Commodities to Hit Wall If China Falls Into Recession

Commodities from copper to crude oil, in three years to five years, may plummet anywhere from 50 percent to 70 percent from existing level prices as a domino effect of a China potentially falling into a recession by 2015, a mutual fund CEO said.

Bill Smead, CEO of Seattle-based mutual fund Smead Capital Management Inc., said China, currently the world's second-largest economy, has a 30 percent chance to go into recession because of the continuing falling property prices that have as a result hurt the country's banking industry.

China's construction boom started in 2008, where more than a dozen companies and banks capitalized on the surging growth. But now, these same companies and banks are now said showing troubled signs of amassing more debt than profit, and might be unable to write off the said debt in the long run, Smead said.

Last week, Barry Eichengreen, US economist and former senior policy adviser to the International Monetary Fund (IMF), confirmed China is indeed poised to enter a growth slowdown in the next five years.

But compared to the other larger economies, China will be more flexible to bend itself to accept the challenge of the slowing economic growth as well as to accommodate changes to its federal policies to cushion the forthcoming economic slowdown, such as curbing the prices of its property sector and imposing stricter bank lending requirements, to name just a few, Eichengreen said during the Mining Indaba conference in Cape Town, South Africa.

"We're not negative about the long term prospects for the Chinese economy," Smead said.

"But what needs to happen for the success story in China to continue is that they have to clean the system. And that's what a recession will do."

In December, according to a report by research firm Beijing Fost Economic Consulting Company Ltd., China's government debt may have grown to $3.14 trillion by the end of 2010 alone, or 50 per cent of its gross domestic product.

Last week, the IMF slashed its growth forecast for China for 2012 to 8.25 per cent from 9 per cent in September 2011, warning exports will significant drag its expansion in the next two years.

China is the world's biggest consumer of energy, metals and grains.