China: The Engine of Restraint

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One can argue the exact percentages, but the fact remains in broad terms that China is the source of up to half the global demand for many raw materials such as iron ore, copper, cement, steel and so on.

The state of the Chinese economy therefore remains a fundamental driver in both actual physical demand for metals and for investor confidence in the future demand for and direction of metal prices.

So when official surveys show the manufacturing sector expanded in June at the slowest pace in seven months and even Chinese government researchers estimate the economy only grew at 7.5 to 7.6 percent in the first half of this year, then we can take it the direction is clearly going toward a pronounced slowdown.

Indeed, with growth in the first quarter of 8.1 percent, 7.5 percent for the first half would suggest a sharply deteriorating position for the second quarter.

Nicholas Lardy, an economist at the Peterson Institute for International Economics and quoted by the FT, advised that worse is yet to come. Lardy believes a major slowdown in China’s overheated real estate market has not yet fed through to the wider economy, but when that happens, the economy is likely to slow further in spite of government stimulus attempts.

The slowdown appears in part to be led by weak exports as evidenced by more specific sub indices. The PMI sub-index for new export orders fell into contraction territory with a reading of 47.5 in June from May’s 50.4, while the sub-index for overall new orders fell to 49.2 from 49.8 in May.

Worryingly, domestic consumption is not picking up the slack; domestic demand, as illustrated by the imports sub-index, also declined to 46.5 in June from 48.1 in May.

Car consumption, previously expanding at a rapid pace, slowed when new car subsidies were removed and is now being further constrained by government policies. The FT explains how Guangzhou has become the third Chinese city after Beijing and Guiyang to limit car sales in an attempt to improve traffic conditions and air quality.

Guangzhou, the capital city of Guangdong, will only allow 120,000 new cars to be registered over a one-year trial period, mimicking Beijing’s decision in January to limit new car sales to 20,000 a month. Although who can blame them — the average traveling speed of a car during peak hours in Guangzhou has slowed to 20 kilometers an hour (12 mph), and is expected to slow further as traffic numbers rise, the article states.

The biggest driver to China’s economy, though, was construction.

To be continued in Part Two.

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