Robert Friedland on Why The Chinese Stock Market Fall Isn't as Bad as You Think

The Sprott-Stansberry Natural Resource Symposium kicked off yesterday with introductions from Sprott’s Rick Rule and a keynote presentation from Robert Friedland of Ivanhoe Mines (TSX:IVN).
Speaking to a packed audience, Friedland answered questions from Rule about the current state of the market and where things are headed.
Not surprisingly, Friedland was bullish on copper, platinum group metals (PGMs) and zinc – Ivanhoe holds the Kamoa copper project and Kipushi zinc project in the Democratic Republic of Congo (DRC), as well as the massive Platreef PGM project in South Africa, and Friedland took some time to talk about those projects during the hour-long Q&A session.
The mining financier also spoke about what he saw as another significant issue – the amount of attention being paid to the falling Chinese stock market. The Shanghai Composite Index fell roughly 32 percent in just a few weeks after peaking in June, putting extra pressure on other stock markets and already falling commodities prices. Stocks in Shanghai rose late in the day on Tuesday to break another 11 percent fall over the past three days, Bloomberg reported.
However, Friedland suggested that worries about the market are overdone, stating that the index is still up over 100 percent since the start of the year. While that point might not ease concerns about volatility in the Chinese stock market, it does put the extent of the fall into perspective.
Furthermore, despite reports that some Chinese are taking out high-interest loans to invest in the market, Friedland stated that the average Chinese household only has about 10 to 12 percent of its assets in stocks. A July 12 post from the Peterson Institute for International Economics made a similar point.
“At the end of 2014, Chinese households held on average 10 percent of their assets in stocks, and out of 350 million households, a maximum of 30 million to 35 million have exposure to the stock market,” stated authors Sean Miner and Jan Zilinsky. “Given that household final consumption is around 37 percent of China’s GDP, and the fact that the exposure of Chinese households to equities is (on average) still limited, even a 30 percent drop from recent highs in the stock market will not affect the average household very much, as the majority of their assets are in cash or property.”
That said, the researchers admitted that “distribution of exposure also matters,” – 10 percent is just an average, and some Chinese households could stand to lose all of their wealth.

Copper worries overdone?

Certainly, investors outside of China have still been worried. For example, Friedland stated that with over 50 percent of equities halted in China, he saw a number of hedge funds shorting copper as a proxy to the Chinese market.
That doesn’t sound like great news for the red metal. However, Friedland stressed that the fundamentals still look good for copper, citing a lack of new projects coming online, falling grades, and higher production costs as factors contributing to a dwindling copper supply in the future.
Further to that point, when Rick Rule asked whether the current bear market would be ended by demand creation, or, more violently, by supply disruption, Friedland argued that the latter scenario would be more likely to take place.

A command economy

Friedland isn’t alone in believing that worries about the Chinese stock market and economy are overdone. In a note put out Wednesday by the Disruptive Discoveries Journal, Chris Berry noted that Chinese share prices are still “among the best performing equity markets globally.” He suggested that the market’s volatile performance could be “more driven by speculation and margin calls than economic fundamentals,” especially given the amount of control that Chinese regulators hold over domestic markets.
As the Globe and Mail reported, China has already stepped up efforts to allay another sharp selloff. Some market participants have questioned the state’s heavy-handed intervention, but at least in the short term, state measures seem to have been effective in helping the market bounce back 3 percent on Wednesday following another three-day fall. Certainly, Friedland’s point that “China is a command economy” appears to be relevant.
Of course, there are other points to consider – Berry suggested that worries should be focused more on China’s debt load than on equities. Still, it was interesting to hear Friedland’s views on the situation in China, and on what that might mean for copper and other metals.
 
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.