This is a big week for China watchers – it’s announcing a ton of economic data.
So far this year, everything points to Chinese economic growth falling out of bed.
So the market will be keeping a close eye on the numbers over the coming days.
The biggie will be China’s economic growth rate for the last 3 months. This has fallen steadily from 9.7% to 8.1% over the last year. The market reckons it will be closer to 7.9% this time around – we find out Friday, about lunchtime.
You have to wonder how a country as big as China can calculate this number just a few weeks into the new quarter. It takes other countries a month or two. Is this Asian efficiency, or just good old-fashioned government statistical manipulation…?
We get the numbers for the trade balance today. Retail sales, industrial production and new loans are later this week.
We’ve had a few bad omens for this lot already.
Yesterday we heard that inflation (CPI) has dropped from last month’s 3.0% to hit as low as 2.2%. Just 12 months ago it was up at 6.4%.
The other bad omen is that last week China cut interest rates for the second time in four weeks. This pair of cuts came after leaving them on hold for nearly four years. You wonder if they’re getting ready for a storm coming their way.
My pal and colleague Greg Canavan started calling for a China crash 12 months ago.
Things are following his script to the letter so far.
So I sent him a text message when China cut rates again the other night – his reply was:
‘Too little…and too late’.
What to Avoid As Chinese Construction Falls
It certainly seems that way. China put the brakes on its runaway housing sector to cool the economy down last year. Unfortunately its biggest customer, Europe, went into recession at the same time. Now China’s economy is stalling, and the government is furiously trying to back-peddle.
Greg makes the case that what we are seeing is the result of one of the biggest credit bubbles in history. And that history also teaches us that you can’t reinflate a burst bubble. You can read more from Greg here.
In the words of another colleague, Nick Hubble, ‘It’s kind of like trying to blow up a balloon that popped – all it does is make a rude noise.’
As editor of Diggers and Drillers, I keep a close eye on what China could mean for resource stocks.
It’s been well over a year since I tipped any stocks in iron ore, coking coal, and copper – commodities tied to Chinese infrastructure and construction. They did provide some good trades previously, with readers doubling their money on Discovery Metals (ASX: DML), and gaining 85% on Riversdale (ASX:RIV).
But I’ve steered clear of those commodities for a while, focusing instead on strategic minerals such as graphite and lithium. This strategy is to avoid the effect of the crashing Chinese property construction sector. Less construction means less demand for steel. This in turn reduces demand for iron ore. The price of this has now fallen from $175 / tonne to $135 / tonne in the last year.
But a China crash wouldn’t just affect iron ore.
What would you answer if I asked you what commodities China spends the most on?
Most people would say iron ore, coking coal, thermal coal, and maybe copper.
They’re all up there, but it’s Brent Crude oil that costs China more than any other commodity.
True – China has its own oil industry. But this only meets half its needs. So it imports around 6 million barrels a day, which is about 11% of the seaborne market.
So if this week’s data confirms that China’s economy continues to decelerate, then we may see the oil price take a hit.
The chart below shows just how important Brent Crude is to China. It’s from ANZ’s new China-focused commodity index. This shows the relative cost of the various commodities China consumes.
There are a few other surprises in there.
Analysing Chinese Consumption
China spends twice as much on pork (8.2%) as on copper (4.3%).
And to think all this time you should have been filling your freezer with pork chops instead of trading copper stocks!
To be honest I’m not sure whether an economic slowdown would lead to Chinese people eating less pork dumplings. And I couldn’t tell you how much of the pork China consumes is imported anyway. It’s not exactly my turf. But I can tell you that the price of pork at my local supermarket has risen steadily for years.
So perhaps China’s influence stretches further than just hard commodities like coal and iron ore.
Something I have talked about a lot is China’s rising gold consumption.
China produces more gold than any other country – and it now also imports more than any other country. Both sources are to meet the rapidly increasing gold demand from the Chinese investor and the Chinese central bank.
So it’s quite surprising to look at this chart and see that the cost of China’s gold demand is behind wheat, and roughly the same as cotton, soybeans and rubber! That takes a bit of the glamour out of my favourite precious metal!
All the same, China’s decelerating economy hasn’t seen it reducing its gold imports. Quite the opposite – these have increased rapidly over the last 12-18 months. My suspicion is that the central bank is behind most of this – and if anything a sliding Chinese economy will only encourage more buying.
As for the rest of the commodities, we’ll first have to wait to see what this week’s economic data shows.
All I know is that Greg doesn’t expect good news.
Dr. Alex Cowie
Editor, Diggers & Drillers
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