China rout adds to heat on resources

Australian officials are bracing for a further slump in commodity ­prices as China’s sharemarket continues to dive.

Australian officials are bracing for a further slump in commodity ­prices as China’s sharemarket continues to dive despite extraordinary measures to support the market, and Greece moves closer to the brink of exclusion from the eurozone after rejecting austerity in a weekend referendum.

Federal Treasury officials were closely monitoring international developments after a plunge in iron ore futures in China indicated that the spot price of Australia’s largest commodity export would hit a record low overnight.

Those fears were realised in overnight trading, with the price of iron ore slumping 11 per cent to a 10-year low of $44.10 a tonne.

“We continue to engage closely with the Reserve Bank, Australian Prudential Regulation Authority and Australian Securities & Investments Commission on these developments,” a Treasury official said in regard to slumping share prices in Australia’s biggest trading partner and the world’s No 2 economy.

The dollar yesterday hit a six-year low of US73.72c in early London trading after iron ore futures fell 7.9 per cent, while the benchmark S&P/ASX 200 share index plunged 2 per cent, with BHP Billiton and Rio Tinto diving to multi-year lows. In Tokyo, the Nikkei 225 dropped 3.1 per cent.

Australian 10-year government bond prices jumped on safe-haven demand, and interbank cash rate futures implied a strong chance of another cut in the Reserve Bank’s official cash rate by the end of the year.

“You’ve got a perfect storm over Greece, China and commodity prices tumbling,” said Ray Attrill, National Australia Bank’s global co-head of forex strategy.

“The commodity falls feed ­directly into our economic outlook.”

While the Shanghai Composite bounced off its 200-day moving average yesterday after tumbling more than 8 per cent in early trading, China’s main share index finished down 5.9 per cent, even as officials raised margin requirements for sell orders on stock index futures and the People’s Bank of China said it would provide “ample liquidity” to the stockmarket. “This must be their equivalent to a ‘Black Wednesday,” said Chris Weston, chief market strategist at IG.

“When we see around 90 per cent of China’s sharemarket ­either suspended or hitting their daily limit, and regulators target short sellers, that’s usually a red flag of desperation.”

After slashing interest rates in recent weeks, China has taken unprecedented steps to stabilise its sharemarket as the economy grows at the slowest pace since 1990. In recent days, it has halted initial public share offerings, ­frozen trade in at least 1301 companies, ordered state-owned brokerages not to sell shares, and directed state-owned funds to buy.

The distortions caused by ­official measures to support China’s sharemarket made it particularly difficult for investors to get a clear view of the market, which surged more than 155 per cent in the year to mid-June.

FTSE China A-share index ­futures on the Singapore Exchange crashed 28 per cent late yesterday before hitting circuit breakers set by the exchange.

“So the questions now are, what mother of all bazooka is China going to pull out,” said Kay Van-Petersen, Asia macro strategist at Saxo Capital Markets. “And given that we are going into a weekend that could see systematic risk from a Greek exit (from the eurozone), will it work or not?”

Mr Van-Petersen predicted that the People’s Bank of China would take strong action over the weekend.

But while China had $US4 trillion ($5.4 trillion) of currency reserves that could be deployed in the sharemarket, it may not want to take such an unprecedented action unless it believed the stockmarket bubble had completely deflated, NAB’s Mr Attrill said.

“It would have interesting consequences because obviously China’s sharemarket was close to being officially appointed into the MSCI index earlier this year, yet that’s now being viewed as a bit of a joke as it tries to manipulate its stockmarket higher,” he added.

“China has also been holding its currency very stable, in the belief that it will enhance the prospect of inclusion in the IMF’s Special Drawing Rights, as a symbolic prelude to being a reserve currency. But arguably, in the ­current circumstances, you would typically expect your currency to be weakening.”

While a bursting bubble in China’s highly regulated stockmarket won’t necessarily have a material economic impact on China, the 30 per cent fall in the Shanghai Composite index in the past four weeks has contributed to a 25 per cent fall in the price of iron ore and a renewed sell-off in base metals.

Mr Attrill said the potential for a terms-of-trade shock caused by sustained falls in commodity prices underscored the Reserve Bank’s view that a further depreciation of the exchange rate “seems both necessary and likely”.

Reflecting the increased risk of a further slump in commodity prices, NAB revised down its forecasts for the dollar this week. It now expects the exchange rate to hit US71c by March next year, and remain mostly below US75c until 2017.

European sharemarkets rose slightly in early trading last night, amid hope that Greece would come up with an acceptable debt reduction plan in time for a deadline set by European officials for Sunday.

“With everyone in the market raising the probability of a Grexit this year, I am going to go the other way and suggest that we are going to see a resolution which will be signed off on Sunday, if for no other reason than commentary from (EU officials) Merkel, Tusk and Juncker has been outright pessimistic,” Mr Weston said.