China: expect more tightening

Greece’s public debt crisis continues to unsettle markets. But another reason to fret about the health of the global economy resurfaced last week: a slowdown in the world’s fastest-growing economy. China’s central bank unexpectedly ordered banks to increase the amount of reserves they hold by 0.5%, in order to temper the lending boom.

State-mandated lending has revived growth by spurring a boom in investment. Spending on fixed assets comprised 92% of last year’s 8.7% growth in GDP, says Lex in the FT. That compensated for a slump in Western consumption, which hit the export-dependent economy. But now the authorities are worried about overheating. Growth is back in double-digits and lending is still rocketing – January saw more new loans granted than in the previous three months combined. With strong growth and “rising inflationary pressures, it is no surprise” that the authorities are stepping in, says Fiona Lake of Goldman Sachs. Expect further tightening.

Can China manage a soft landing?

The authorities have “an unenviable task”, says Edward Hadas on Breakingviews. They need to keep growth above about 8% and job creation steady so as to avoid social unrest. Yet with debt-soaked Western consumers retrenching, exports are unlikely to revive soon. And there won’t be a significant jump in Chinese consumption until an improved welfare state gradually lowers high savings rates, says New York University’s Nouriel Roubini.

So the “entire economy depends on loose lending”, says Stratfor. And that is already storing up trouble, with an increase in bad loans in the pipeline and overcapacity widespread. Jack Rodman of Global Distressed Solutions reckons that half the office space in Beijing is vacant. Deflating “monumental” investment and property bubbles “gently” is “difficult at best”, says James Chanos of Kynikos Associates.

Commodity correction on the cards

Whether or not China can ultimately avoid a nasty crash, however, the gradual slowdown on the cards for this year is one key reason why commodities are vulnerable to a correction. Given the “unprecedented” stockpiling last year, even if GDP growth stays in double-digits, Chinese demand will slow, says Capital Economics.

And Western demand is hardly going to rise to offset this. With credit tight and indebted consumers cautious, “the withdrawal of even small parts of the stimulus packages” risk sending the economy “back into the doldrums”, says The Economist. Note that the International Energy Agency, for instance, predicts an “oil-less” recovery in the OECD countries. In America, total oil products demand was still 2% down year-on-year in January. Supplies, meanwhile, look ample. According to Weinberg, total copper stocks in warehouses monitored by exchanges in London, Shanghai and New York are at a six-year high. Crude inventories also reflect an “oversupplied market”, says Deutsche Bank.

Copper and oil will hit the skids

Ongoing talk of tightening by central banks will continue to fuel concern over the global growth outlook. In the meantime, risk aversion, due to Greece’s debt crisis, also undermines raw materials as it bolsters the dollar. Given all this, metals in particular look “overvalued”, says Deutsche. It sees oil back at an average price of $60 in the third and fourth quarters, from $74 now. As for copper, it will average just over $6,000 a tonne between June and September – 12% below current levels.

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