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By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
CHINA RELEASES HIGHER THAN ANTISPATED CREDIT FOR MAY, WHILE ALL EYES REMAINS ON U.S. INFLATION
This morning China released its latest figures for total social financing, new yuan loans and M2 money supply, with the overall reading of these figures supporting an outlook that China’s path to normalisation will be steady and measured. Indeed, total aggregate financing in May (although it came in just below market expectations at 1,920Bn yuan), recorded a M/M lift of 4%, while new yuan loans issues at 1,500Bn yuan, marked a 2% lift M/M, which is a significantly different picture from the 45% and 46% respective pullback recorded over March-April. Indeed, if we look at overall broad money supply in the system, the M2 figure for May lifted to 8.3% Y/Y, after having been constrained continuously since February 2021, as the central bank moved to limit asset bubbles and risk in the market (please note April’s reading at 8.1% was the slowest level of growth since July 2019). However, one thing to identify from the release of these recent numbers, is that the increased issuance of central and local government bonds is likely a significant contributor to the higher figures, following the Ministry of Finance approving 4.27Tr yuan of debt to be issued this year (in which only 26% of these bonds have been issued in the first five months of 2021). Meanwhile, digging deeper into the figures, if we look at corporate borrowing, net funding declined in May to 481Bn yuan from 791Bn yuan in April.
CHINESE AGGREGATE FINANCING, NEW YUAN LOANS AND M2 MONEY SUPPLY
Source: Bloomberg
CHINESE PPI READINGS—HIGHER PRODUCER PRICES NOT YET PASSED ON TO THE CONSUMER
Source: Bloomberg
CHINESE PPI VERSUS CPI READINGS
Source: Bloomberg
If we look to base metals prices this morning, the suite is in a sea of red, marking a second day of declines, driven in part by China’s continued rhetoric that they will keep a lid on rising commodity prices (having heard from China’s National Development and Reform Committee again yesterday, following the release this week of May’s PPI reading, which jumped to 9% Y/Y, its highest level since 2008). A further influence is the anticipation surrounding the release of the United States May reading for inflation, which on a Y/Y basis is forecast to come in at 4.7% from 4.2% in April, and whether this will impact the Federal Reserve’s dovish stance towards tightening monetary policy this year. However, given that Y/Y inflation readings remain impacted by base effects, in addition to the impact that global supply chain bottlenecks are playing on commodity prices, not to mention stimulus checks in the system (which will run out in September), we maintain the view that current inflation rates are transitionary, with the Fed unlikely to adjust its stance on policy until its dual mandate is met.
SOMETHING YOU MAY HAVE MISSED
CHINA’S STATE RESERVE TO INJECT ALUMINIUM INTO THE MARKET?
Rumours are circulating in the markets that China’s State Reserve bank will inject up to 800-900,000t of aluminium into the system, in order to cool prices which have jumped on a year-to-date basis by 18% (based on SHFE prices), driven largely by concerns over reduced production following emission capacity cuts in Inner Mongolia, and more recently, thermal coal (and rainfall) shortage driven cuts in the Yunnan province. As it stands, up to 750,000t/y of aluminium is estimated to have been lost due to Yunnan smelter reductions, and this release of metal (if it occurs), would certainly help to cap prices in the near-term. However, the question over the longer-lasting impact on aluminium prices in China remains uncertain, given investors’ focus on future emission curbs in the country and the failed impact of price caps following the State Reserve’s previous attempt to cool prices (when it injected ~600-800,000t of aluminium earlier in the year).
TIN IS MOVING AWAY FROM THE BASE METAL COMPLEX ON INCREASING SUPPLY BOTTLENECKS
LME 3M BASE METAL PRICE PERFORMANCE (2nd January 2020 = 0)
Source: Bloomberg
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