China’s Hard Landing Will Batter Commodity Markets

Leading economists have started studying the scenarios of possible effects on commodity markets in case China’s growth dips to 3 percent.

China's Hard Landing Will Batter Commodity Markets

If China’s growth plummets to 3 percent, Barclays’ economists envisage a scenario with copper prices falling over 60 percent, zinc by over 50 percent and oil prices dropping to $70 a barrel.

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Shamim Adam of Bloomberg observes that China’s growth has slowed below 8 percent, signifying the longest streak of expansion below 8 percent in at least two decades. Shamim feels the recent economic data reinforces the view that China’s slowdown hasn’t ended.

Adam notes a growth target of 7.5 percent has been set by the Chinese government for 2013, and its five-year plan projects 7 percent average growth through 2015. It is significant to note China’s growth has never fallen below 7.6 percent since 1990.

Barclays says ‘Likonomics’ inflicting short term pain

Adam’s report cities Barclay’s Sudakshina Unnikrishnan and Jian Chang observations, and notes that China is experiencing growing risk of financial stress thanks to build-up of debt by companies and local governments.  Barclays’ analysts point out that Likonomics – a term applied to the market reform policies of Chinese Premier Li Keqiang –has started inflicting short-term pain on the economy.

Barclays’ analysts feel that China’s recent data has not been encouraging, though it is difficult to predict when exactly a hard landing would happen.

Nomura predicting sharp drop in prices of China

Shamim Adam of Bloomberg also cited a Nomura Holdings report predicting that China will experience a one-in-three chance of a sharp drop by the end of 2014. According to Nomura’s report, if China grows at 5.9 percent in 2014, metal prices would fall by 30 percent, while oil prices may drop a substantial 20 percent.

China has shown an increasing appetite for commodities, and its thirst for commodities has made it the world’s biggest buyer of industrial metals and the largest energy consumer.

The Nomura report also predicts  that if China’s growth is 5.9 percent in 2014, it would cut 0.3 percentage points from world economic growth. However, Nomura’s baseline forecast for 2014 growth is pegged at 6.9 percent.

SocGen warns against investor complacency

As reported earlier, SocGen analysts feel many investors may still be relatively complacent about the risk of China’s hard landing. According to SocGen analysts, the Chinese economy is set on a path of structural deceleration, due to deeply rooted imbalances. Symptoms include a massive amount of excess capacity, high and rising corporate and local government debt, as well as an increasingly marginalized private sector. All of these contribute to a concerning trend of deteriorating productivity growth. In their view, there is no other ending to China’s massive resource and credit mis-allocation than a painful bursting of the bubble.

Echoing similar views to Barclays, SocGen analysts also wonder when exactly the Chinese economy might experience this inevitable hard landing.