Canada, U.S. feel drag in China slowdown – by Simon Avery (Globe and Mail – October 14, 2011)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

Commodities, resources take hit as Beijing moves to rein in inflation, develop more sustainable economic model

As China’s leaders apply the brakes to slow the world’s second-largest economy, Canadian and U.S. markets are feeling the jolt.

Copper prices have plunged, as have the values of other commodities reliant on Chinese demand. The recent volatility on global stock markets reflects, in part, concerns about how fast and severe the slowdown in China will be.

North American stocks will be hammered if China’s annual GDP growth should shrink to 5 per cent, says Jurrien Timmer, director of global macro for Fidelity Management & Research Co. and co-manager of the Fidelity Tactical Strategies fund.

While that’s still a robust figure by today’s western standards, it would represent a dramatic decline from the 9.6-per-cent growth that China boasted in the first half of the year.

Such a slowdown could shave between 10 per cent and 20 per cent off the forecasted earnings for S&P 500 companies, Mr. Timmer said.

In such a case, “the whole notion that markets are cheap today gets thrown out the window,” he said. That’s because stocks are valued based on profit expectations, and almost half of all profits among S&P 500 companies come from abroad, with a large portion of that amount derived from China.

Mr. Timmer is concerned about how effectively Chinese officials will manage to gear down the country’s economic engine after fuelling it for years on cheap money. To spur growth, the government has encouraged banks to lend vast amounts to state-owned enterprises. That has led to bad bank debt and, some argue, a housing bubble of unprecedented proportion.

“I’m more worried about China than Europe,” he said.

Concern that China cannot continue to grow at today’s rates has pummelled the price of copper, the commodity most reflective of global economic conditions given its widespread industrial use. In the last few months, prices have fallen from $4 (U.S.) a pound to the $3 range. If the metal slips below $3 there could be a wider selloff in commodities, said Colin Cieszynski, analyst with CMC Markets Canada.

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