I appreciate your views (and the views of others on this thread).
7 points for consideration (including growing problems in China):
1) The current RBA bias is favouring increased import substitution over domestic product choice (ie: as a nation, we are being coaxed into preferring the imported over the local item.
2) Just as the RBA is using interest rates to moderate consumer spending, the A$ is continuing to rise and distort this. A higher A$ actually favours increased (or a continuation of) consumer spending, at the expense of domestic production, export production and capital generation.
3) The RBA's history over the last 15 years has been one of reacting too much, too late, particularly on the interest rate front. On the FX front, however, the RBA's own bias has become exposed as currency trading is now a major income earner for the RBA and for the Government.
4) Most commentators, econometric studies and analysis reflect that fair value for the A$ is closer to the mid-60s range. This means that on current trading conditions, the A$ is ~20% over-valued, with an increased risk of going soon to being 25% over-valued.
5) The change in the A$ would not be so bad but for the corresponding movement in the TWI (up >25% in just over 12 months).
6) There is a very real danger that an increasing number of manufacturers will now move their manufacturing offshore, primarily to China. However, in doing so, many of them will not be taking acocunt of any of the following emerging issues for China (check this week's Economist, pages 13, 54-56, and 57 for more detail): 6a) China has just used US$45B of its foreign reserves propping up just 2 of its Banks which were on the verge of collapse; 6b) China's banking sector is getting quite close to collapse with non-performing loans now approximating 40% of GDP; 6c) China's rustbelt (particularly in the North-East) is also on the verge of collapse, as are an increasing number of its State Owned Enterprises (as I was arguing back in March - April 2003); 6d) internal displacement, unemployment and the prospective forced shedding of 50M SOE employees will eventually risk the continuation of China's economic growth; 6e) China's own terms of trade are starting to deteriorate as China becomes more of an importer (as opposed to being an exporter); 6f) almost certainly, the renimbi /yuan will be re-valued sharply this year (with the Chinese authorities trying to hold on as long as possible because of the the growing banking debt crisis) - when this occurs, a number of our re-locating manufacturers will be caught out in a pincer move which will decimate their businesses.
7) The RBA is to be applauded for raising rates (even if too late). But if they raise rates again in February, this will represent the first time in the last 15 years that the RBA has raised rates at 3 consecutive meetings. In 2001, it dropped rates at 3 consecutive meetings.
