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The China Bubble
China’s Overheating Economy

China’s economy has, on the surface, looked like its doing better lately sending stock markets around the world to record highs. Investors are even returning to beleaguered commodities markets according to Bloomberg:

Trading in futures on everything from steel reinforcement bars and hot-rolled coils to cotton and polyvinyl chloride has soared this week, prompting exchanges in Shanghai, Dalian and Zhengzhou to boost fees or issue warnings to investors. While the underlying products may be anything but glamorous, the numbers are eye-popping: contracts on more than 223 million metric tons of rebar changed hands on Thursday, more than China’s full-year production of the material used to strengthen concrete.

But is this really such good news? Is the correction really over? Another Bloomberg story suggests not:

Elsewhere, Bloomberg reports that there are some particularly worrying signs in China’s steel markets:

Warnings are stacking up fast after China’s eye-popping steel rally. Fitch Ratings Inc. said prices lifted in part by heightened speculation are destined to slump, while a bank in Singapore flagged the risk of a boom-bust cycle reminiscent of China’s equity market.

The rapid advance isn’t sustainable as mills are expected to bring back idled capacity, raising supply, Fitch said in a report on Monday. Price gains have been driven by a seasonal recovery in activity that’s been exacerbated by increased speculation in the futures market, according to analyst Laura Zhai.

There are, unfortunately, lots of reasons to be concerned about China beyond the overheated steel market. From more signs of capital flight to high levels of debt, China doesn’t appear to be out of the woods yet. Given how much international governments and businesses depend on a hungry Middle Kingdom to keep factories and raw materials exporters busy, this news about China means the world economy isn’t in the clear either.

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  • Nevis07

    They’re addicted to debt. Great article from the FT on this a couple days ago, in case you missed it, titled: “China debt load reaches record high as risk to economy mounts”.

    http://www.ft.com/cms/s/0/acd3f2fc-084a-11e6-876d-b823056b209b.html

    • Andrew Allison

      Unhappily, they are not alone in this.

      • Nevis07

        True, it’s not as though we’re in much better shape. The composition of their debt (being overweighted in corporate debt) is where the real problem is for them. Ours is more balanced, thought it’s set to increase on our federal balance sheet in the coming several years – and why reforming our big social programs is critical.

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