China's property market is seeing strong sales and rising rents, indicating a continuing demand for housing that pessimists are missing, according to veteran economist Hong Hao.
China's stuttering economy poses a major threat to global commodities demand, as economic activity and credit flows deteriorate, and structural challenges and weaknesses in various sectors, including base metals, iron & steel, crude oil, coal & gas, and pork, affect the market.
China's commodities sector, including coal mining and metals production, is experiencing declining profits due to the worsening property crisis and economic slowdown, with steel producers being the hardest hit. However, there is potential for growth in metals firms linked to the energy transition, particularly in China's green copper consumption driven by electric vehicles and renewable power.
Brazilian mining company Vale SA remains cautiously optimistic about declining steel demand in China, as the country's economy has shown resilience despite uncertainties, according to the company's vice president of iron ore solutions, Marcello Spinelli. Vale relies heavily on sales to China, and Spinelli highlighted that while steel demand is declining, it is not as severe as some indicators suggest. Spinelli also noted that nondeveloper entities are actively constructing homes, partially offsetting the decline in the building sector.
The decline in Chinese imports into the U.S. is impacting steel prices and raising concerns about sourcing steel and other metals.
China's macroeconomic challenges, including deflationary pressures, yuan depreciation, and a struggling property sector, could have broader implications beyond its borders, impacting global metal exporters, trade deals, and global inflation; however, investing in China's stocks may offer compelling valuations despite the current downturn.
Despite prevailing negativity regarding China's economy, alternative high-frequency data points, such as subway ridership and commodity prices, suggest that many parts of the economy are functioning well, although the real estate sector is still struggling.
The spot price of iron ore has reached a five-month high in China due to improving sentiment and supportive fundamentals, but the rally may be limited by potential government measures to restrict steel production and officials' dissatisfaction with rising prices.
The outlook of U.S. companies on China's markets in the next five years has hit a record low due to factors such as political tensions, tariffs, slow Covid recovery, and issues in the real estate market; however, complete decoupling between the two economies is unlikely.