The bears are back in the metal markets, and one of their prime motivators is this year's dismal prospects for China. A note in the FT's Unhedged today explored the country's "impossible trilemma" of achieving 5.5% GDP growth, reaching a stable debt-to-GDP ratio, and meeting zero-COVID initiatives. When you combine this with the reality that China's demand is already sagging, you have a real recipe for disaster.
The article also mentioned how the typical "get out of jail free card" won't work for China. This usually consists of pouring debt into low productivity real estate and infrastructure projects. However, that will trash their debt-to-GDP growth limits. This would also be futile given the ongoing zero-COVID lockdowns, which are estimated to cover some 300 million people. After all, who is going to buy a new house if they are locked in their current one?
April's data was, to quote the FT, "horrendous:"
On top of all this, credit growth has stubbornly refused to accelerate. It's worth noting that this is despite policy moves such as last month's reduction of banks' reserve requirements. Meanwhile, household loans are falling, medium to long-term corporate loans are falling, and the issuance of government bonds is slowing. This all points to lower investment and activity.
China's extremely strict zero-COVID policies are finally showing signs of reducing infection rates. And while Shanghai has announced that it will begin easing restrictions, major changes are unlikely to take place before the Presidential elections in Autumn. For that reason, we can expect consumer and corporate spending to remain cautious (and growth to remain tepid).
All in all, it's no wonder then investors' view of metal demand is pessimistic. While China's metals production has recovered strongly from last year's power restrictions, demand has not. As a recent report by Reuters states, metal is flowing out of the country at unprecedented rates.
Related: World Sees First Global Energy Shock: World Energy Council
Indeed, exports of all metals increased significantly this year. Even in the case of metals like copper and nickel, where China remains a net importer, the net import ratio has fallen.
These levels of surging exports are only possible because domestic primary and semi-finished prices in China are lower than in the rest of the world. Why are they lower? Because demand is lower. This may be good for consumers benefiting from supply in an otherwise constrained global market. However, it does not speak to China's growth prospects, especially when the rest of the world is doing relatively well.
By Stuart Burns via AG Metal Miner
More Top Reads from Oilprice.com:
Stuart is a writer for MetalMiner who operate the largest metals-related media site in the US according to third party ranking sites. With a preemptive… More