China Stimulus Won't Boost Commodity Imports

Another anemic reading on China's factory sector will no doubt spark increased expectations of monetary and fiscal stimulus, along with hopes for improved commodity demand and prices.

But the problem with this scenario is that there is little correlation between China's Purchasing Managers' Index (PMI) and the level of commodity imports.

That's not to say that manufacturing activity and commodity demand are entirely unrelated, rather that even if the authorities in Beijing do ramp up stimulus and that is successful in boosting the economy, it won't necessarily mean a similar jump in commodity imports.

The official PMI rose to 50.2 in May from April's 50.1, managing to hold above the 50 level that separates expansion from contraction on a monthly basis, according to data on Monday from the National Bureau of Statistics.

However, the final HSBC/Markit PMI, which surveys more small- and medium-sized enterprises, contracted for a third month in May, coming in at 49.2, up slightly from April's 48.9.

The problem for the Chinese economy is that both the official and HSBC PMIs have been hovering around the 50 level for some time, occasionally dropping below but never rising far into expansionary territory either.

The last time one could perhaps say the official measure was showing some signs of strength was the reading of 51.1 in September last year, but even this is a far cry from the 56.6 reached in December 2009, in the wake of the massive stimulus following the global financial crisis in 2008.

Many economists expect Beijing to respond to ongoing softness in the giant manufacturing sector by continuing to lower interest rates and reserve ratio requirements for banks, and to increase spending on infrastructure.

The central bank already has delivered three interest rate cuts since November, lowering the benchmark lending rate by 90 basis points, and cut bank reserve ratio by 150 bps this year.

While this has spurred hopes of a stronger second half in 2015, it's unlikely that even the most optimistic of analysts expects the PMI to rise strongly.

Herein lies the problem for commodity bulls. It would take a sustained and robust rally in the PMI, as well as broader economic indicators, to spark a demand-led revival in commodity imports and prices.

A modest recovery, of say to 50.5 to 51 in the PMI would most likely not be enough to provide much of demand boost, rather it would be enough to ensure that demand still grows, instead of slipping into negative territory.

However, there isn't much of a correlation between the PMI and China's imports of major commodities such as crude oil, copper and iron ore.

By Clyde Russell