China: It's not that bad out there!

Predictions of a Chinese hard landing seem over-pessimistic and demand for industrial metals, gold and silver is likely to continue unabated as a controlled economy, coupled with rampant capitalism, keeps growth well and truly going.

Author: Lawrence Williams
Posted: Saturday , 24 Mar 2012

Hong Kong -

There's been a degree of misplaced schadenfreude in many of the comments on a supposed downturn in Chinese growth, particularly from the North American and European media. The comments have been responsible, at least in part, in contributing to a downturn in industrial and precious metals prices - but don't necessarily believe all you read!

Much of this comment has arisen from people who may never have set foot in China and, perhaps, take things at face value - never a great idea with respect to China. In other cases it is purely because there is an underlying feeling that Chinese growth levels cannot continue in perpetuity, which is probably true, but now is probably not the time for us to see a serious slowdown. As noted above, much of the comment too is from those who take a natural delight in predicting downturns when there aren't any - a bit like those who have been knocking gold ever since it started its bull market 11 years ago and have called every blip in the metal's upward progression as the start of a new bear market. So it is with China.

Some of the best, and most insightful, comment on Chinese industrial growth comes from the research arm of Macquarie Capital Securities which does have the benefit of having people on the ground in China who look at every nuance of supply and demand - particularly in the industrial metals sector. It is thus heartening for those looking to China for a continuation of the kind of demand levels seen over the past several years to read the Australian bank research division's latest comments. Macquarie notes as follows in its latest regular Commodities Call - :

"It's not that bad out there

• In this week's China Commodities Call we have a series of reports that all point to the view that conditions in China are not as bad as some of the more bearish market watchers are suggesting. Our proprietary steel sector survey has revealed a positive shift in end-user demand, trade and apparent consumption data for January and February, suggesting that China has had a positive impact on global commodity prices over the last few months, and analysis of Chinese steel data suggests the lower-end estimates for production run rates have been wrong.

Steel survey analysis - Real demand is coming back

• The March results have shown a significant improvement in end-user ordering, suggesting that the seasonal recovery that had been lacking in the February data has finally come through. There are also signs of improving confidence at the mills - with production plans and raw material purchasing plans both more positive. Inventory of both steel and raw materials is not low but it is not dangerously high either.

China data fails to reveal a "slowdown" in demand for metals and steel

• Latest data for the first two months of 2012 show relatively strong demand across most commodities from China, belying the fears of a significant slowdown in consumption. Part of the reason appears to be that Chinese buyers have decided to restock metals at low prices, which may mean that the slowdown in apparent demand is ahead of us, even though there appear to be increasing signs of a nearby trough in "real" consumption. Chinese strong net trade balance with the rest of the world has been a significant support for global metal prices over the past 3-5 months.

Chinese steel data - NBS vs CISA: they've both been wrong

• When China's National Bureau of Statistics released steel production data for Jan-Feb this year of 685mtpa, it seemed to contrast sharply with CISA's high-frequency data over the same period of ~620mtpa. The debate raged over which number to believe, with bulls and bears each finding validation for their views. Now CISA has released a high-frequency update for early-March that suggests production of 693mtpa, seemingly in line with NBS data for January and February.

Now China's official growth forecast for the current year is 7.5% - a figure which would have all Western governments drooling, but which is seen outside China as the sign of a considerable slowdown in the giant consumer's economic growth pattern. But, China invariably overshoots its own economic growth forecasts, sometimes quite considerably, and while exports are indeed likely to be hit by the European downturn in particular, there are signs of a pick-up in its other key export market in the U.S., while the emerging markets continue their own rapid growth patterns and become more and more significant as potential buyers of Chinese goods.

Even growth of 7.5% in China itself - and as we note above there is every likelihood that this will probably be exceeded - suggests a continuing increase in huge demand for metals and minerals from around the world at a level which the mining companies will find exceedingly hard to meet given the constraints affecting global mining industry growth patterns.

One only has to visit Chinese mega-cities like Shanghai, Beijing, Shenzhen, Hong Kong etc. to see that construction continues apace, the millions of people in the street are beginning to enjoy a standard of living which could only have been dreamt of just a few years ago and at least parallels that seen in major Western cities. Indeed the growth in construction as seen in the skyrocketing skylines of these cities and urban transportation systems which put most American and European cities to shame, is indicative that the China growth scenario ain't over yet.

There is much talk of whether Chinese domestic growth can make up for any loss in export markets. Evidence suggests that it is getting there - growth rates in Chinese consumption are phenomenal by Western standards. Don't underestimate the combination of virtually unbridled capitalism, an enormous, and rapidly growing middle class coupled with a heavily state-controlled political and economic system. Economically it leaves the Western democratic model trailing in its wake.

And as wealth grows in China, as more and more people are brought into the middle classes every day, investment and wealth protection becomes significant as much as the desire to own and use modern capital goods. The inbuilt predilection in the Chinese population towards gold and silver as the principal protection in this arena is strong and while there may be blips, in all likelihood the explosive growth we have seen in recent years in popular demand for precious metals is more than likely to continue unabated.

Despite Western predictions of a hard landing for the Chinese economy, those who predict that should realise that China is a different animal to its Western counterparts and that economic theory, which may hold good in their own economies, may not apply in quite the same way as in countries like China with hugely tighter government controls - and the overwhelming necessity to keep its enormous population compliant and under control. It chooses to do this by meeting their economic aspirations and, to the outsider at least this seems to be a path that currently is working extremely well.