Recently China has been viewed as a stand out in a horrible global economic situation. It has been peculiar that the world's biggest exporter has been able 7% rate of growth while other major exporting economies, Taiwan, Japan, Hong Kong, and South Korea, all suffered negative growth rates and negative annual growth targets. In response to this environment, Chinese government has mandated lending in the face of a massive drop in exports revenue.
Unfortunately, in traditional heavy handed approach by the Chinese governmenet, the lending has been indiscrimminately applied. Initial observations suggest that manufacturers have used the additional capital to build up raw material inventories without actual demand to produce for. "The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China's recovering economy. Indeed, the international financial market is portraying China's perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.
But China's imports are mostly for speculative inventories. Bank loans were so cheap and easy to get that many commodity distributors used financing for speculation. The first wave of purchases was to arbitrage the difference between spot and futures prices. That was smart. But now that price curves have flattened for most commodities, these imports are based on speculation that prices will increase. "Demand from China's army of speculators is driving up prices
, making their expectations self-fulfilling in the short term" Although I do not have the information resources to support this, I would be curious to know if Chinese companies were actually given incentives to borrow money based on their purchases of commodities, and took advantage of the situation to "arbitrage" the purchase domesticly with other market consumers. If anyone has any insight to how the Chinese stimulous package is being administered, chime in. But back to story...
But there is evidence that Chinese firms, and foreign firms operating in China, are not planning to import, but instead are speculating on an increase in domestic demand or a future recovery in export demand.
If China is speculating with stimulus money expecting renewed global demand, by the second half of 2009, it may not come. Surveys show that shipping rates could actually decline
because of reduced purchases by Chinese manufacturers in late 2009. Moreover, just a technical or market mover related adjustment in commodity prices due to lack of real end user demand could cause significant pain or even unloading of commodity futures contracts if balance sheet issues arise at these speculating firms.
In any case, commodity prices appear to be a solid "tell" over the next six months regarding the effect of the Chinese stimulus and the Chinese economic growth story as scenario to end the global recession.
The author has no positions related to this post.