A slowdown in China’s economy will have implications beyond that country’s borders and will hit global commodities markets for years to come, according to one portfolio manager.
Concerns about weakened demand from China have been a wet blanket on commodities prices. The Continuous Commodity Total Return Index (CCITR) is down some 22% over the past 12 months.
Of course commodities aren’t just being weighed down by China. Crude oil prices are now at half of what they were a year ago as supplies increase. But the market is also anticipating that China won’t need as much energy as it did in the recent past.
China’s growth from 2000 to 2015 had been nothing short of phenomenal. A decade and a half ago, the country’s GDP was at $1.2 trillion. In 2014, it was at $10.4 trillion, a compounded annual growth rate of 15.4%. In comparison, U.S. GDP grew to $17.4 trillion from $10.3 trillion, a 3.6% compounded annual growth rate.
Chad Morganlander, portfolio manager at Stifel Nicolaus’ Washington Crossing Advisors, sees credit as the engine driving China’s growth.
“Total credit growth [is] the real reason for this explosion of economic activity,” Morganlander said. Corporate credit in China went from about $2.6 trillion in 2006 to $16.7 trillion this year and now exceeds the U.S. corporate credit level of $12.2 trillion, according to data compiled by the Bank of International Settlement.
“This has had a massive distortion on economies as well as the emerging markets and commodities,” said Morganlander.
Such intense growth required China to buy commodities – and lots of them. The country consumes 12% of the world’s oil but also 31% of the its cotton, 45% of its steel, 47% of its copper, 50% of its nickel, and 54% of its aluminum, according to data from the World Economic Forum.
But a decline in China’s demand for materials could spell trouble for those and other commodities markets, as well as emerging market economies that are dependent on exporting commodities.
Morganlander said his forecasts for China’s future growth fall below Wall Street’s projections.
“Our expectations are for between 2% and 4% GDP growth,” he said. “That's based off of a policy shift with the new leadership of China and their next 5-year plan.”
That, in turn, could put a damper on the world's economy.
“We think global growth will be far lower than estimates going forward for 2016 and 2017,” Morganlander predicted. “Be prepared: I would pare up your portfolio when it comes to commodities trade and move up to quality spectrum with all of your speculative asset classes.”
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