Last week China came out with its 2010 first quarter, year on year GDP growth figure of 11.9%. This is a long way from the 6.2% this time last year. This is mostly due to the massive government spending programs since then. Such a high figure has now got the markets worried that this means that China is going to step up efforts to slow things down.
These annual figures are made by adding up the last four quarters. But you get a different picture if you look at the individual quarterly growth figures. Quarterly growth has actually been falling for the last four quarters and is a now third less than it was in the 2009 June quarter.
All the same, it looks like China is ready to tighten things up. In fact, this is already happening. Last year China became land of the generous bank manager, and even this February astronomical amounts were being lent out. This put excess money into the system which is partly behind the rapid growth. Then the government made noises about reining this in, and by virtue of a being a communist system this happened surprisingly quickly. March bank lending was 27% lower than in February. If this new level is maintained, the government will achieve their more restrictive goal for the year. This could put a dampener on commodity prices, as it will probably reduce import levels.
At the same time though, we have the US braying for China to allow its currency to appreciate to a fair level. This war has been waged for a long time, and it looks like there might some movement soon. If the Renminbi were allowed to appreciate, then China would be able to afford more imports. For the things that China imports a lot of such as iron ore, copper and platinum, prices in these commodities should rise.
The Big Mac Index, published by The Economist is a rough and ready way to measure how fairly-valued a currency is. It does this by looking at how much a Big Mac costs in each country in terms of US dollars. This sounds crazy but actually makes a lot of sense. By this measure China’s Renminbi is the most undervalued currency at around 50% below true value. By this measure the most overvalued is the Norwegian Krona. (A word of warning: Never buy a round of drinks in Norway. You’ll feel like you’re buying the pub).
China always steals the show when the conversation turns to commodities, but there’s plenty more buyers outside of China. What is exciting is that the Purchasing Manager Index (PMI) figures are now showing a strong increase in commodity demand in the US and Europe. Despite the events of the last few years, they are still in a long term uptrend as this chart nicely shows.
Dr. Alex Cowie
Editor, Diggers & Drillers
for Markets and Money