In the last week of August, Marc Faber gave a signal that all is not well in China. He points out that some of the Chinese statistics, like 7.7% GDP growth, are inflated to the upside. There is a big chance of a hard landing in China because many statistics point to a significant slowing of the Chinese economy. For example, in July, industrial production declined sharply (see Chart 1).
Click to enlarge images.
It is very important to know that commodity prices are completely dependent on the growth of China, as China is the biggest consumer of commodities in the world. If for example, the U.S. slows down 10%, it would be completely meaningless and wouldn't have any influence on the price of commodities. The reason is that the U.S. GDP is composed of about 80% services, which don't use any commodities (see Figure 1), while only 44% of China's GDP consists of services (see Figure 2). So all eyes should be on China for the commodity investor.
So what is the best way to find the real growth of China? We make use of historic correlations, and the best correlation is that between electricity consumption and year-over-year GDP growth.
Let me show that Chinese power consumption and Chinese power production go hand in hand with an almost 100% correlation (see Chart 2). If I talk about a decline in power production, it is a synonym for a decline in power consumption.
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| Chart 2: China Power consumption/production |
Furthermore, as you can see in Chart 3, Chinese power output correlates very well with Chinese GDP growth.
This means that Chinese power consumption (and power production) must correlate with Chinese GDP.
The latest number (July 2012) for electricity output/consumption growth in China is 4.5%, up from 2.7% in May 2012 and 0% in June 2012. So we can assume that year-over-year Chinese GDP growth is between 0% and 5%, rather than 7.7%.
My bearish view on China is supported by the declining export numbers (see Chart 5) and the declining Shanghai property index (see Chart 6).
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| Chart 5: Chinese exports to EU 27 |
Conclusion
Marc Faber is predicting a 100% chance of a global recession in the coming six months, where China could have a hard landing. If no stimulus measures are announced from China or the U.S., we will get a difficult market going forward. In that case, investors need to flee for safe haven assets like precious metals (PSLV, PHYS). They should avoid industrial metals like copper, zinc, and iron. This also implies that they should avoid stocks, as stocks correlate with the copper price.
