Chinese Economic Indicators Could Drive Metal Prices

Source:

"PMI from China [saw] 'unexpectedly weaker conditions' during the month of February."

In addition to paying attention to U.S. economic indicators, particularly the PMI, unemployment claims, consumer confidence and GDP numbers, metal buying organizations must now concern themselves with all of these numbers from China. Many of these same indicators from China drive global metal markets and in turn, help explain the rise (and/or fall) of metal prices particularly for base metals. So we turn to a few news items from this week that may have escaped your radar. The first indicator involves China manufacturing activity, the equivalent of our PMI. Three organizations conduct a survey to measure PMI from China and all three reported "unexpectedly weaker conditions" during the month of February. Of course February also marks the Chinese New Year, so we would expect a slowdown. The question becomes, how should one interpret the data?

According to the China Federation of Logistics and Purchasing, PMI fell from January's 55.8 to 52.0 in February. HSBC's version of the index fell from 57.4 in January to 55.8 in February. Some might conclude the fall in the index indicates slower growth due to poor sentiment or falling industrial activity, while others suggest the slowdown is evidence that finally the Chinese government has started to control credit growth and government stimulus. Consider this about China growth during 2009 according to a recent Reuters article:
  • Borrowings by local China governments accounted for $556b of loans
  • These same local governments also raised $65.9b through bonds
  • UBS expects $439b of non-performing loans over the next few years due to borrowing by local governments
  • 78/136 bonds issued by local governments do not have third party backing or backing with hard assets
We view the slowdown in numbers as positive, particularly if it means China has sought to gently slow down lending. Broad pendulum swings in any direction cause markets to panic.

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