The explosion in money creation in China (and associated high credit intensity of GDP) has created a series of revolving bubbles around the economy. Here we look at where it is showing up.
Back in 2015, the bubble was initially in the stock market. As that deflated, money then moved into housing (especially Tier 1 housing). With that now deflating, liquidity continues to search for a home. Interestingly in that respect copper has been performing well in recent months. The common narrative is that the strength in copper fits the pick-up in the economy. Yet most forward-looking housing data is rolling over (and has clearly peaked). The divergent price action of copper and iron ore must also question that thesis (fig 3).
FIG 3: Copper and iron ore prices (both US$) - divergent in 2H 2017
Perhaps more interestingly, copper is behaving like another highly speculative instrument in 2017 – that is it’s recently become highly correlated with bitcoin.
Whilst difficult to confirm, anecdotally it is suggested that the majority of bitcoin’s trading volumes are from China (with the Chinese probably using it as a vehicle for getting money out of the country). Given copper’s historical and high levels of speculative interest (and its use as a vehicle for getting money out of China), that correlation would seem to make some sense.
FIG 4: Copper and bitcoin prices (both US$)