The turmoil in Asian stock markets, including India, on Monday was triggered by fears about a floundering China. China’s stock market is down 36 per cent (in yuan terms) since June. All efforts by its government to prevent its stock market from crashing such as a 25 basis point cut in interest rates, a green flag to pension funds investing in stock market, relaxation of rules on margin funding for stocks, have been in vain. This has unnerved global markets. Data on Friday showed that China’s manufacturing index contracted in the first three weeks of August — at the worst pace since 2009. The China factor is expected to accelerate the recent downward spiral in commodities.
Two weeks ago, the People’s Bank of China announced its decision to make yuan partially floating. Though it appeared then thatChina was making a case for itself in the reserve currency basket, a position it has been eyeing for years, fears are now that the country is facing a slowdown that it is finding hard to manage.
So what if China slows down? China is of critical importance to commodity markets because of its voracious appetite for most commodities. The country consumes about half the global production in metals and is the second largest consumer of oil in the world. If the dragon economy weakens, it is bound to have a ripple effect on prices.
In the years between 1991 and 2011, when China’s GDP recorded an average growth of nine per cent a year, the country made huge investments in manufacturing capacities. As a result, industrial production leapfrogged at a rate of 12 per cent every year in the period. Economic growth, industrialisation and increasing income of the middle class saw the economy boom. But in the last 15-18 months, growth has been sputtering in China. The country’s GDP growth in the June quarter was reported at 7 per cent, down from 7.5 per cent the same time last year. Its industrial production in July stood at 6 per cent, down from an average eight per cent in the second half of 2014. The country’s exports have also been heading down. In July, the country reported that its exports dropped 8.3 per cent from a year earlier, compared to an increase of 2.8 per cent in June.
Shrinking demand With so much evidence of a faltering China, commodity markets are worried about shrinking demand from the dragon economy for a range of commodities. Countries such as Australia, Russia and Brazil which are dependant on revenues from commodity exports are expected to see a sharp slowdown with prices of industrial metals such copper, zinc and aluminium down 25-30 per cent in the last one year. Oil prices are down even more sharply. Here, while the fall began on the back of increasing US oil stocks, in the last two weeks, concerns over China’s slowdown have also hit prices. Brent crude has plunged 13 per cent since PBOC’s move to make yuan more market linked.
While lower commodity prices are a blessing for net importers such as India, the fear is that cheap Chinese imports will pressure domestic industries elsewhere.