In the last month or two, the macroeconomic data in China has tended to be a bit better than expected. Industrial production and fixed asset investment has stabilised. PMI data have tended to rise rather than fall.
High-frequency data I put on this blog, like steel production and coal burn, have been relatively stable.
It would appear that the stimulus measures seen over the past few months are getting traction. Funding for infrastructure programs has picked up, with this development mirrored by rising bank lending. Interbank markets have also been calmer and short-term interest rates lower. M2 money supply growth has recovered somewhat.
Given China's ability to turn the cycle around in recent history, do these developments mean its time to dive into metals and bulk commodities?
While some of the downside risks to Chinese demand seems to be fading and some of the headline data are improving, the stabilisation in activity is not uniform. In particular housing market activity and funding to this sector is still under a lot of pressure.
This differentiates the current situation from previous periods. For example, the recovery in property markets in 2012 was given huge support from a massive increase in funding via wealth management products. That kind of support is unlikely to come into play this time around.
So it would appear risks of a severe dip in activity in the next 6-9 months have fallen. But it is pretty hard to ignore the downside risks to commodity consumption from weaker property market activity.
In a lot of ways, this weakness has yet to be seen in Chinese demand for many commodities, which for the most part has remained strong.
For example, steel production has probably been stronger than many were expecting in the first 6 months of the year, with inventories not a particular problem. While growth rates are not particularly high, the level is still strong thanks to revisions to last years data.
Iron ore prices have sunk as more seaborne supply has come to market, but destocking of domestic ore has contributed to price weakness that shouldn't be persistent if current demand rates are maintained.
Chinese copper demand has also proved to be pretty decent on an apparent basis. We have seen a build in bonded warehouse stocks, although this is less aggressive than the same period in 2013. Furthermore, exchange stocks are much lower, while supply growth is pretty good.
On a relative basis, iron ore and copper commodities have performed much worse than those with better supply stories. Metals like nickel and palladium outperforming, while even aluminium has outperformed copper.
Indeed copper has been especially jittery when it comes to new about Chinese financing deals, although so far it doesn't appear to have meaningfully shifted inventories.
For me, the signs of stabilisation in China could be a bit of a trap for those who want to be more bullish on underperforming commodities like copper and iron ore. So far it doesn't look like the weaker profile from weakening housing construction has impacted actual consumption, which is not unusual given lags. There maybe some offsets coming from other sectors, but this is more softening the blow rather than mitigating downside risks.
But if you believe that the downside risks to property markets are not particularly severe and policy makers can offset it, it would be a good time to switch from commodities that have been driven by supply side concerns to those where demand fears are overdone.
