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Whatever China seems to be trying to do, it doesn’t look like it’s working. When the country released some data on the amount of new credit, the results surprised everybody. Not only fell the aggregate financing to just $75B which was lower than the number projected by all analysts, it was also just 45% of the median of the forecasts which expected approximately $165B of credit to have been extended during October.
Despite having cut the benchmark interest rates no less than six times in a limited timeframe, China doesn’t seem to be able to jumpstart its economy again, and we fear this is a sign the Chinese overcapacity situation continues to persist.
Does this mean we should give up on China’s miracle of economic growth? Not at all, as China’s prime minister has once again confirmed its country is willing to increase the country’s GDP by deploying rather aggressive measures. Not only were the interest rate cuts an important signal, the PM now also said he was willing to reduce the corporate taxes in another attempt to boost the output.
Source: tradingeconomics.com
Unfortunately China can try to do whatever it wants, the truth is the fact the corporate and household debt levels have reached new heights. Whereas the combined household and corporate debt stood at 125% of the GDP during the global financial crisis in 2008, this level increased to 208% now. The 65% increase already sounds impressive when compared to the GDP, but when you’d look at it in absolute numbers, the total debt increased from $5.5 trillion to $22.36 trillion. That’s a 307% increase and definitely nothing to ignore.
It just looks like China might need a temporary break and instead of investing in above-average future growth rates, there might be a period of consolidation. This doesn’t have to take long and in just a few years time the total debt vs the GDP might already have reached a more acceptable level (as the GDP continues to increase but the level of debt will decrease).
That being said, the commodity markets were quite spooked by the Chinese credit data and Dr Copper, the barometer of the economic sentiment in the world, blinked. The copper price fell by a few percent to less than $2.2 per pound and has now reached the lowest level since the global financial crisis.
Source: stockcharts.com
And this low copper price could mean we will see a new balance between supply and demand pretty soon. There aren’t a lot of copper mining companies that are still profitable at the current copper price, and when looking at the levels of the copper inventory at the warehouses, you can clearly see a direct correlation between the decreasing copper price and the reduced inventory levels.
Source: Royal Bank of Canada
When China sneezes, the copper price takes a nose dive. But how sustainable is this? The copper price is generally being seen as an excellent way to gauge the strength of the world economy and let’s not forget China is continuing to grow and the Federal Reserve is so convinced about the health of the American economy it’s even considering to increase the interest rates again.
So, either the economy is sicker than you think and Dr Copper is right. Or the Doctor has it wrong, and everything is fine with the world economy (but that's less likely).
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