Tony Daltorio, The Investment U Research Team
Despite the continuing negative sentiment toward China from much of Wall Street, China’s remarkable economic growth continues unabated.
While Wall Street "experts" focus solely on the export-oriented eastern cities in China, they are missing the rapid growth occurring in other parts of China with the government’s "Go West" program.
And let’s not forget that within a few years, the size of China’s middle class will exceed the entire population of the United States.
However, there are still many investors who are not comfortable investing directly in China and buying Chinese companies.
There is another way to invest profitably in the economic growth in China, of which most investors are completely unaware. And it doesn’t involve owning any Chinese or Asian stocks.
It is the Australian Dollar.
The Australian Dollar & The Aussie Economy
Before we take a look at the Australian dollar, let’s take a glance at the Australian economy.
A few weeks ago, Glenn Stevens, governor of the RBA – the Reserve Bank of Australia (Australia’s outstanding central bank) – suggested that the Australian economy could well be coming out of recession in advance of most other developed countries.
Much of the relative strength of the Australian economy is due directly to the strength of the Chinese economy and the natural resource riches in Australia. Not only is Australia blessed with lots of metals and minerals (iron ore, copper, coal, uranium, etc.) that China needs, but Australia also has lots of energy resources as well. The recent $50 billion Gorgon liquefied natural gas project deal is only one example.
At the last RBA meeting, Mr. Stevens not only held interest rates steady at 3% but he also moved from an "easing bias" to a "neutral" stance. This is in stark contrast to the Federal Reserve’s zero interest rate policy that looks set in place for the foreseeable future.
The view that the RBA was likely to be the first major central bank to raise interest rates has in conjunction with interest rate differentials, lent considerable strength to the Australian dollar this year.
The Australian Dollar’s Link With China’s Economic Growth
However, much of the strength in the Australian dollar this year has been due to Australia’s link with economic growth in China.
There has been a significant amount of research done by HSBC, which shows that the Australian dollar has become the mirror image of Chinese economic activity.
Getting an accurate picture of Chinese economic activity is always difficult, but HSBC has isolated Chinese electricity production as the most reliable measure of the Chinese economy.
