Silver spot price: Marked rise in perceived risk of China hard landing

New York (Jan 22)  The risk of a “China hard landing and commodity collapse” escalated further from December to January, according to the latest fund manager survey undertaken by Bank of America Merrill Lynch. The survey may explain the lacklustre performance of the spot price of silver in the period. The People’s Republic of China plays a central role in commodity markets, accounting for much of the increase in global demand over the past decade.

A hard landing may be the undesirable consequence of efforts by the PRC’s central bank to tighten monetary policy to keep inflation in check. The expression refers to an economic phenomenon in which an economy slows sharply or is tipped into outright recession after a period of rapid growth, due to government attempts to rein in inflation and bank lending. Although a soft landing is normally the objective of such tightening, a hard landing may prove to be inevitable.

China’s economic fortunes in recent years have given rise to increased speculation on the possibility of such an overshoot, if the PRC government’s measures to tighten monetary policy and regulate the shadow banking system slow GDP growth faster than intended.

BoA’s survey, released yesterday, has 37 percent of institutional investors seeing a “China hard landing and commodity collapse” as the foremost threat to the global economy, up from 26 percent in December (see left chart above). This month’s reading is still well below the 56 percent of market specialists who thought in July last year that China poses the biggest ‘tail risk’ for the global economy.

A more positive sign for silver is that the proportion of fund managers identifying inflation as the major risk for the world economy edged higher from December to January, despite the US Fed’s announcement of a start to QE tapering.

Contrariwise, the net percentage of analysts believing the greenback to be overvalued hit a new post-crisis record low in January (see right chart above). An attendant resumption of the US dollar’s uptrend could place silver pricing under significant pressure from short-sellers