Much to everyone’s surprise, China's economy showed impressive growth numbers as the economic growth rate will very likely come in at 6.6% which is a bit higher than the official government estimates which were calling for a 6.5% growth rate (but lower than the historical growth rate). For 2018, the market seems to be expecting a 6.3% growth rate.
These preliminary results boosted the commodity markets as the prices of pretty much all base metals increased on renewed hopes as the Chinese industrial economy remains the main consumer of raw materials. As such, the fate of the base metals prices is closely connected to the well-being of the Chinese economy (which was clearly visible when for instance the copper price collapsed after China prohibited the copper-based lending scheme in an attempt to tackle the shadow banking system).
The main question now is whether or not the Chinese economy will be able to withstand an economic shock caused from increased political tensions? It looks like the domestic issues have been swiped under the carpet as the Purchase Manager Index seems to be holding up quite well whilst the real estate market (still) hasn’t crashed (for now).
The attention now seems to be shifting to ‘the bigger picture’. Not only have there been (growing) tensions between the USA and China with regards to the trade balance between both countries, the North Korean issue also seems to make things worse, as President Trump now seems to be connecting both issues with each other.
For some reason, the current president of the United States has voiced the opinion China ‘owes’ the USA help in the North Korea conflict exactly because of the historical trade deficit between both countries. Although tit-for-tat situations rarely exist in high-level politics, it does seem to be interpreted differently by the current leader of the USA.
Without choosing sides here, the issue with North Korea definitely seems to be one of the larger risks China is facing right now. Will it intervene with force? Or will it continue to ‘just talk’? It’s perfectly understandable for China to remain on the sidelines, trying to solve the issue during back room meetings as China definitely has more to lose than to gain, but China also has the power to prefer an economic war rather than a military war as it’s the main trade partner of North Korea.
After all, any military intervention would be the first large-scale intervention in a long time and if China doesn’t meet the primary objective within a certain time frame, the credibility of its army could get hit, and this could have spillover effects onto the entire political system in China, and ultimately reflect in the consumer confidence levels as well.
A domino reaction would be very likely, and that’s the main reason why China doesn’t want to appear too tough on North Korea right now as it’s still counting on a ‘diplomatic’ solution to make all three parties happy again. However, a second risk could emerge if the USA thinks China doesn’t move fast enough in trying to defuse the situation.
President Trump has repeatedly warned the US would not allow North Korea to develop an ICBM which could reach the USA and the clock seems to be ticking as it’s now pretty realistic to assume North Korea will be able to build one of those missiles during Trump’s current term.
A peaceful solution would be a bad outcome for gold investors, but provide a welcome boost for base metals investors, as the Chinese economy would be allow to keep its momentum going.