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A lot of (virtual) ink has been used to discuss the economic situation in
China at great lengths, and most opinions voiced concerns about the reduced
growth rate in the country. Here at Secular Investor we were always a bit
reluctant to accept that type of reasoning as what would make the Chinese
economy crumble because after all, the GDP continues to grow at a 6-7% rate
on an annual basis.
On top of that, you just know the Chinese government will try its best to
save face and avoid any remarkable slowdown, and we feel the Chinese
president and prime minister would also use Super-Mario Draghi’s catch phrase
‘whatever it takes’.
The market now seems to be catching up on that as well, as China has been
removed from the forefront since it devalued its currency, almost exactly a
year ago. Even though the impact of the devaluation initially remained very
limited with a 3% difference in one week (from an USD/CNY exchange rate of
6.20 to 6.40), the Chinese Yuan continued to weaken and as of right now, you
receive approximately 6.65 Yuan per American Dollar you’d convert. This means
China’s currency has now become 7.26% cheaper (which is twice as much compared
to the initial ‘official’ devaluation), and this doesn’t seem to upset the
market as much as the initial 3% move.
Does this mean there’s no slowdown? No, not at all, as all data are still
pointing in the direction of a lower growth rate. We will very likely never
see the double-digit GDP growth (again), but we also shouldn’t overestimate
the impact of the slowdown as everything seems to be very gradual. After a
GDP growth of 7.7% in 2013, 7.3% in 2014 and 6.8% in 2015, the economy is
expected to expand at a rate of 6.2-6.7% this year. Yes, that’s a lower
growth rate, but if you can continue to grow your economy at a rate of in
excess of 6% per year, you’re still putting in a very nice performance!
Cracking down on shadow
banking has done the economy pretty well, but this also meant the base
metals prices were hit pretty hard, as for instance copper
played an important role in the shadow banking system.
 
Source: Financial Times
The system was pretty simple, and some sources estimated up to half of
China’s copper warehouse inventory was used in the shadow banking system. As
a lot of these trades were unwound (either voluntarily or being forced by
margin calls), the copper
price experienced some pressure on its price, as you can see in the next
image.
Source: Stockcharts.com
Now the impact of the shadow banking system on the overall health of the
Chinese economy has been reduced, we wouldn’t be surprised to see the ‘real’ demand
for copper picking up again in the near future, as the end-users of the
copper have been drawing down from their stockpiles in the past few quarters
and years.
We saw the exact same thing happen with the iron ore price, where a sudden
supply glut killed the prices (and the operating margins), but the situation
now seems to have been stabilized, and the iron ore price is now trading in the
low-60’s range once again (after having traded as low as $40/t
just eight months ago).
Source: Vale website
If our theory proves to be right, we are expecting a higher copper price
in the not so distant future on the back of an increased demand for seaborne
copper from China. China isn’t dead at all, it just took a temporary pause.
>>>
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