The Changing Nature of China’s Influence on Commodity Markets

Figure 1: Copper closely tracked Chinese growth until 2022 when it diverged

Figure 2: Up until 2026, WTI crude prices lagged Chinese growth rates by up to one year

Figure 3: Corn prices often lagged Chinese growth by 12-18 months

Figure 4: Wheat prices also tend to follow the pace of growth in China

Figure 5: Soybean oil prices often track Chinese growth but have gotten an additional boost from the renewable fuel standards in the U.S.

However, the relationship between China's economy and commodity markets is no longer as symbiotic as it once appeared. Since 2022, owing to complex dynamics within China's economy, technological changes, structural rotation towards green manufacturing and the conflict in the Middle East, many commodities have diverged from the overall pace of growth in China all the while remaining closely connected to various facets of the Chinese economy.

China's Current Situation: A Complicated Story

Is China's economy growing quickly, slowly or shrinking? The answer could be yes or no depending on which aspect of the economy one is measuring. In the past, we measured China's pace of growth with an index based on the Chinese National Bureau of Statistic's monthly data on retail sales, industrial production, electricity production, rail freight volumes, bank loans and import and export volumes. In recent years, these various indicators of China's potential demand for commodities have diverged sharply.

Two components of China's economy are doing very well: international trade and industrial production. Exports are booming, led by China's electric vehicles, solar panels and other industrial and consumer goods. Imports are also growing as Chinese demand for industrial metals, including copper, continues to grow (Figure 6). Some of the import growth is also a price effect due to soaring prices for copper, crude oil, refined products and natural gas. Meanwhile, industrial production is also humming along, growing at around 5% year over year (Figure 7).

Figure 6: China's imports and exports have been growing strongly in recent months

Figure 7: Chinese industrial production has been growing by around 5% YoY

Some of China's industrial production growth also reflects surging domestic demand for EVs and solar panels. Sales of lithium battery electric vehicles and plug-in hybrids will likely account for 68% of total car sales in China this year and nearly all these cars will be produced domestically (Figure 8). The days of China importing cars from Europe and North America appear to be over. China has also been installing vast new solar arrays as prices for solar power generation continue to fall at around 6% annually (Figure 9). Copper demand is also being boosted by China's investments in data centers, which rival the vast expansion currently underway in the U.S.

Figure 8: The Chinese EV market is booming domestically and abroad

Figure 9: Solar energy costs are plunging as China installs more capacity

Higher EVs sales create strong demand for copper but tend to depress demand for crude oil, refined products, biofuels and ferrous metals such as iron and steel. As such, Chinese export growth and EV sales may be a better indicator of demand for copper than broader measures of the health of China's economy. Booming EV sales also explain, in part, how China was able to reduce its consumption of crude oil so rapidly this past spring after the conflict in the Middle East curtailed the region's oil exports. China likely reduced demand by three million barrels per day.

What's facing headwinds in China is the real estate business. Construction of new homes and offices has fallen 58% from a 2021 peak of 15.1 trillion yuan to 6.3 trillion yuan over the past 12 months (Figure 10). Moreover, home prices have been sliding for five years, according to China's National Bureau of Statistics, declining by about 15% from their 2021 peak (Figure 11). Since the average Chinese household has roughly 68% of their net worth in their primary residence, lower real estate prices appear to be dampening consumer spending growth through a negative wealth effect. Indeed, Chinese data shows consumer spending rising at a historically slow pace (Figure 12).

Figure 10: Chinese real estate investment flows have fallen by nearly 60% since 2021

Figure 11: Home prices have fallen by 14% on average across China's 70 biggest cities

Figure 12: Chinese consumer spending has been growing at less than 1% per year

Also of concern is China's large budget deficit at nearly 8.5% of GDP (Figure 13). The budget deficit has grown largely because of a sharp fall in government revenue from 29% to 21% of GDP owing to the contraction of the building sector. This has weighed on local government finances and prompted large transfers from the central government in Beijing.

Figure 13: China's deficits ballooned as real estate prices and construction activity fell

Meanwhile, China's total public sector debt burden has grown to 101% of GDP, very much in line with levels in countries like the U.S. and those of Western Europe. Twenty years ago China's public debt was only 26% of GDP. Meanwhile, China's overall debt burden, including the private sector, has climbed to 305% of GDP (Figure 14) from 140% on the eve of the global financial crisis. This has led China's total debt burden to exceed that of Western European nations and the U.S., in sharp contrast to past decades when China had a much lower level of debt (Figure 15).

Figure 14: China's overall debt-to-GDP has surged from 140% to 305% of GDP in 20 years

Figure 15: China's debt to GDP now exceeds that of the U.S. and Western Europe

For the moment, financing China's debt is of little concern. Owing to high savings rates of around 30%, China has a vast pool of domestic savings and interest rates far below those in other nations (Figure 16). Also, Chinese interest rates have not participated in the post-pandemic global uptrend largely owing to an inflation rate that is far below those of other nations and, indeed, well below The People's Bank of China's (PBoC) 3% target (Figure 17). As such, the PBoC has been the only central bank in the world not to have hiked rates even a single time thus far this decade (Figure 18). That said, yield differentials between China and the rest of the world may explain why the PBoC has not cut rates even more aggressively in the face of soft domestic demand for consumer items and below-target inflation. That said, recent strength in the Chinese currency may give them some latitude for further reductions if capital flight and currency weakness are concerns (Figure 19).

Figure 16: Chinese bond yields are low compared to their peers

Figure 17: China's inflation did not surge after the pandemic

Figure 18: The PBoC stands alone in lowering rates since 2020

Figure 19: China's currency has defied the downward pull of an easy monetary policy

Bottom Line

China's economy remains a key influence on commodity prices but divergent growth patterns between different sectors of the Chinese economy, combined with technological changes and geopolitics are leading many commodity markets to diverge from broad measures of Chinese growth.

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered legal advice, investment advice or the results of actual market experience. Where regulatory matters are summarized, they represent CME Group's good faith understanding of the applicable requirements.