Key Takeaways
- • China's broad growth index has diverged sharply from its component indicators, with exports and industrial production strong while real estate remains a drag, complicating the traditional link between Chinese growth and commodity prices.
- • Construction of new homes and offices has fallen 58% from a 2021 peak of 15.1 trillion yuan to 6.3 trillion yuan over the past 12 months, while home prices have declined roughly 15% from their 2021 peak.
- • Lithium battery electric vehicles and plug-in hybrids are expected to account for 68% of Chinese car sales this year, supporting copper demand while depressing demand for crude oil, refined products and ferrous metals.
- • China's budget deficit is near 8.5% of GDP, with government revenue falling from 29% to 21% of GDP, and total debt reaching 305% of GDP versus 140% on the eve of the global financial crisis.
- • The PBoC has been the only major central bank not to hike rates this decade, with low inflation and a large domestic savings pool limiting near-term financing concerns.
Summary
China has long been the dominant driver of global commodity demand, but the relationship between its economy and commodity markets is no longer as tightly linked as it once was. According to the analysis, copper tracked Chinese growth closely until 2022, when the two diverged, and many other commodities have decoupled since 2022 owing to shifts in China's economic structure, technological change, a rotation toward green manufacturing, and the conflict in the Middle East. Historically, the author's index of Chinese growth was built from National Bureau of Statistics data on retail sales, industrial production, electricity output, rail freight, bank loans, and trade volumes. Those indicators have recently diverged sharply.
Trade and industrial production are performing strongly. Exports are growing, led by electric vehicles, solar panels and other industrial and consumer goods, and imports are rising on demand for industrial metals including copper, though part of the import increase reflects higher prices for copper, crude oil, refined products and natural gas. Industrial production is growing at around 5% year over year. Domestic demand for EVs is a major factor: lithium battery EVs and plug-in hybrids are expected to represent 68% of Chinese car sales this year, with nearly all produced domestically. Solar installations are expanding as solar generation costs fall roughly 6% annually. The article argues that EV sales and export growth may be a better gauge of copper demand than broad economic measures, while the EV shift weighs on crude oil, refined products, biofuels and ferrous metals. Booming EV sales also helped China cut crude consumption sharply this past spring after Middle East supply disruptions, with demand reduced by an estimated three million barrels per day.
Real estate remains the principal headwind. Construction of new homes and offices has fallen 58% from a 2021 peak of 15.1 trillion yuan to 6.3 trillion yuan over the past 12 months, and home prices have declined for five years, by about 15% from their 2021 peak according to the National Bureau of Statistics. Because the average household holds roughly 68% of its net worth in its primary residence, the article attributes weak consumer spending, which is growing at a historically slow pace of under 1% annually, to a negative wealth effect. Government revenue has fallen from 29% to 21% of GDP as construction contracted, pushing the budget deficit to nearly 8.5% of GDP and prompting large transfers from Beijing to local governments.
Debt levels are also elevated. Total public sector debt has risen to 101% of GDP, compared with 26% twenty years ago, and the overall debt burden including the private sector has reached 305% of GDP, up from 140% on the eve of the global financial crisis. This places China's total debt above that of Western Europe and the U.S. The article judges financing to be of little near-term concern, citing domestic savings rates of around 30%, low Chinese bond yields relative to peers, and inflation well below the People's Bank of China's 3% target. The PBoC is described as the only major central bank not to have hiked rates this decade, and recent currency strength may give it room for further cuts should capital flight or currency weakness emerge.
The article's bottom line is that China remains a key influence on commodity prices, but divergent growth across sectors, technological change and geopolitics are causing many commodity markets to move independently of broad measures of Chinese growth.
Trade and industrial production are performing strongly. Exports are growing, led by electric vehicles, solar panels and other industrial and consumer goods, and imports are rising on demand for industrial metals including copper, though part of the import increase reflects higher prices for copper, crude oil, refined products and natural gas. Industrial production is growing at around 5% year over year. Domestic demand for EVs is a major factor: lithium battery EVs and plug-in hybrids are expected to represent 68% of Chinese car sales this year, with nearly all produced domestically. Solar installations are expanding as solar generation costs fall roughly 6% annually. The article argues that EV sales and export growth may be a better gauge of copper demand than broad economic measures, while the EV shift weighs on crude oil, refined products, biofuels and ferrous metals. Booming EV sales also helped China cut crude consumption sharply this past spring after Middle East supply disruptions, with demand reduced by an estimated three million barrels per day.
Real estate remains the principal headwind. Construction of new homes and offices has fallen 58% from a 2021 peak of 15.1 trillion yuan to 6.3 trillion yuan over the past 12 months, and home prices have declined for five years, by about 15% from their 2021 peak according to the National Bureau of Statistics. Because the average household holds roughly 68% of its net worth in its primary residence, the article attributes weak consumer spending, which is growing at a historically slow pace of under 1% annually, to a negative wealth effect. Government revenue has fallen from 29% to 21% of GDP as construction contracted, pushing the budget deficit to nearly 8.5% of GDP and prompting large transfers from Beijing to local governments.
Debt levels are also elevated. Total public sector debt has risen to 101% of GDP, compared with 26% twenty years ago, and the overall debt burden including the private sector has reached 305% of GDP, up from 140% on the eve of the global financial crisis. This places China's total debt above that of Western Europe and the U.S. The article judges financing to be of little near-term concern, citing domestic savings rates of around 30%, low Chinese bond yields relative to peers, and inflation well below the People's Bank of China's 3% target. The PBoC is described as the only major central bank not to have hiked rates this decade, and recent currency strength may give it room for further cuts should capital flight or currency weakness emerge.
The article's bottom line is that China remains a key influence on commodity prices, but divergent growth across sectors, technological change and geopolitics are causing many commodity markets to move independently of broad measures of Chinese growth.
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