The Slowing Dragon - Rich Clifford, fractalerts

The Slowing Dragon

How economic slowdown in China is going to affect Metals, Oil and More…

The Slowing Dragon

How economic slowdown in China is going to affect Metals, Oil and More…

Written by  fractalerts

If you receive our alerts, you’ll know that we’ve been talking a lot about China recently. In fact, the constant threat of an economic slowdown in China is now a regular talking point, given that the consequences of such a slowdown will be felt globally.

But the situation could be much worse than figures suggest.

The former chief economist of the International Monetary Fund has gone on the record in regards to the slowdown in China. Ken Rogoff thinks that one of the major drives of the slowdown is credit fuelled growth (“these things” he points out “don’t go on forever”).

When speaking to the BBC Rogoff stated that "China is going through a big political revolution, [a]nd I think the economy is slowing down much more than the official figures show”. Last week the latest GDP “gap” figures – these show the amount of debt in relation to annual growth – stood China at 30.1%, which is fuelling fears that China’s economic boom years where built on a foundation on credit bubble.

Rich Clifford, fractalerts

But if you aren’t in the metals markets, and you don’t pay much attention to the crude benchmark, well, China will still effect you.

Metals…

The Chinese slowdown is hitting metals hard. As the major consumer of gold (with up to 25% of the world’s gold jewelry finding a home in China), its meant a volatile few months for the yellow metal. That is set to continue, until we have a firmer indication of the true situation in China.

As for the industrial metals of copper and silver, Chinese slowdown is equaling continued volatility and increased trading volumes. China accounts for 40% of the global consumption of copper, which means that there is potential in the not to distant future for the price to plunge. And in regards to silver, we’ve already seen a price decline over the past year, as sales of semiconductors are down as China’s production of electrical goods is also in decline.

 

Crude…

Now you would think that if there is an economic slowdown, that if industry is waning, and that if the GDP of a country is falling, then so to will the crude oil imports. Well, you’d be wrong if you thought that was the case in China.

Their crude imports have remained strong throughout 2016, and are set to continue at that pace into 2017 as Beijing continues to fill their reserves whilst domestic oil production decreases.

Most of China’s oilfields are over 50 years old, which means that they can only continue to produce if investment is there. In the middle of an economic slowdown, investment simply can’t be found, and that is why production has dropped 6.9% in 2106

But, the slowdown in Chinese oil production has been a blessing to the global oil markets. As China is the 5th largest producer of oil, behind the US, Russia, Saudi Arabia, and Canada, their slowdown has been felt in the markets. And things could have been much worse, given that 2016 has been the year of low demand and huge surpluses.

 

But what does the slowdown mean to me?

But if you aren’t in the metals markets, and you don’t pay much attention to the crude benchmark, well, China will still effect you.

A lot of other countries are invested in China. British banks are in to the tune of $695billion worth of lending. That means that 16% of foreign assets in China (and Hong Kong) are held by the Brits. In addition, the Australian economy is largely dependent on a healthy, functioning Chinese economy, and that’s why the National Australia Bank have gone on the record this week to warn about their fears for ballooning Chinese debt.

Quoting ABC News Australia, ‘NAB chief economist Alan Oster said if the Chinese Government does not step in soon the world, and indeed Australia, will face another debt crisis within years. "I think everybody's on the hook," he said’.

And that means that if China continues to slowdown, we’ll not only see a shift in prices for goods being made in China (this will go up, because fewer are being produced as production costs soar), but we’ll also see debt crisis and slowing economies across the globe particularly in the UK and Australia.

So, to the average investor this means that volatility is going to enter the markets at an unprecedented rate. Fear fuels the markets, and arguably the uncertainty in China will be the underlying driver for the markets going forward.

The IMF has marked down its forecast for global growth nine years in a row. It wouldn’t be hyperbole to suggest that a tenth mark down is coming and that this is largely driven by the the Chinese.

 

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