Commodities Peking?
Just when the world seems to be counting on China the most, there is a growing risk the Chinese economy goes the other way. This disconnect shows up most clearly in the contrast between recent trends in global commodity markets and incoming data on the Chinese economy. Commodity prices rose sharply in February and early March, hitting 24-year highs for the broad composite gauges and 7-year highs for the industrials subsets.
The Chinese import dynamic indicates a possible slow down, where the cumulative gains in January and February averaged only 8.3% -- a dramatic slowing from the 36% increase for all of 2004. The shortfall of import growth -- if, in fact, it is a reliable reading -- underscores the important possibility of a slowing in Chinese internal demand.
If the Chinese economy is already slowing and the government wants it slow further, then what’s going on in commodity markets? A speculative commodity play by financial investors? Research suggests that the hedge fund community has not unwound the major long position it established in commodity markets in 2003. Consequently, to the extent there has been a decoupling between commodity prices and Chinese industrial production growth -- and that there is no new candidate that fills the global growth void -- the role of financial speculation emerges as a prime suspect.
If that conclusion is correct, a further slowing in Chinese industrial production growth -- consistent with both the fragmented data flow of early 2005 as well as the intent of the Chinese leadership -- could catch commodity speculators leaning the wrong way.
Morgan Stanley
The Chinese import dynamic indicates a possible slow down, where the cumulative gains in January and February averaged only 8.3% -- a dramatic slowing from the 36% increase for all of 2004. The shortfall of import growth -- if, in fact, it is a reliable reading -- underscores the important possibility of a slowing in Chinese internal demand.
If the Chinese economy is already slowing and the government wants it slow further, then what’s going on in commodity markets? A speculative commodity play by financial investors? Research suggests that the hedge fund community has not unwound the major long position it established in commodity markets in 2003. Consequently, to the extent there has been a decoupling between commodity prices and Chinese industrial production growth -- and that there is no new candidate that fills the global growth void -- the role of financial speculation emerges as a prime suspect.
If that conclusion is correct, a further slowing in Chinese industrial production growth -- consistent with both the fragmented data flow of early 2005 as well as the intent of the Chinese leadership -- could catch commodity speculators leaning the wrong way.
Morgan Stanley
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