China was supposed to save the world when it reopened. But so far, the world's second-largest economy appears to be without its cape and super powers.
After years of lockdown and an underperforming economy, the nation finally began to end its Zero-Covid strategy last October. Since, the Chinese markets have rallied 50% from their lows. The world rejoiced in the "reopening" trade that was expected to push the globe out of its GDP slump. Investors tried to get ahead of the expected rally -- they envisioned factories reopening, more consumption, and a restart in travel. They saw a resurgence in commodity demand: higher oil, copper, and base metal prices. Chinese tech stocks and commodities exposed to China all rallied.
As usual, traders bought first and asked questions later.
There is no doubt that the Chinese economy had been suffering from its extreme Covid strategy. The nation faced a property market debacle and trend GDP growth was a lot lower than official numbers suggested. As the Chinese economy reopened, the Peoples Bank of China flooded the market with tons of liquidity in December through February, right into the Lunar New Year. Occasionally, it pumped about 1 trillion yuan in a few days alone. The economy needed a jumpstart as China needed to save face after developers like Evergrande were going bankrupt. Infrastructure was the fastest way to boost the markets and GDP which they needed at the time. This infrastructure boost caused a jump in copper prices and other mining stocks exposed to it and all things Chinese spending related.
As travel demand rebounded back to 2019 levels, oil demand did pick up, but inventories were ample as China had stockpiled prior to the opening. China onshore inventories were ample and with cheap Russian discounts, China took in more Russian oil, which meant less Organization of the Petroleum Exporting Countries oil, and so this did not cause a rally in oil prices as most had expected. Analysts are very quick to price in the 1.5 million to 2 million barrel per day of demand pick up from China reopening, without taking into consideration what was happening in other regions of the world. The U.S. and E.U. demand were falling short. Oil price barely rallied from lows of $80 per barrel. Brent shot to as high as $90, but then gave back all those gains as the past few weeks showed inventories building across the board. Copper did rally all the way to $9,300 per ton from lows of $7,000 per ton, but has since given that up as it is now trading close to $8,800 per ton.
Commodities are not just about demand but also about supply, and supply is not an issue right now in oil, copper, and coal, as the supply tightness from last year is slowly abating. The 2021 saw a total mismatch, as demand surge overtook any supply side response as the former got a massive boost following central bank injections. But as the year progressed, prices got to such a level that caused demand destruction, which eventually caused prices to fall.
Emerging markets rallied 30% and so did European bourses, taking the Yuan higher vs. the dollar. The dollar reversal back in October last year aided this risk on rally in Chinese assets which filtered into all the cult "meme" stocks and fear-of-missing-out related non-profitable tech companies (laggards of 2022), without the fundamentals moving in their favor. The rally became self-fulfilling as the S&P 500 broke above the 200 day moving average breaking the downward trend of last year. But this follow through was not met by actual pick up in the real economy, hence the rally is now fizzling out as Chinese indices are down 15% since their new year.
Central bank's main focus is inflation and the U.S. Fed wants to get it down to 2%. The Fed's favorite Core PCE Deflator came out today, both the headline and core PCE Deflators printed hotter than expected, rising 5.4% year-over-year and 4.7% year-over-year vs. expectations of 5.0% and 4.3%. They will do whatever it takes to see it there, this has been the Fed's main message.
China may be the world's largest consumer of goods in the world, but it still needs the E.U. and U.S. to demand its goods. If the developed markets are going through a recession, there is only so much China can do to save them all as it has its own problems to deal with.
Kind regards,
-mb
Maleeha Bengali
AWAAM Consulting FZ LLE
Office 1309, 13th Floor, Creative Tower,
Fujairah, UAE
+971(0) 4 258 5104
+971(0) 5 675 945 25
