Financial markets strengthen in European sessions with bourses gaining almost +1% and WTI and Brent crude oil prices surging above 75 and 76 respectively. Investors anticipate encouraging US payroll addition in May. Concerning precious metals, gold price remains weak with front-month futures approaching 1200. Silver and PGMs change little and prices consolidate.
World Bank chief economist Justin Lin said that China's GDP growth will slow to 9-10% in 2010 after being overheated in 1Q10. China's economy recovered swiftly after global financial crisis with the government's stimulus package of RMB 4 trillion. In 1Q10, the country recorded annual growth of +11.9%, the strongest in 3 years. Coming with robust growth was inflationary pressure and property price bubbles. Headline CPI rose +2.8% y/y in April, up from +2.4% and +2.7% gains in March and February, respectively. Consensus forecast CPI soared further in May.
The Chinese government has been definitely aware of the problem and has implemented cooling measures such as increasing required reserve ratio in commercial banks and imposing lending restrictions. Concerns that the government will introduce a property tax to curb home prices triggered a sharp decline in property price in recent months. In fact, the State Administration of Taxation has just announced minimum rates for pre-paid land taxes. The minimum rates for eastern, western and central China were set at 2%, 1% and 1.5%, respectively.
Given its uncertain impacts on global economic growth, sovereign crisis in the Eurozone may delay further tightening measures in China. Yet, we believe it's a matter of time and impacts of tightening on commodity prices worth attention. Different monetary measures will have different impacts on commodities. For instance, revaluation in RMB will eventually trigger higher commodity demand but measures that curb lending may diminish oil demand.
A curb on lending should diminish oil demand. As the chart suggests, China's loan and money growths are leading indicators of growth in oil imports. As both loan and money growths appeared to have peaked late last year, we doubt the highest point of oil imports growth has also been reached.
Indeed, consumption from China is material to global oil demand. According to the US Energy Department, China contributed 9.8% of the world oil consumption and the shares will rise above 10% in 2010 and 2011. Concerning growth, China is the locomotive and is expected to represent one-third of global demand growth. Impressively, Chinese consumption rose in the face of contraction in world oil demand in 2008 and 2009.
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