View on weak China infrastructure data about metal demand

China infrastructure fixed asset investment (FAI) showed a sharp deceleration in May. Given the ongoing restrictions on local government debt, broader weakness in the May credit and activity data, and challenges from trade frictions between the US and China, fears about Chinese metals demand falling and metals prices suffering are on the rise. We raise our views on three fronts.

First, the link between the monthly infrastructure FAI data and Chinese metals demand has weakened notably over the past few years. The reason, we think, is because some provinces had been over-reporting economic data previously and corrections were made more recently. Such one-time corrections result in large declines in reported investment growth, but should have limited effects on actual metals demand.

Second, when we look at wide ranges of micro data – from steel demand to copper demand, from electricity consumption to construction companies’ new contracts, from excavator and loader sales to channel checks of construction demand – we see few signs of significant slowdown as suggested by the May infrastructure FAI data.

Third and most importantly, we believe growth stability is still an important policy priority in China. While macro-prudential regulations and financial deleveraging are likely to continue, our economics team expects the government to ease monetary policy and supply ample liquidity to offset their negative impact. Overall, infrastructure investment should hold up much better than the May data and market sentiment suggest, leaving room for upside surprises in Chinese metals demand and metals price performance in 2018H2.