If someone asked us at MetalMiner what issue or theme has the greatest impact on metals markets I think we would collectively say “China’s economy. From steel to aluminum to zinc to iron ore, what China does (or doesn’t do as the case may be) and how the various markets react to that impacts all of us whether we sit in the US, the UK, Mexico or Italy. Let’s take a look at one news story from Friday – the Chinese government raising bank reserve requirements to reign in a bank lending spree that any market observer would call out of control (by the way, please don’t misconstrue that last point as self-righteousnessÂ¦.I am well aware that our own bank lending policies looked similar). Chinese banks will have to increase reserve requirements by 50 basis points in an attempt to put the brakes on new loans that exceeded $203.6b in January alone. According to a recent Wall Street Journal story, the number of new loans in January exceeded all loans made during the last quarter of 2009. We would argue much of the loan money has gone toward two areas the housing market (probably the largest chunk) and investment in manufacturing capacity.
Both result in dangerous bubbles. The first, well we all know first hand what happens when property markets turn bubbly but the second, over-capacity, does not equate to increased consumption a goal the Chinese authorities have said remains paramount to their economic growth strategy. And according to two leading Chinese economists, Mao Yushi, chairman of the Unirule (Tianze) Institute of Economics in Beijing and Ha Jiming, a former senior economist with the International Monetary Fund, and currently chief economist in Hong Kong for China’s first Sino-foreign investment bank, China International Capital Corp. in Beijing, both believe the real estate market is a bubble and both feel the government must turn excess capacity to consumption. Yushi believes the government must reduce taxes and spur investment in the private sector vs. the state-owned companies. Both also share some points of view on income. Yushi believes the government out to focus on improving income for individuals whereas Jiming suggests the government focus on income disparities between rural and urban dwellers. These suggestions, they believe, would help foster consumption. Finally, both economists believe the RMB must appreciate in value, a point that we have discussed at length on these virtual pages.
The policy change on reserve requirements represents a double-edged sword. To preserve Chinese growth for which both the investment community and our own economy depend (particularly if you believe Obama’s desire to double exports over the next four years), we all have a vested interest in a slow air leak on these bubbles. Metal prices of course take their cues from China economic data and forecasts. And though many a sourcing professional cringed at the rising base metal complex during 2009, we all know that the alternative feels much worse!