Tuesday, April 16, 2013

Is China's anti-corruption campaign responsible for global commodities sell-off?

Commodities came under severe pressure yesterday, in part driven by some negative news out of China, the world's largest single consumer of natural resources.

CRB Commodity Index (Bloomberg)

The nation's GDP growth rate came in below expectations.

Source: Econoday
Anecdotal evidence suggests that some large hedge funds were forced to unwind commodity holdings across the board. This latest move has been extraordinarily painful for investors, who are left scratching their heads in trying to understand the fundamentals. Many point to China's lackluster industrial production as the cause for this weaker than expected growth. But there is a new theory emerging to explain China's negative surprise. Some analysts believe that the latest anti-corruption campaign is having a chilling effect on the nation's economy.

Worried about being accused of spending excesses, local officials have cut down on extravagant parties and gifts used to entice (and essentially bribe) central government bureaucrats. Restaurants and luxury goods have been hit especially hard.
Global Post: - Since the end of last year, Xi has spearheaded a drive to curb officials' notoriously lavish dinners and high-end gift-giving. At a Party meeting in December, he called for new regulations that require cadres to cut back on liquor, flowers and extravagant banquets. Some provinces even banned the use of red carpets to greet visiting officials.
...
"Abalone, baby birds, sharks, big prawns, sea cucumbers and geoduck clams are just some of the creatures who can breathe easier, for a bit at least," says Bill Bishop, a commentator in Beijing and author of the influential Sinocism newsletter. "But [food and beverage] businesses should expect more pain."
Can a slowdown in these sectors really have a significant effect on China's overall growth? Some economists are convinced that the impact is quite real and is indeed responsible for slower growth.
Bloomberg: - “The anti-corruption action by Xi is creating unprecedented phenomena, including an absolute fall in high-end restaurant sales,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, who previously worked for the European Central Bank. “It’s certainly a big factor dragging down short-term growth.”
And that in turn could be a big part of the story behind the latest sell-off in commodities.
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