Beijing Taps the Brakes

11/30/2009 9:43 am EST

Focus: GLOBAL

Gregory Weldon

President and CEO, Weldon Financial

Slowing money supply growth and metals imports signal possible trouble ahead for China and commodities, writes Greg Weldon of Weldon's Money Monitor.

Driving that train, high on cocaine,
Casey Jones you better… watch your speed.
Trouble ahead, trouble behind,
and you know that notion just crossed my mind.
- Grateful Dead, "Casey Jones"

Of course, Casey Jones is traveling too fast, and crashes the train. We wonder: Might Casey Jones be at the helm of the high-speed train carrying the Chinese macro-monetary market dynamic to ever-faster, credit-driven reflation? We wonder: Is the Chinese “train” about to run off the tracks?

For sure, we could suggest that the Chinese train is running on monetary cocaine, in the form of high-powered credit creation. We wonder: In the absence of monetary “fuel,” what kind of withdrawal might be experienced in China? It is worthy of consideration, given the macro-monetary data released [recently] in Beijing, revealing the smallest credit, money supply, and bank deposit growth of the year. Indeed, in many cases, October’s figures were the lowest in several years.

Money supply, credit, and deposits are all posting record highs on a nominal basis. China’s M-1 monetary aggregate reached yet another new all-time high, while posting its third consecutive month above 20 trillion yuan.

Moreover, Casey Jones is indeed "driving that train,”as the 12-month growth in China’s broad money supply (M-2) has spiked to another record high, at an astounding 13 trillion yuan. [That’s] more than double the growth posted at the previous record peak set in the middle of last year, and more than six times as fast as the high posted during the 2000-01 “ride.”

[However,]the M-2 aggregate posted the lowest monthly increase of the year [in October], and the second lowest since May 2005. Subsequently, from an annualized growth rate of 55.6% in March, China’s broad money growth has been derailed, as per October’s mega-slow 1.6% annualized growth rate. Similarly, new yuan loans rose by only 0.87% during October, a steep decline relative to the 4.7% single-month nominal growth posted in June, meaning that the annualized rate has hit the “emergency brake,” as defined by the screaming slowdown to 6% growth in October, down from +56.4% annualized growth posted in June.

Banks are seeing less growth in deposits, as October’s increase of 300 billion yuan was the smallest of the year and the smallest since January of 2008.

According to a recent Forbes article, China consumes more cement than the rest of the world combined, at 1.4 billion tonnes per year. However, thanks to a parabolic expansion in domestic cement output capacity, China is now sitting on spare capacity of 340 million tonnes, annually—a surplus equal to one-quarter of annual Chinese consumption, or more than the entire annual consumption of the US, India, and Japan combined! Indeed, Chinese cement output reached a new all-time high in October at 160 million metric tonnes, taking the ten-month, year-to-date output total to 1.34 billion tonnes.

Worse, a variety of commodities offer the same withdrawal-like symptoms amid rising domestic output, slowing credit growth-driven demand, and thus, rising inventories, which led to a deep decline in China’s October commodity imports.

Against the record domestic output and the diminished credit growth, we note the sharp decline in China’s steel imports during October. Pig iron output posted its second largest single-month output total in October, with production of nearly 50 million tonnes, and a half-billion-tonne year-to-date output total.

And then there is copper, which in our opinion is a train wreck waiting to happen. Imports of both copper and aluminum fell by more than 100,000 tonnes each [in October]. China’s copper imports plummeted by 135,940 tonnes in October (versus September), Shanghai Exchange warehouse inventories of deliverable copper rose yet again, and reached a new multi-year high. Indeed, Chinese warehouse supplies of copper have soared by 488.8% since the beginning of the year, albeit from exceptionally low levels.

And finally, we see that Casey Jones has been designated as the new driver for China’s high-speed export train, with the headline monthly decline of 4.5% and the year-to-year contraction of 13.8% masking a broader erosion, [as] exports to 12 out of the 17 major trading partners posted a decline in October.

Still, thanks to the fact that imports fell faster than did exports, China’s trade surplus soared to $24 billion, or nearly twice the level of September’s surplus ($12.9 billion). Subsequently, the pressure on the dollar against the yuan continues to build.

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