CHART: Stop panicking about China and mining

Putting the finishing touches to the bull statue outside Shenzen stock exchange

The Bloomberg Commodity Index slid to its lowest level in 16 years on Monday as oil suffers its longest run of weekly declines since the mid-1990s and the run on commodity ETFs gathers pace.

Base metals are down across the board and the price of iron ore which has been surprisingly stable amid the chaos in China fell back 4% on Monday.

Even the gold price which is supposed to be benefit in times of trouble has now succumbed to bearish sentiment to trade down today.

While the weakness in commodities is not surprising given the crucial position China holds in the global trade, would the slowdown in the world’s second largest economy not be priced in by now?

While there’s not shortage of doom mongers out there a more sober reading comes from the China service of Capital Economics, one of the world’s largest independent economics research firms.

Julian Jessop, a commodity strategist and Chief Global Economist and Mark Williams, the company’s chief Asia economist, argue that recent data, although concerning does not suggest a hard landing for the Chinese economy.

In addition, the fallout from the Shenzen and Shanghai stock market falls should be limited as equity ownership extends only to a relatively small and wealthy portion of households (not to mention the fact that only today did stocks fall below their opening levels for the year).

Beijing also has room to loosen monetary policy substantially – benchmark lending rate still stands at 4.8% and some of the country’s $3.6 trillion in forex reserves can be used to stimulate the economy.

As for the rout on commodity markets, the authors point to this graph that shows the panic gripping mining and commodities markets may misplaced and commodity prices have overshot on the downside:

“Of course, the adjustment phase [to slowing growth in China] is bad news for commodity producers. What’s more, at face value the plunge in commodity prices over the last year is consistent with a global recession as severe as that in 2008-09.

“But as economic conditions and prospects are nowhere near as bad as they were then, this supports our view that the present negative sentiment in commodity markets is overdone too.

GRAPH: Stop panicking about China and mining

Source: Capital Economics

Capital Economics makes another  point about Chinese economic growth. It’s an obvious observation but not repeated enough when talking about China and mining.

While China’s GDP growth is expected to slow to below 7% in 2015, the country would be adding some $700 billion to gross domestic product.

That’s  greater than the size of mainland China’s entire economy in 1994 and also bigger than Switzerland’s economy and worth almost 2 South Africas and 4 New Zealands.

“The much larger size of China’s economy as a result of the previous years of rapid expansion means that its contribution to global demand has been pretty stable over this period,” says Jessop.


Image of construction workers in Beijing by Loic.Hofstedt

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