China is slowing down and this has hit everything from global stocks to commodity-reliant currencies.

China and the commodity impact

John Meyer at SP Angel gives a cracking summary of how we got to where we are and how the Chinese slowdown feeds into the commodity complex:

The economic crisis which started in 2007/8 when the banks stopped lending to each other and the Sub-Prime crisis unfolded rumbles on

  • China bailed out the world as it pumped >$500bn of stimulus into its markets to avoid the contagion.
  • The effect was for ongoing strong growth in China at a time when the economy should have been naturally reigning in its excesses.
  • Today, there is no Sub Prime crisis but China is now cutting its growth rates in an effort to better manage its economy.
  • Chinese imports are slowing faster than Chinese exports and producers have been told to export surplus metal. 
  • China is no longer Mr-nice guy in the global economy
  • Chinese consumption is still growing in many areas but a slowing of consumption growth has led to a collapse in many areas due to overproduction in many areas.
  • The collapse in metals prices should now cause mines to close while a new wave of production issues is also causing buyers to look for new production.
  • Metals demand was driven for some time by ‘financing demand’ where metal was used as collateral for loans or other financial exercises.
  • Higher interest rates are drawing money back to the US to the cost of metal demand and currencies but this migration of money from East to West may give new life to manufacturers which had been struggling to compete in a weaker dollar/renminbi environment.
  • The IMF have cast doubt on the renminbi as a potential reserve currency.  Reserve status may be conferred if China undertakes reforms to allow the currency to become more freely usable.