China PMI, Lending Figures Not Looking Rosy as Metal Inventories Build Up

We don’t make excuses for writing with relative frequency on the Chinese economy.

As the world’s largest consumer of metals, and indeed of nearly all commodities, the condition and direction of the Chinese economy has a profound impact on metals prices. The latest numbers make relatively bearish reading and run counter to expectations earlier this year that there would be a pickup in Chinese activity by Q3.

As an FT article explains, the purchasing managers’ index, one of the most important forward-looking gauges of industrial activity, slouched to 49.2 in August, a nine-month low. It had been forecast to stay roughly level with July’s 50.1 reading.

Bank lending is slowing, to its lowest rate for 10 months, and official economic growth has slowed to 6.8 percent in the first quarter and 6.9 percent in the second, from 9.2 percent last year; meanwhile, fixed asset investment, once the driver of Chinese growth, is growing at a fraction of the rate a few years ago.

This is not a doom-and-gloom picture.

Inflation is low, growth of 6+ percent is still fantastic by rest of the world’s standards, and with China’s working-age population growing much more slowly over the last five years, Beijing is not yet facing mass unemployment like they did in 2008/9.

Most observers see the current situation as a natural over-swing of the pendulum, from excessive export-led growth to a cooler, more consumer-focused future. As another article points out, China’s export-led model, as Japan has so painfully illustrated, is not a sustainable long-term model.

Moreover, while China’s investment/infrastructure model of recent years has proved incredibly effective at lifting millions out of poverty and rapidly industrializing the country, it has also resulted in huge waste.

Output now exceeds sales in a host of industries, leading to a build-up of inventories of everything from cement and coal to iron and steel. Even gold, officially promoted by Beijing as a good investment for consumers, has seen a drop in demand from China.

As the FT points out, the investment-led model only works well at a certain stage of development, and Beijing’s avowed shift to a more consumer-led economy is probably recognition of that view.

So as this article asks, what is the new normal for Chinese growth?

Continued in Part Two.


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