uploads///Chinas Industrial Production Struggling To Regain Its Strength

Slowdown in China Impacts the Demand for Commodities

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Mar. 31 2016, Updated 8:10 a.m. ET

China’s slowdown impacted the metal’s movement

China (YINN) is one of the major commodity-consuming countries. It consumes nearly 50% of the world’s commodities. Domestic consumption and exports are two important components of China’s (FXI) economy. In recent years, domestic consumption slowed down rapidly compared to exports. From 2011 to 2013, a massive industrialization and urbanization transformation took place in China. After many years of investments, projects aren’t able to deliver the expected return to investors. This raises questions about additional investment plans. As a result, the demand for commodities in domestic consumption fell. This also dragged down the movement of the commodities.

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Stimulation provided by the People’s Bank of China

The PBoC (People’s Bank of China) is taking steps through monetary policy intervention to boost economic growth. On February 29, 2016, the PBoC cut down its reserve requirement ratio by 0.5 percentage points or 50 basis points. The Market is expecting that there will be more stimulus from the central bank to accelerate the economy. With this speculation, major metal stocks such as Freeport-McMoRan (FCX), Alcoa (AA), and Nucor (NUE) gained 41%, 10.8%, and 18%, respectively, since February 29, 2016, as of March 21, 2016.

China’s industrial production fell more

According to the National Bureau of Statistics, China’s industrial production growth slowed more in the first two months of 2016. The growth in the industrial production index rose by 5.4% in January and February—compared to 6.1% for December. This is the lowest growth recorded since November 2008. The reason behind the poor industrial production is China’s efforts in shifting its focus from an export-oriented and investment-based growth model to the consumer spending economy. It could help increase domestic demand.

In the next part, we’ll look at the performance of the US Dollar Index (UUP) and how it impacted commodities’ movement.

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