China is Growing But We Don’t Know What… Not Metals Consumption

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What does this dragon mean to you?

As if to underline just how tough it can be to predict the direction of Chinese economic growth and the consequences for metals consumption two articles in the same Reuters publication appear to quote the same data but draw opposite conclusions.

The basic data is China’s industrial and retail sales figures for March and for the 1st quarter as a whole. Reuters quotes National Bureau of Statistics figures when it says the economy grew 7.4% in the January-March quarter from a year earlier, slightly stronger than the median forecast of 7.3% in a Reuters poll but still slower than 7.7% in the final quarter of 2013. It was, however, China’s slowest annualized growth since the third quarter of 2012, when the world’s second-largest economy also grew at 7.4%.

A Tale of Two Outlooks

For the month, the economy grew 1.4% the slowest rate in two years, equivalent to annualized growth of 5.8%. Quarterly retail sales were a shade ahead of forecasts with an annual increase of 12.2%, while factory output came in just below expectations with a rise of 8.8%, continuing longer-term trends of rising retail sales and slowing industrial growth. The services sector, which includes retail, now makes up 49% of gross domestic product in the first quarter, 4.1 percentage points more than the industrial sector

One article sees these data releases as positive for China, supporting the government’s attempts to steer the economy away from industrial growth towards what it considers more sustainable consumption growth. Money supply growth has continued to slow, growing at it’s slowest pace in a decade but the article sees this as simply implying a reduction in bank reserve requirements could be in store, freeing up more funds for lending this quarter.

The other article sees the slowing industrial growth as a sufficiently serious risk for the economy that it may encourage Beijing to embark on a mini stimulus, particularly of much discussed rail and road infrastructure that could boost short term demand for steel, coal, iron ore and metals, but that, in the longer term, threatens the economy in the form of migration to consumption as the engine of growth. This would tighten the lending practices in the shadow banking sector and a continued weakening of the Yuan would dampen commodity demand even if some form of stimulus is introduced.

This second article points out too much iron ore, copper and now gold have been used as collateral for loan agreements that could unravel fast if Beijing applies sufficient pressure. Stockpiles are sufficient to significantly dent prices if they were to be sold into the market.

Could They Both Be Right?

So, while it is true to say both views are not mutually exclusive one is decidedly positive and one negative. In our opinion, the risks of further slowdown in industrial activity, the release of stockpiles accumulated to support financing deals, and pressure from Beijing and regional governments to deter any further capital investment in metals-producing and heavy-consuming industries are negatives that outweigh generally positive GDP growth. China may be growing, but the growth is not in metals.

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