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China’s economy this month decelerated much faster than many economists had anticipated, sending shock waves throughout the commodity sector. Copper, known as the bellwether metal because it is particularly sensitive to changes in global economic growth, plummeted into a bear market last week. And Brent crude prices have contracted about 9% since peaking in late January.
The world economy depends on China to import more and more metals and oil to keep global demand healthy. The country has, after all, the world’s second-largest economy and it’s the biggest consumer of metals and energy. It’s a dependency that’s been in place for the better part of the past decade and that has helped fuel commodity prices and the stocks of the companies that produce them.
But China’s economy is clearly slowing. From double-digit growth just a few years ago, Chinese officials now expect the country’s gross domestic product to increase by 7.5% this year. And, of course, somewhere down the line, China’s economy will transition to an upper-income and slower one.
When that eventually happens, the global market will need another source of demand to fill the giant hole left behind by China. Which begs the question: Can another country ever become a China, so to speak? If not, alternative investors focused on commodities may be out of luck.
“It’s hard to see because China is very unique,” said Qu Hongbin, HSBC’s China chief economist. “It’s unique in terms of scale, in terms of its consumer potential, and in terms of its ability right now to build massive infrastructure projects that no other country can really match at the moment.”
China’s current history of astronomic economic growth has its roots in 1979, when the country implemented reforms that opened up its domestic market to foreign investment and encouraged Chinese companies to be more export oriented. For much of the past three decades, the country has experienced double-digit annual growth.
But this month it’s become clear the status quo is changing. China’s first-quarter GDP missed expectations last week, coming in at 7.7% versus economist expectations of 8%. Chinese manufacturing, meanwhile, appears to be on the verge of contracting.
Data from the Purchasing Managers’ Index for China this week showed a reading of 50.5 for April, versus 51.6 for March. Anything above 50 indicates growth; anything below indicates contraction. And it’s becoming increasingly clear that China’s appetite for commodities is starting to lessen.
“Trade data show that Chinese imports of commodities, and industrial metals in particular, have been falling in recent months,” said David Rees, an emerging markets economist at Capital Economics.
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