Slowing growth in China also poses a near-term challenge to other emerging markets. However, it is important to keep in mind that the reforms being spearheaded by President Xi Jinping are aimed at improving efficiency and pursuing a more sustainable (albeit slower) pace of growth. In the longer term, this outcome could benefit global growth and the global economy.
In stark contrast to the mid-2000s — when China’s share of global demand rose substantially across a range of commodities as diverse as copper, soybeans and crude oil — recent data suggest that China’s demand for some commodities is growing more slowly, and in certain cases declining. The structure of China’s economy is changing. Fixed asset investment grew at about 15% in 2014, according to official figures. This rate is about half the level of five years earlier, when the government unleashed massive financial stimulus to counter the effects of the global financial crisis.
China’s transition away from investment-led growth toward an economic structure more reliant on consumption means a painful period of economic adjustment for some nations. To varying degrees, the economies and currencies of commodity-exporting nations such as Brazil, Indonesia and South Africa are already feeling the impact of the changing nature of demand. The weakness in their currencies is consistent with historical patterns of U.S. dollar strength (or foreign currency weakness) coinciding with weakness in the prices of industrial commodities. In turn, the weakness of industrial commodity prices is consistent with weaker global industrial production, of which China is an important component.
China’s Move to More Sustainable Growth Likely to Affect Demand for Commodities Economic and Credit Growth in China (Year on Year) and China’s Proportion of Global Demand for a Selection of Commodities