When Apple sent a rare warning about its disappointing sales in China, it almost spooked global markets. A slowdown in the world’s second largest economy is an ominous sign indeed, a sign that the slowdown might have a ricochet effect on other economies as well.
Add China’s tariff wars with the US, and the sliding manufacturing purchasing managers’ indices in both countries, the fears appear to be well founded. Signs of actual contraction in China bode particularly ill for metals, given the country remains the engine of growth in global usage.
Metals bulls are banking on Beijing doing what it always does when the going gets tough, opening the taps and stimulating investment down the usual infrastructure and construction channels.
Both China’s official manufacturing PMI and the Caixin PMI, which captures the mood among the country’s smaller companies, fell below the 50 level in December, signalling slowdown has become outright contraction.
Metals analysts have been worried about the impact of China’s credit tightening for many months, particularly since it has hit the private sector the hardest. Beijing’s new “war on smog” policy has also been a huge deterrent. The environmental crackdown has been running continuously for over a year and has encompassed every part of China’s metals economy.
Many smaller companies, both producers and users, have been closed while even official-sector supply chains have been plagued by rounds of inspections and restrictions. The clean air campaign has been a significant and prolonged drag on the metals sector globally.
The Chinese authorities have reacted with an increased sense of urgency to the deteriorating economic picture. More infrastructure spending has been promised with the focus on urban subway systems, high-speed railways and power grid spending. This week has also provided a bigger stimulus in the form of a cut in banks’ reserve ratios, in effect freeing up $116 billion in new lending.
Analysts feel that the impact of the current round of Chinese stimulus will start to lift metals prices some time in the second quarter. China engineered its current slowdown and now it must engineer growth.