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EASING CHINA GROWTH AND IMPACT ON COMMODITIES

Commodity Online, May 7, 2010

China's GDP growth will slow down from 11.9% in Q1 to 9% in Q4.Lower productivity growth, adverse demographics and lower returns to capital will reduce future potential GDP growth in China to around 9%. The peak is already evidenced in the data: Industrial production has turned and the growth in power, coal, cement, steel and auto production has slowed down. The circulation of money and credit, a major driver of commodity demand, could slow the economy down further, a Bank of America-Merrill Lynch (BofAML) analysis said.

BofAML economists continue to believe that China’s economy will rebalance, via more FX flexibility. A stronger currency will likely reduce the current account surplus, in turn reducing Chinese FX reserve accumulation. On our estimates, the impact of a Chinese revaluation varies strongly by commodity. In some cases, a CNY revaluationwould negatively impact consumption growth as a stronger CNY reduces exports and hence GDP growth. Most commodities, however, should benefit from a positive long-run effect, as a revaluation would boost the purchasing power of the Chinese consumer for USD-denominated raw materials.

Chinese government has tightened lending growth, this past weekend, the People's Bank of China hiked the reserve ratio requirement by 50 bp, continuing on its path of tighter monetary policy via quantative measures. Most importantly, China is also tightening its screws on the property sector as it poses a real risk to the economy.

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