As many of you know, the name Summit Energy will officially be no more in the coming months as we move under the banner of Schneider Electric. One of the more immediate opportunities this relationship has presented us with is the chance to participate in the company-wide employee broadcasts.
So it was with interest that I listened to our CEO, JPT (Jean-Pascal Tricoire), explain this week how the Asia Pacific segment of the business has shown slightly negative growth in the first half of the year, as strength in India and South Korea has been more than usurped by headwinds from Japan (whose economy seems to be permanently stagnating) and also…….China. This piqued my burritoview™ because I have filed away five charts in the last week or so which highlight the long-term sturdiness yet current soft underbelly of China. So this gives me a good excuse to break ‘em out. So from copper to choppers, let’s take a look at this current conundrum.
First up let’s start with why so much emphasis is placed on China. As this chart below (from the IMF) illustrates, the US economy is set to be eclipsed by China in 2017. Perhaps the consolatory point to be taken from this chart is that the US should continue to show steady growth as an economy. China, on the other hand, will just continue to go nuts:
However, there is immediate weakness being seen in the Chinese economy, and this is reflected in the price of raw materials, and specifically, industrial metals. As a chart in this previous post highlights, China is the world’s largest consumer of commodities, from rice to rubber, from cotton to copper. Hence, as manufacturing activity in China turns lower, so does the price of copper:
This is of rather grave concern, as copper has the moniker of ‘Dr Copper’ because it is so good at predicting economic trends it appears to have a Ph.D in economics. This trend is evident elsewhere; we are also seeing weakness in iron ore (that’s an understatement…it’s getting walloped). Due to its close ties with economic growth, it has a positive correlation with Chinese equities. Hence, both are a-tumbling:
But let us not get too downhearted; China has been growing at a breakneck pace for many years. It is only natural that it experiences some speed bumps along the way, especially when both the global economy is slowing (h/t Euro debt crisis) and China tries to keep inflation in check. Lest we forget, as China transitions away from an economy being predominantly based in rural communities to one shifting to urbanization, it is naturally morphing from a developing country to a developed one. As the chart below illustrates, China accounted for 10.8% of global energy use in 2000…but now leads the world with double that:
But given the skepticism surrounding the Chinese economy and fears of a hard landing, we must be vigilant and take heed from the commodity price moves we are seeing. When in doubt, it is useful to delve into more quirky indicators for guidance (like we have done previously). The below chart shows helicopter flights taken between Macau and Hong Kong – an indicator of the spending behavior of the affluent. As this indicator plummets to a level not seen since March 2009 (= the belly of ‘The Great Recession’), we could be in for some turbulence. Alternatively, we may already be there.
So, through these five charts from copper to choppers, there are signs of immediate challenges for China, but also affirmation of its growing importance. Although falling commodity prices are viewed as a good thing by some as it means lower costs, this can imply something much more negative as it does here – that of economic deterioration.
Nevertheless, China’s mounting dominance is plain to see through both its position as leading global energy consumer, and its impending role as largest economy. Going back to the start, perhaps China’s significance is best highlighted by Schneider Electric CEO, JPT himself …after all, he has now relocated to where the action is.