China’s economic woes continue to mount. Not only has the stock market collapsed, but this week, China’s central bank unexpectedly cut key policy rates for the second time in three months, a fresh sign of urgency to support the struggling economy. This might already be spilling over to the U.S. commodity sector in the form of weaker export demand.
On Tuesday, the People’s Bank of China lowered the rate on medium-term lending facility loans 15 basis points. Plus, the yield differential between the China and U.S. benchmark 10-year government bonds widened to the most since February 2007, as investors speculated further easing of monetary policy and as China’s major state-owned banks were selling U.S. dollars to support their yuan.
Mark Schultz, Northstar Commodity, says: “China’s currency, I believe, is down to 16-year lows against the U.S. dollar. It’s all an attempt to try to spark better demand to come over and buy Chinese goods. And, of course, if China can then sell more of their goods, they would have cash and then they would probably start looking to buy more product.”
Mike Zuzulo, Global Commodity Analytics, adds: “You throw on top of that the 10-year yields we’re looking at right now going back up to the areas close to when we had the financial crisis in the Great Recession of 2008. The market is laser-focused on China and the negative side that’s going to spill over. There’s going to be a contagion.”
Firms are cutting China’s economic growth forecasts and Beijing’s official target of around 5% appears optimistic, which is already hurting demand for some U.S. products.
“They are probably in a real recession,” Zuzulo says. “They’re not near 5% growth. In my opinion, they’re probably barely at 2%, 2.5%. They really do need to stimulate, and that’s the heart and soul of why I think we’re dealing with 2019, 2020 levels and the corn and wheat prices right now. They don’t have the wheat and corn, they don’t have the support of the demand.”
Nearly $4 billion has been pulled out of the Chinese equities in August and there’s concern the collapse of their real estate bubble will cause financial contagion. Other economic news has been souring with industrial output slowing to just 3.7% annually, and retails sales are slow. China’s purchases of U.S. goods are down substantially in 2023, and their economic outlook will not help the situation.
