington Mutual Wachovia, IndyMac) though mostly small. Many are in the states of Georgia, Florida and California, where the subprime crunch has been deepest. For all that time, the National Australia Bank has been on most broker ‘suspicion’ lists because of the small rural bank it bought just before the crisis started in 2007. Analysts thought the presence of the Great Western bank, based in South Dakota, may have exposed the NAB to the subprime and other ills ravaging US banks. Far from it. It is a farm-focused bank and US farmers were mostly spared any significant damage from the crunch (After all, everyone wants to eat). The NAB was exposed through dud assets in a SIV at head office.

After keeping its head down for 18 months or so, the NAB, though Great Western, has been slowly expanding, playing a ‘vulture’ and buying the assets and branches of distressed or failed banks. Bottom fishing is the term applied to so-called Vulture funds that hunt for unwanted assets amid the wreckage of corporate collapses.

This week Great Western paid around US$50 million ($57 million) in cash for F&M Bank which has been put up for sale by loss-making Citizens Republic Bancorp on Michigan, which is a long way from Iowa.

The sale includes about US$125 million in loans and a deposit book of US$410 million. It also gives Great Western 10 more branches across Iowa. Citizens Republic lost US$514.2 million last year and has developed a distinct list that needs to be staunched by asset sales. The NAB obliged. Over the past year NAB’s mid-western focused Great Western has spent nearly $US100 million picking up several banks and deposit books, including TierOne Bank which had over $US1.1 billion of deposits. When the latest deal is done Great Western Bank says it will have assets of approximately $US5.8 billion, with 137 locations serving 86 communities throughout Iowa, Nebraska, Arizona, Colorado, Kansas, Missouri and South Dakota.