Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

As China grows bigger, implicit risk for commodities goes up

Commodities / China Economy Mar 11, 2011 - 03:59 AM GMT

By: Submissions

Commodities

Best Financial Markets Analysis ArticleJan Kaska writes: This may sound counterintuitive, but we believe that as China grows bigger, it poses the biggest risk to commodities. No doubt, over the long term, commodities should remain structurally well bid as emerging Asia and developing countries will continuously have to tackle the infrastructure gaps. For example, countries like India and Indonesia have a lot of catch-up to do. Or recall Africa, where the Chinese have to build roads and ports first in order to obtain access to untapped reserves of valuable minerals. And China itself is not done with infrastructure in its homeland by any means as the Western provinces are still stuck deep in poverty.


Yet now comes the heretic thought. We believe bigger China does not imply riskless bet on commodities at all. Let us present couple of charts that prove our point.

On the first chart, you can see that China is running extremely high investment ratios to its GDP. As a matter of fact, almost half of China’s GDP is investment based. That means a lot of excess housing, factories, roads, etc. For sure, the capital stock is still very low in comparison to developed countries, yet in terms the actual phase of development in China, as measured by GDP per capita, the urban China is already experiencing some kind of excessiveness to the tune of 20-30%. The result is China has to slow down its investments otherwise it will run into trouble in a not too distant future. Especially given interest rates are on the way up.

Secondly, and probably more importantly, we have given a thought to the matter What is true role of China in the global investment boom? In order to respond to this question, one has to come up with some kind of methodology. The most obvious approach is to compute the share of Chinese investment to the global investment. We could simply call it a market share of China in commodities as fixed asset investments are the main commodity driver. However, we went a step further. What we are really interested in is the nature of the investment environment, how broad and diverse it is. We want to know whether the investment boom is driven by China itself or whether it is more broad-based? In order to measure this monopoly power, we employed the Herfindahl–Hirschman Index (HHI). HHI is a measure of the size of individual players in relation to the industry and an indicator of the amount of competition among them. As such, it can range from 0 to 1.0, moving from a huge number of very small players to a single monopolistic power. What we found is that as China rises, its monopoly power is also increasing. As the relevant market, we chose a universe comprised of developing countries, for we know that bulk of new investment and thus commodity demand will come from the emerging world. The HHI index rose to 16% which shows that investments are still broad-based, yet well less so than in 1991.

Global investment reached USD 13trn in 2009, China alone was responsible for adding 2.3trn, or roughly 18%. If we look only at investments stemming from the emerging world, we are talking about almost 40% share.

Now assume China gets forced by market forces (probably a collapse in the banking sector) to adjust its investment rate back to where it should be (with capital-output ratio at 2.5x and new structural growth rate of 8%, the implied investment rate is 34%). A 10% drop in investment rate would mean a loss of 25% of investments in absolute term or probably 25% drop in demand for commodities from China if you wish.

With a lot of emerging world dependent on Chinese vendor financing, and demand for commodities fueling domestic growth, we see little probability of these countries being able to step up, withstand the shock and increase investment spending.

Over 3-5 years, the internal growth of emerging markets (just as a response to population growth) would close this gap and that is why we think commodities will stay well bid structurally. Yet in terms shocks, make sure you get China right!

By Jan Kaska

http://www.atwel.com/cz/

Analyst with ATWEL International Hedge fund

© 2011 Copyright  Jan Kaska, - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules