Copper Prices Get Shanghaied

Prices of the metal, which have lost steam recently, bear more than a casual resemblance to trends in China’s rates and stock market.

By Nathaniel Taplin

Molten copper flowing at a smelter in Tongling, China, on Jan. 17.
Molten copper flowing at a smelter in Tongling, China, on Jan. 17. Photo: Qilai Shen/Bloomberg News

Students of global markets may have noticed that when it’s sunny in Shanghai, copper prices tend to gleam brighter, too.

The Shanghai Composite, China’s main stock benchmark, and global copper prices have risen in tandem since the start of the year, with the latter gaining 9% and the former up a full 23%. Recently both have lost steam.

Copper, the metal that supposedly has a doctorate in economics, is widely considered a reliable barometer of economic activity. The Shanghai Composite, filled with trend-chasing retail investors and heavily managed by the government, is not. What’s going on?

The man behind the curtain is, most likely, Chinese short-term borrowing costs. This latest run-up in Chinese stocks, like the last big bull market in 2015, was fueled by margin borrowing.

Early this year, China’s central bank was busy easing, too—a cut to the amount of cash banks must hold in reserve pushed short-term borrowing costs down near 2016 lows for much of January and February. That helped supercharge the stock rally, initially sparked by rising odds of a trade deal with the U.S. Meanwhile, speculators—watching the monster rally in Chinese stocks—probably concluded the worst was now over for the Chinese economy and bid up copper.

That now seems to have been premature. What ultimately matters for Chinese copper demand isn’t overnight borrowing costs, but how much companies that actually build things borrow and pay for loans. Corporate bank lending rates remain stubbornly high, and real credit growth has barely begun to recover. And China’s property market, the most important global copper demand source, is starting to look soggy.

Meantime, the People’s Bank of China, worried about a new stock bubble, has already mopped up much of the liquidity released in January. Short-term rates have moved back up, while margin borrowing has flatlined again, as have stocks and copper.

The Chinese economy is still slowing—just ask those real corporate borrowers and builders. That means more easing looms, which could spell a lot of volatility in short-term rates, stocks and metal prices in the months ahead while the central bank keeps trying to wrestle down long-term borrowing costs without pumping up a new stock bubble.

Short-end rates and shiny stock rallies are all very well. Investors looking for a clearer signal on metal prices should keep an eye on more-boring but reliable barometers, such as credit growth and weighted average bank lending rates.

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