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Group discussion > Growth in China and impact on commodities

Growth in China and impact on commodities

matt black
2832 days ago

Just wondering what people are thinking regarding China. The measures put in place recently to rein in the exapnding economy really put a dampener on the commodities market here on the FTSE 100 (RIO and BHP). The fact that China is tightening stimulus is good because Goldman Sachs still believes that China will have 11.4% growth in 2010 even after they tighten stimulus, economists have said that if China doesn't slow down stimulus they will reach 16% growth and overheat!  In 2009 China had 8.7% growth, so 11.4% is very bullish for metals and miners.  
 
Now a leading analyst from Goldman Sachs has said that there are moves in place tro put further measures in place to halt the economy and we could see these mid way through the year or towards the end of the year.
 
http://www.reuters.com/article/idUSSGE61E00U20100215
 
http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=BHP%3AUS&sid=aoeGkNI22hKc
 
Maybe its time to reduce commodity stocks...

 

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Ken Yeadon
2832 days ago

I think China has lots of latitude to manage its domestic economy in either direction. A grossly undervalued currency, enormous and growing reserves and an excessively buoyant domestic economy are the right sort of problems to have! There are few binding boundary conditions when you are accumulating foreign reserves at the rate they are, and they surely must be looking at this from the perspective of it being healthy to restore the balance, both from their capacity to secure political advantage and from the perspective of having  a vested interest in maintaining the underlying value of their foreign financial assets. Perhaps a catastrophic deterioration in the sovereign creditworthiness of US and European governments is the only boundary condition they have to worry about, and it serves them great capacity to play hard-ball on the political concessions associated with any change in their policy.

In short, I think they have played a blinder!

To gently prod the brakes don't they just allow their currency to move towards a better reflection of its true value, thereby making the export sector take the marginal strain and allow the domestic sector to carry on? ...a move that would be popular with trading partners and could probably be used to secure diplomatic advantage anyway; and would help move their economy towards a more balanced position. At the same time it would go some way to improving the West's trade balances and boosting the value of the vast swathes of foreign financial assets they own as a store of domestic value. They already have the rest of the world where they want it from the perspective of financing its deficits, depending on their liquidity, and looking to them for the marginal growth to pull us through.

Should domestic demand soften, they have plenty of capacity to stimulate it by monetary expansion, and no real need for any concerns about undermining the value of their currency in doing so, since its so undervalued to start with.

I cant really speak to the impact on commodities, as I have no idea of how commodity demand splits between the export sector and the domestic one, but either way I think they have lots of policy options. To the extent that a richer, more mature and consumer oriented domestic Chinese economy will drive underlying demand for commodities I still think its a one way bet, both from the perspective of rising underlying demand, and from the perspective of their purchasing power in $ terms improving as they allow their currency to appreciate towards a closer approximation of fair value. Not being a commodity expert I cant comment on the extent to which that is already reflected in prices.

But if you look at their exposure to rising commodity prices, they already have the best macro hedge in place in that they own pretty much everything!

 

matt black
2832 days ago

Thanks ken from what i have read your analysis seems close to the mark. BHP and Rio Tinto seem set to do well out of the next round of Iorn Ore price settings.  The CEO of BHP was on ABC's business show last week claiming that China will have increasing demand for commodities over the next 20 years.  Im sure there will be some 'putting the foot on the breaks' this year but as the analysts seem to be all saying this is necessary.

Jenri
2662 days ago

As to China's demand for commodities: it's all infrastructure driven: railroads, electric grids... Unfortunately don't have numbers at hand.