According to Credit Suisse, after months of worry about fragile developed world economies, China has become the main drag on activity important for demand

Global growth remains weak in aggregate but it is becoming clear that the latest 'slowdown scare' has come to an end and global industrial production growth is in the process of recovery, albeit at a relatively subdued pace. In normal circumstances, this would be a clear positive for industrial commodity prices. However, the current story is more mixed, largely because China's growth is diverging substantially from that being achieved in the West, says Credit Suisse.

According to the financial services company, a recovery in the West should alleviate some of the downward pressure on the industrial commodity complex but the importance of China for basic materials use, in particular, suggests caution remains warranted. Paradoxically, after months of worry about fragile developed world economies, China has become the main drag on activity important for demand, Credit Suisse said in a report.

The report says, the Markit PMI suggests that manufacturing activity in the US is rebounding, while the contraction in Europe may be finally coming to an end.  In contrast, the slowdown in China looks to have continued into third quarter (Q3) with the flash PMI suggesting that growth has returned to the weak level seen at the beginning of last year.

According to Credit Suisse, as the pace of growth continues to ease, China’s leadership appears to be showing some signs of nervousness, with the apparent deterioration in the labour market a key concern. Social stability remains a primary objective to the Chinese leadership, hence full employment is a critical factor in this socio-political equation.

In response to increased growth concerns, Premier Li suggested that 7% is the 'bottom line' for the government's growth tolerance which, taken literally, would suggest that leaders do not want growth to slow further (GDP in Q2 expanded by 7% on a seasonally -adjusted, annualized rate). 

"Although this comment indicates the government remains focused on growth, we do not think a large stimulus is imminent as this would risk undoing Beijing’s structural economic goals. In some ways, slower growth is a consequence of these deeper reforms to reshape the economy and industrial activity," the report said.

Credit Suisse said, the Chinese government's emphasis on quality, rather than quantity, of growth, not to mention reduced corruption, has also seen the introduction of new restrictions:
 

• • A five-year ban has been imposed on construction of government offices across China, as the leadership looks to curb the excesses of some local governments. Renovations will only be permitted under strict oversight.
   
• • Bloomberg reported that China ordered more than 1,400 companies in 19 industries to cut excess production capacity this year, as part of the efforts to shift towards slower, more sustainable economic growth. This includes mandated closures of specific steel plants, although the totals at this stage are modest.
   

• Environmental performance is clearly being much more heavily “policed” than in the past, impacting a range of commodity businesses from iron ore mining to non-ferrous metals smelting.