What really drove Chinese commodity imports? | FT Alphaville

What really drove Chinese commodity imports?

Remember how China was importing every commodity under the sun last year – quite inexplicably, considering exports were lagging throughout most of the period?

Sean Corrigan at Diapason Commodities has a theory to explain the phenomenon. As he noted in an email to FT Alphaville:

Further to the suspicion that much in the way of Chinese metals imports are related to schemes to game the cheap money there by circumventing capital controls – -whether in order to bet on Yuan appreciation or commodity price rises, or both – note that the relative prices of copper, aluminium, and zinc in Shanghai vis-à-vis that on the LME bear more than a passing resemblance to the volume of new loans concurrently granted by Chinese banks (including a rough estimate of ~CNY1 bln for January, as widely bruited on the newswires).

He goes on:

If – as seems increasingly likely – a genuine crackdown on lending is indeed in train (and given current USD strength to boot), a good part of the rationale for such speculative holdings would be removed, with potentially significant consequences for prices of base metals (and possibly other commodities), even absent a wider effect on stimulus-related end-demand in China.

And here are the charts.

1) Copper:

2) Aluminium:

3) Zinc:

As can be seen, all three charts show a big convergence in Shanghai/London prices around January — the time China’s 4,000bn-plus yuan stimulus was first to be implemented — led by Chinese prices.

They also show  a secondary boom and convergence around February, the time China announced the distribution of the second tranche of its stimulus.

Lastly, they also see Chinese prices surging versus London in June — that’s days after the People’s Republic decided to cut the equity capital requirement on fixed-asset investments —  a move which analysts later connected to record borrowing during the month.

Now we know correlation doesn’t equal causation.

But if it is really the case that Chinese commodity imports were driven by schemes “to game cheap money” and “circumvent capital controls” rather than actual demand, it’s worth considering what might happen to commodity prices when opposing tightening forces are introduced instead.

Oh, hang on. We may have an indicator already.

On Wednesday it emerged that China had told banks to temporarily halt lending amid growing fears of asset bubbles and inflation.  And guess what? The news wasn’t exactly bullish for copper.

Here’s Reuters:

LONDON, Jan 20 (Reuters) – Copper slid on Wednesday, knocked by worries about demand after the latest move to tighten monetary policy in top consumer China, but analysts say strong growth data later this week will reinforce bullish sentiment.

Benchmark copper on the London Metal Exchange was trading at $7,460 a tonne in official rings from $7,545 a tonne at the close on Tuesday. The metal used in power and construction earlier hit a session low of $7,452 a tonne.

Losses were triggered by news that Chinese authorities have instructed some major banks to curb their lending over the rest of this month. Last week China raised bank reserve requirements for the first time since June 2008.

Related links:
Borrowed in China
– FT Alphaville