Sydney Sex Pills Show New Proxy for China's Shifting Economy

Sydney Sex Pills Show New Proxy for China's Shifting Economy

(Bloomberg) -- On the edge of Sydney’s Chinatown, a new store has almost sold out of its most popular product: “Kangaroo Power” pills that claim to boost one’s libido. A sister branch 10 minutes walk away has just one pack left.

The stores are owned by AUMake International Ltd., part of the booming industry that connects local suppliers with Chinese shoppers and tourists. The company’s stock is trading at almost nine times the offer price when it sold shares on Australia’s stock exchange two months ago and it plans to open another downtown store in the new year.

Just as Australia was viewed as a proxy for Chinese growth amid its decade-long mining investment boom, it now offers a useful gauge of the world No. 2 economy’s shift to consumerism. While China’s thirst for Australian minerals hasn’t waned, it’s now complemented by demand for everything from education and tourism to wine and vitamins.

“If China is in a big upward or downward cycle, then Australia will be a good proxy because the swings in demand for Australia’s products will reflect Chinese activity,” said Steven Englander, head of research and strategy at Rafiki Capital Management, a Hong Kong-based hedge fund. “If the Chinese economic cycle is becoming more mature with a greater weight to services, the Australian dollar will still move broadly with China.”

For an illustration of China’s impact on Australia, look no further than last week’s trade data. China’s crackdown on pollution was blamed for almost wiping out Australia’s October trade surplus, which came in about A$1.3 billion ($992 million) under forecasts thanks to reduced mineral exports.

Australia has become the most China-reliant economy in the developed world, with around a third of its exports going there. The composition of those sales is changing: 8 percent of China’s imports from Australia were consumer goods last year, compared with just 2 percent in 2013, while the share of minerals has fallen to 56 percent from 62 percent over the period.

The ties have made the Australian dollar a proxy for Chinese growth, especially as it’s easier to trade the more-liquid currency than the yuan.

In the first half of the year, Chinese demand for iron ore shaped the direction of the Aussie. When prices for the steelmaking ingredient surged 16 percent in the first two months, the Aussie gained more than 6 percent, becoming the best-performing Group-of-10 currency. It then tracked the decline of iron ore prices through June as global supply soared and concerns flared up over Chinese demand.

That relationship has shifted in recent months. The pace of interest-rate increases by the Federal Reserve and progress in U.S. tax reforms led traders to focus on the narrowing yield gap between Treasuries and Australian bonds. The Aussie went from a year-to-date high above 80 U.S. cents in September to hover above 75 cents. It rose above 76 cents on Thursday in Sydney after the Fed followed through on an expected rate hike.

Tailwinds from China have been "overwhelmed by the erosion in the interest-rate differential,” said Susan Buckley, managing director of global liquid strategies at Brisbane-based QIC Ltd, which oversees A$82 billion in assets. QIC predicts the Aussie could drop below 70 U.S. cents next year amid a widening divergence between the Fed and the Reserve Bank of Australia.

Like other commodity exporters, Australia does stand to lose as China slows and rebalances toward consumption, Bloomberg economists say. But it will also have a floor as China continues to deploy infrastructure spending to smooth the bumps in its growth cycle, according to Tom Orlik, chief Asia economist at Bloomberg Economics.

China’s full-year growth will moderate to 6.4 percent in 2018, from 6.8 percent this year, according to economists surveyed by Bloomberg. Consumption remains a key support, with CICC economists saying China will likely top the U.S. as the world’s no. 1 importer within five years.

That makes Australia a gauge of China’s changing tastes. While iron ore and coal remain by far the nation’s biggest exports to China, consumer good sales are surging. Among the biggest sellers in the year through June, edible goods rose 38 percent, medical treatments 34 percent and alcohol 44 percent. Oil seed exports are up almost 1,000 percent.

When affluent Chinese aren’t buying hand creams or wine, they’re sending their kids to Australian universities and taking snapshots of Bondi Beach. Education exports to China were worth A$9 billion in the year through June, up 260 percent in a decade. More than a million Chinese visited Australia last year, a figure predicted to more than triple by 2026.

“The Chinese economy is moving away from a focus on physical infrastructure to developing social infrastructure, and from investment-driven growth to consumption-driven growth. At the same time, Australia is moving beyond the mining boom to focus on non-mining sources of economic growth,” Australia’s Minister of Trade and Investment Steven Ciobo said by email. “These changes are highly complementary, and provide huge potential for Australia.”

©2017 Bloomberg L.P.

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