After rising significantly in 2016, the Chinese manufacturing PMI has weakened as of late. This has been accompanied by a decline in the industrial metals commodity price index. Chart 1 shows that historically the Chinese PMI and metals prices have moved up and down together most of the time. This reflects China’s commodity intensive growth model based on corporate investment and construction activity. The second chart provides a more precise picture of this relationship by means of the 12 month rolling correlation. Although this correlation reaches high levels quite often, it has also experienced strong dips. Recently this has been the case towards the end of 2014 and in mid-2016. It seems that on these occasions the drop in oil prices (the grey line in chart 1) has pulled along metals prices. This could reflect bearish growth expectations of investors with the big drop in oil prices raising concern about the outlook for energy producers. Taking both charts together, they would imply that when looking at metals prices as a proxy for Chinese growth momentum, it is recommended to check the behaviour and hence influence of oil prices as well.
by William DE VIJLDER