What may be useful to commodity and currency investors, however, is that commodities and commodity currencies often show a lagged response to economic developments in China. Sometimes they don’t respond to economic accelerations or decelerations for as much as one year. For example, if China begins to grow more quickly today, it may take some time before domestic inventories of key commodities begin to dwindle. By contrast, if China slows, they may not reduce buying of commodities immediately, giving time for inventories to build. In some cases, the price response in commodity markets to changes in the pace of Chinese growth may not show up for six months to a year, or more.
Looking ahead to the 2020s, growers of corn, soy and wheat might want to focus on Chinese growth as a leading indicator of future changes in both ag exporting currencies such as AUD, BRL, CAD and RUB but also agricultural goods prices themselves.
Given China’s outsized importance in terms of demand for metals and energy and the knock-on effects for exchange rates and agriculture prices, the question of how China’s economy performs in 2020 is key. China’s official growth rates slowed to 6% in late 2019, its lowest in decades. The Li Keqiang measure also shows slowing in recent years to around 7.5% (from a pace of as high as 11.5% in 2017 – Figure 14). Other measures also indicate that China’s growth has slowed somewhat: retails sales grew at 9% in 2018 but “only” 8% in 2019. China’s exports have stagnated as percentage of GDP. Moreover, there is anecdotal evidence of credit stress brewing among Chinese corporate borrowers and even some local governments are faced with extremely high levels of debt.
Despite these signs of slowing and stress, there is plenty of reason for optimism. To begin with, the People’s Bank of China has been slashing its reserve requirement ratio, which, if it has its desired effect, should stimulate borrowing (Figure 15). Moreover, the US-China trade dispute appears to have at least levelled off and may be heading towards at least a partial solution. This has the potential to boost confidence and investment. A de-escalation of the trade war, combined with easier monetary policy, has steepened China’s yield curve. The slope of China’s yield curve has been strongly correlated to subsequent accelerations/decelerations in Chinese growth during the past 15 years. If a steeper Chinese yield curve is indeed pointing to a rebound in growth, that could come as welcome relief to sellers of crude oil, coal, industrials metals and agricultural goods, who have suffered through five years of low prices and sideways markets.