China’s Growth Model And The Threat to Commodity Derivatives
The comments below are an edited and abridged synopsis of an article by Daniel Lacalle
The threat to commodity derivatives stems from deeper structural issues in China’s economy, according to recent analysis by Daniel Lacalle. China’s growth model relies heavily on debt, and this reliance may be creating stagnation, which could ultimately affect global markets and financial instruments, including commodity derivatives. The economy now needs larger amounts of credit for smaller increments of growth, indicating diminishing returns from debt‑fueled expansion.
Since the 2000s, China has dramatically increased its non‑financial-sector debt relative to GDP. Total leverage rose from about 120% of GDP in 2000 to near 285% by 2023, and estimates suggest it may exceed 300% by 2025. This reflects persistent reliance on borrowing by state‑owned enterprises, local governments, and corporations.
The core challenge is that private‑sector credit demand remains weak, even as overall financing expands. Bank loans to businesses and households lag the broader growth in money supply and social financing. This dynamic shows that China’s economic participants are cautious about taking on new debt, even at low rates, pointing to deeper concerns about growth prospects and return on investment.
China’s model has historically leaned on massive investment and exports to drive growth. However, domestic consumption has not kept pace with production, leaving the economy dependent on external demand and government stimulus. Export‑led growth masks underlying weak private‑sector demand.
Another strain comes from China’s property sector and local government finances. The prolonged slump in real estate has eroded a major source of local revenue, reducing land sales and weakening regional budgets. As a result, local governments have increased bond issuance to cover shortfalls, pushing public debt even higher and contributing to financial fragility.
Some analysts have likened China’s situation to past debt‑heavy economies that struggled with stagnation. High debt levels require continued borrowing to achieve modest growth, which can trap an economy in a cycle of credit expansion with limited productivity gains. Such a cycle risks repeating patterns seen in other economies that experienced lost decades of low growth despite sustained stimulus.
In this context, the threat to commodity derivatives arises because markets priced on confidence in growth and credit expansion may face stress if China’s economy slows or stagnates. Commodity derivatives rely on hedging and speculative activity tied to future supply and demand expectations. A sluggish economic backdrop and heavy indebtedness can weaken those fundamentals.
Furthermore, China’s effort to manage debt through state‑directed finance, including local government financing vehicles (LGFVs), masks true risk. These off‑balance sheet debts may not be fully transparent in official figures, complicating risk assessments for global investors.
The potential stagnation also stems from overcapacity in many sectors. China produces a large share of global manufactured goods but faces weak domestic consumption. Excess capacity pushes producers to export goods at thin margins and rely on foreign markets, even as profitability declines.
China’s economic evolution will likely influence global markets, including commodity pricing and derivatives trading. If domestic demand remains weak and debt continues to accumulate, the threat to commodity derivatives becomes more pronounced. Market participants may need to reassess risk models that assume robust Chinese growth and credit dynamics.
Overall, China’s debt‑dependent growth model is straining under its own weight. The combination of heavy leverage, weak private credit, and sluggish consumption creates risks that extend beyond China’s borders, challenging conventional assumptions about global commodity markets and financial instruments tied to future economic activity.
