The Chinese Commodity Conundrum

We don’t see how China can maintain production by stuffing warehouses with inventories and allowing banks to finance commodity speculation, although we understand the political imperative to do so.

Maybe we lack sufficient imagination, but this approach does not strike us as a plausible exit strategy from the broken global growth model. It is a stopgap measure at best, designed to buy time, with fingers crossed that global demand gathers enough speed by year-end. We thought Asia faced some serious macro challenges at the beginning of this year, and we see no reason to change our mind yet.

China, undoubtedly, has extraordinary potential, and we would not for a moment disregard the desire of Chinese leaders to achieve the status of the next global hegemon. The fact of the matter is that until China is prepared to accept currency appreciation, and thus prepared to reorient its growth strategy away from export-led development without simply putting up redundant capacity or building up speculative inventory stocks, its goal is likely to remain elusive…

Asia’s production structure needs to recalibrate for a slower Western consumer growth profile, and that inevitably must involve steps that scrap excess capacity and allow new domestic demand sources to flourish. When we see it, we will be happy to flag it. In the meantime, using bank credit to keep production going and stuffing inventories in warehouses looks like a precarious gambit, at least from the vantage point that Dr. Richebacher cultivated over his career.