COMMODITIES NOW
testament of deeper underlying issues that could cause, at the very least, a drastic slowdown of the Chinese economy. Emerging Markets, especially those that are heavily reliant
on exports to China such as Brazil, South Africa, Canada and Australia continue to be vulnerable and copper has come under heavy pressure recently due to a combination of credit-induced Chinese construction slowdown and a crackdown of Chinese borrowing with copper as collateral. In addition, another troubling data point is inflation; China’s PPI for February dropped to -2% and has now been in negative territory for 23 consecutive months, the longest period since 2000. China recently reported surprisingly weak export/import
data. Iron ore imports dropped to an 8-month low and copper imports fell 29% m/m. Equally important was a surprise decline in new loan creation. Furthermore, there are “ominous signs that authorities are accessing (read worried about) the balance sheet risks of Chinese financial institutions,” according to van Batenburg. For several years Chinese firms have been able to use copper as collateral to borrow US dollars with low interest rates (courtesy of Mr. Bernanke). Borrowing these dollars with copper as collateral was cheaper than borrowing in the domestic Chinese market. All this collateral copper has been stored in VAT- exempt bonded warehouses in China. According to Goldman Sachs as much as US$35 - 40 bn may have been raised as of mid-2013 through this scheme. Copper wasn’t the only commodity used for this sort of borrowing activity, so the total figure might be a multitude of this. Some estimate that as much as 10% of China’s short-term forex lending may be associated with copper financing. “However, the State Administration for Foreign Exchange
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developments,
Jessop five general points.
• First, the big picture is that China’s economy has already been slowing sharply since 2011. GDP growth averaged “just” 7.7% in 2012 and 2013 (on the official figures), in contrast to the double-digit rates that were the norm before the global financial crisis. Our forecasts of 7.3% for 2014 and 7.0% for 2015, while a tad below consensus, would simply be a consolidation of this existing trend. What’s more, rather than being a new development, this slowdown has
Figure 2: Industrial Metals Prices & China GDP
S&P GSCI Industrial Metals Price Index (Quarterly Average, LHS)
China Real GDP (%y/y, RHS) Latest= Q4 2013
10 12 14 16 18
6 8
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Source: Thomson Datastream
(SAFE), concerned about the undue upward pressure this activity has put on the yuan due to balance of payment distortions, has started to crack down on this activity. The unwinding of this copper-financed borrowing activity can both explain the excessive weakness in copper prices and the recent weakness in the yuan,” explains van Batenburg. The weakness in base metals, in part due to the ongoing
slowdown in Chinese construction activity and unwinding of collateral borrowing is likely to continue to put pressure on emerging markets that are heavily reliant on base metal exports, such as Brazil and on commodity-country currencies such as the Aussie dollar, South African rand and the Canadian dollar.
already been a key factor contributing to the underperformance of emerging market equities over the last few years, and to the sluggish performance of industrial metals.
• Second, the much larger size of China’s economy after years of rapid
expansion means that the increases in demand at growth rates of 7% are potentially just as big as those in the 2000s when growth averaged
... recent developments are a testament of deeper
underlying issues that could cause, at the very least, a drastic slowdown of the Chinese economy
China Concerns Exaggerated? China’s continuing economic slowdown is clearly bad news for some commodity exporters. However, the world as a whole should actually benefit from slower but better-balanced growth in China, according to Capital Economics’ Chief Global Economist Julian Jessop. “The risk of a ‘hard landing’ is also still small and perhaps even diminishing as a result of recent policy moves – despite the latest concerns about the health of the shadow banking system.” When thinking about the global implications of recent
10%. Indeed, a slowdown in China driven by a shift away from net exports towards consumption could in principle boost activity elsewhere, by reducing China’s trade surplus.
• Third, fears that the recent weaker data may be early indications
of a “hard landing” are overdone. For a start, the latest slowdown reflects
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emphasises
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