By John Richardson
CONFUSED? Perhaps, as was definitely the case last Friday, you shouldn’t be.
The thrilled reaction of financial markets to the release of China’s July export and import data needs to be put into the context of it being one positive set of data in a long-running series of negative data.
On the surface, the numbers are very impressive. Exports rose 5.1% for July, year-on-year, compared to a median forecast of 2%. Import growth was even stronger at 10.9%, while the median forecast was for only 1%.
But Chinese statistics, including most notably GDP, tend to be man-made.
The FT Alphaville, in this blog post, also argued: “SocGen’s Wei Yao has some interesting observations. The year-on-year export growth rate, she says, benefits from a base effect — the July 2012 data displayed an unusual decline from the previous month.
“The import data, however, has no such obvious issues (apart from the little matter of Taiwan).
“In comparison, the bounce of import growth from -0.9% yoy to +10.9% yoy without any base effect was much more surprising and difficult to explain.
“By origin, there was improvement across the board and the major contributors were the euro area, Taiwan, South Korea and Australia. Imports from the euro area rose 8.3% yoy in July, improving for two months in a row. However, we noticed that the difference between China’s data and Taiwan’s diverged again. Chinese imports from Taiwan grew 16.6% yoy in July (versus 6.7% in June) using the mainland’s data, but increased only 1.1% yoy (versus 8.6% in June) using Taiwan’s data.”
The blog wonders to what extent the surge in imports is the result of inventory building across a range of commodities, including petrochemicals.
And in the case of copper, as this second FT Alphaville blog post argues, something very strange is happening which has nothing to do with interest in the underlying value of the commodity.
In summary, as has has happened before, the post explains that:
- You get letter of credit from your local Chinese bank to buy copper – i.e., six months credit at a low interest rate.
- You buy imported copper from a bonded warehouse or from an overseas partner.
- You then sell the copper immediately for cash in the local market.
The end-result is that you have six months free credit before you have to pay for the imported copper. This gets round the problem of tighter lending conditions in China since late June.
“While these developments are typically a sign of a tightening copper market, we believe that market participants should be wary of interpreting these recent ‘signals’ – including future resulting copper import strength – as bullish, since they are in large part driven by Chinese liquidity tightness, and not primarily driven by real Chinese demand/re-stocking,” Goldman Sachs is quoted as saying in the same blog post.
We have referred to how the surge in bank lending during Q1 is likely to have fuelled speculation in petrochemicals.
Perhaps the above scenario also applies to petrochemicals.
Ironically, as the government tries to rid the economy of speculation by tightening liquidity, China’s ever-innovative traders look as if they have found a loophole.
This reminds the blog of how couples started temporarily divorcing earlier this year, in order to get round a new property tax.
Something strange also seems to be happening in gold, as the Financial Times reported earlier this week (Australia, which, as we have already mentioned has seen a surge in its overall exports to China, is a major gold producer).
“Net flows of gold into China from Hong Kong – which traders say accounts for the majority, but not all, of the mainland’s gold trade – almost doubled in the first half of this year compared with 2012, to 575 tonnes,” wrote the newspaper.
Maybe the same dynamics are occurring in gold as in copper?
And as gold dipped to a 2013 low (see the above chart) in June/July, Chinese speculators could well have seized on what they thought was a strong buying opportunity. The same might have applied to mono-ethylene glycol (MEG) five weeks ago.
- And it is worth noting again that all commodities, and other types of investment, can be connected through “circular trades”.
- As a reminder, this is how these circular trades work:
- Somebody buys 2,000 tonnes of MEG (or chemicals and polymers that are easy to transport and store – for example, polyethylene) to get 90 days credit.
- He/she uses the credit to buy another commodity or asset, including even real estate.
- He/she then is happy to dump the MEG at a loss because good money has been made on the other purchase.
(This can work the other way round– for instance, somebody gets credit to buy copper because they think there is a bigger opportunity to make money on MEG.)
Big volumes of circular trades took place during the giant 2008-09 stimulus package.
Maybe, now that the appetite for risk has returned, this type of trading is once again playing a major role in distorting the extent of real, as opposed to apparent (imports plus local production) petrochemicals demand.