None of us will ever forget commodity futures market fantasy yesterday in mainland China,that commodities such as Iron ore, Rebar, Copper, and Steel prices have all gone crazedly to to 15-month highs since Dec 23rd 2015 when the US imposed a 256% tariff on Chinese steel imports,despite billionaire George Soros’s warning,as Bloomberg reports he bombards that “China resembles US in 2007-8”.
So soaring prices were certainly not a signal of soaring demand after all as Credit Suisse explains:
“see, we were right that commodity prices were just up on liquidity recently pumped into the system rather than real demand, China is telling us that with this move.”
Faced with collapsing exports and a lack of domestic demand (and surging inventories) along with zombie steel mills on the verge of bankruptcy and desperately in need of cash flow or else China’s whole red ponzi would fail, the central planners unleashed a trillion dollars of new credit in Q1… As shown on the chart below, this was an all time high in dollar terms.
The sky-high credit expansion obviously lead massive amount of speculative money rushing into the commodity futures market,creating unbelievable turnover shocking eyeballs.Yesterday saw main Rebar contract RB1610 reaching historic high of RMB605.6 billion,equivalently the transaction volume is far more than whole country’s annual production of 200 million tons .
Money matters,no doubt.Whom god will destroy, the first made mad,China Wall street has told the story inside the economy.
After decades of spectacular expansion,China is facing the difficult task of managing a soft economic landing.China is emphasizing its “supply-side” reforms since last November,that is a shift from export and investment -driven growth to a model based on domestic services and household consumption.Rome was not built in a day,the ambitious ideal seems developed fully,but the reality of economy slowdown from double-digit growth to about 6 percent annually,is actually skinny.
The academic debate on “supply-side” restructuring is annoying.China remains gripped by deflation, with prices and output in a downward spiral,the economy’s major demand-side driver, real-estate investment, is declining more rapidly,for instance,by the end of 2015, real-estate investment growth dropped almost to zero.Real-estate investment accounts for more than 10% of China’s GDP, the impact on overall economic growth is certainly considerable. Perhaps China realized that the policy of ” deleverage,de-stocking,de-capacity”,enabling its zombie firms to produce at record output levels (as credit markets begin to shut) may have unintended consequences(such as hard landing and social disorder etc.) after all – i.e. a bigger glut, especially compared to ‘real’ demand,in which make it return to “the old normal” path to stabilize the economy.
That contributed to , among other things, the so-called “iron rooster”-stimulus program as Bloomberg reports:
“Mills now have their order books filled till July or onward,” said Li Qibao, an analyst at Changjiang Futures Co. in Wuhan, who predicts that prices will go on rising.There are “unmistakable signs of recovery in demand, with the help of an ‘iron rooster’-style construction boom that has come back at full speed,” Li said, referring to a nickname for China’s previous growth model as the Chinese pronunciation of the phrase translates as ‘railroad, highway, infrastructure.’
However, there is a dark side to all this credit-fueled malinvestment...as Reuters reports, despite pressure to curb output and relieve a global glut, China said on Tuesday its production actually hit a record high last month as rising prices, and profits, encouraged firms that had been shut or suspended to resume production.The China Iron & Steel Association (CISA) said March steel production hit 70.65 million tonnes, amounting to 834 million tonnes on an annualized basis.
“The big rise in steel prices has led to a rapid reopening of capacity that had been shut or suspended … a large rise in output will not be good for the gap between market demand and supply,” the CISA said.
So that’s why Steel, Iron Ore, The Baltic Dry are all surging – Yet another (record in fact) credit-fueled malinvestment boom enabling zombie firms to survive amid totally artificial demand for an already over-supplied and over-capacity industry.
“Given time, output will be raised to a level that tips the market back into oversupply,” said Xu Xiangchun, chief analyst at Mysteel Research. “China’s steel industry remains in severe overcapacity, so a glut will return.”
GDP growth is generated via the interaction between the supply side and the demand side of the economy. For example, investment in human capital enables innovation, the products of which create demand and, in turn, economic growth. Demand-side policy and structural adjustment are not mutually exclusive. In aggregate terms, growth of supply determines growth potential, and growth of demand determines the use of that potential. To change the economic structure and growth pattern, first the structure of demand must be changed.Structural adjustment remains absolutely critical to China’s future, and the country should be prepared to bear the pain of that process.China’s history provides reason to believe that its leaders will make the right choice to lay more concentration on structure reform to upgrade quality and productivity, inducing financials to the real demand streets and innovative sectors.
China Wall Street’s gambling should get to be curbed.