Miners have more often been amongst the fallers than the risers this week on the FTSE, partly as a result of weaker metals prices. From a technical standpoint it’s an uncertain time in the markets.
At Shore Capital, analyst Yuen Low has speculated that in the context of the upcoming Chinese Communist Party, to be held in the middle of next month, certain Chinese demand figures are being massaged.
“In our view,” says Low, “the current broad commodity price boom is likely attributable to measures being taken by the Chinese authorities to ‘pretty up’ things in the run up to, and during, said event. We would not be surprised to see their collective foot coming off the pedal after the congress ends, and for commodity prices to ‘come off the boil’ as a result.”
It’s certainly true that the Chinese financial authorities are taking the event very seriously. Brokerage bosses have been told they are not allowed to travel during the period leading up to the Congress.
The Chinese Securities Regulatory Commission has also issued a general order that brokerages should mitigate risks and ensure stable markets.
And yet, on the other side of the same coin, the Chinese data isn’t all wine and roses.
“Chinese headline macro data for August was surprisingly weak with headline figures missing survey estimates and falling month-on-month,” analysts at Liberum wrote this week
“We had expected momentum to carry the economy for at least a month longer, given the strong PMIs and recent price action in commodities (implying at least speculation of growing demand).”
A month may not be a long time in Chinese politics, which runs its Congress on a five year cycle, but it sure is a long time as far as markets are concerned.
Will the iron ore price boom taper out? What of the recent across the board strengthening of base metals? It may be that the recent strong momentum driven by renewed growth in China is now about to slow.
After all, the growth rate target is now 6.5%. This is a far cry from the double digit growth that drove the mining boom of the last decade, and lower on the whole than growth has been even in recent years.
But the Chinese are mindful that economic growth can’t be sustained at such rapid rates for ever, and the government would much rather manage the slowdown itself that have to react to events outside its control.
Damien Ma at the Paulsen Institute comments that the Chinese are in fact deliberately slowing down their own economy in order to manage a hoped-for transition from an focus on industrial production to a new focus on economic activity with more value-add.
The aim is to make China a high-income economy by 2049 - or to put it another way, the government is increasingly interested in GDP per capita, and not just overall GDP.
But what are markets to make of all this? – the government of the world’s second largest economy deliberately engineering a slowdown of growth rates in order to make its economy more high-end.
It’s good for the lithium sector of course, as China added its voice to the UK’s and France’s calls for the total phasing out of petrol-engined in future. That sort of policy fits in with stated Chinese aims all round: electric vehicles are high-tech, the planned widespread ownership of electric cars in China brings the citizenry right into the forefront of the world’s technological advance, and most importantly for stability in China, the air should be cleaner, allowing its people actually to breathe in safety.
This latter issue may come to have unexpected effects on mining and commodities markets in the months and years ahead. In iron ore for example, analysts have noted the unusual conjunction of price rises driven by Chinese demand alongside a growth in Chinese stockpiles.
But the best thinking puts this down to a flight to quality: the lower grade stockpiles require more energy to process and will generate more pollution. Processing them would risk the wrath of party officials - better to pay a premium for higher quality ore.
Other distortions on a similar vein will follow soon enough.
To be sure, the bull case remains. If GDP per head remains the focus, then huge amounts of copper will be required to build the houses and electronics required to keep the new middle classes comfortable.
But short-term factors may intervene, and the priorities of the One Party State could always change. That is likely to cause a certain skittishness in asset pricing in future, especially when the currency of choice, the dollar, remains subject to its own domestic pressures.