China’s changing growth profile and the commodities that stand to benefit – by Geoff Candy ( – October 11, 2013)

According to Standard Bank, while it is not going to be a linear progression, the nature of Chinese growth is likely to moderate over the next five years.

GRONINGEN (MINEWEB) – Like any good relationship, it is hard to imagine one’s life without the other person while things are going well. Which is why, any mention of slowing growth in China was met by many in the commodities market with loud cries of “I can’t hear you” and hands clasped firmly over ears.

A case in point, it could be argued, is the massive expansion in iron ore production by the likes of Rio Tinto and BHP Billiton in the face of slowing demand from China, which is expected to result in at least four years of expanding gluts, according to data compiled by Bloomberg.

That’s also not to say, and this is an important distinction, that growth in China has stopped, rather it is moderating. Overall growth is expected to slow over the course of the next few years but it is still going to be at a healthy rate. Indeed, it should also be noted that the base on which this, albeit slower, growth is now placed, and thus the quantum of commodities required in any given year, is vastly higher than it once was.

Which means that the more important question for commodity markets than whether or not growth in China is actually slowing, is how the nature of the growth is changing?

There is a concerted effort on the part of the politburo that runs the country, to shift China away from the investment-led growth of previous years, to a more consumer-led type of growth going forward. And, it is that which is likely to have more of a bearing on commodities than pure growth levels.

But, as Standard Bank notes in its latest Commodities Quarterly Review an even more important question than whether or not Chinese growth is slowing is, if it can actually become a more “consumption-led” economy in a low growth environment.

The bank’s initial assumption is that, structurally, growth in the Asian giant will be lower over the course of the next five years, while its base-case scenario is that China will be successful in its attempts to rebalance its economy toward consumption.

The bank points out that, “Ultimately, growth is the most important driver of commodity demand, and it doesn’t seem to matter whether it is consumption-driven or investment-led growth.”

But, it adds, “We find that higher growth (irrespective of the type of growth) implies higher demand for commodities under most scenarios. However, when one is dealing with slower growth rates, the type of growth does matter.”

According to the bank, there is the trade off that must take place between household consumption expenditure (private) and investment expenditure, so called gross fixed capital formation (GFCF).

For the rest of this article, click here: