On Wednesday night, we excerpted a new Goldman note that looks at the extent to which we can expect further commodities carnage as a result of China’s “targeted tightening.”
Here’s an excerpt for our post:
They’re trying to rein in shadow lending and anything that finances risk taking while preserving the credit impulse to the real economy. It’s a tough thing to do but it looks like they’re kinda, sorta pulling it off.
But — and this is a very big “but” — no one is really sure where all the credit extended via the channels they’re squeezing ended up or what it ended up financing.
It is quite literally a guessing game.
You just have to squeeze and hope nothing horrible happens. Invariably, bubbles will burst that you didn’t even know existed. Yield curves will invert. Metals mayhem will ensue. The bond market will suddenly crater. That’s part of it. And we’ve seen all of those things over the past six months.
And here’s the quote from the Goldman piece that summarizes things:
The recent round of tightening in China raised renewed concerns over demand for commodities in the country. In fact, after the Chinese 7-day repo rate spiked in March, iron ore prices have fallen 40%. Unlike previous tightening policies that were mostly broad-based, the current tightening appears to be more “selective”. Exhibit 1 shows that entrusted loan and corporate bond issuance contracted notably in early 2017 but bank loans continued to grow at a brisk pace.
Goldman’s question: “Can Chinese demand for commodities withstand such targeted tightening?”
The bank’s answer, in a nut shell, is “yes,” because it’s credit to the real economy that matters for commodity demand as opposed to credit extended via other channels.
And while that’s all fine and good, the inescapable bottom line is that tighter conditions in China are bad news for commodities and in an effort to drive that point home and convince you that you should indeed care about the PBoC’s ongoing effort to rein in speculation and leverage, we present the following simple chart without further comment…