China Natural Resources Inc (NASDAQ: CHNR) has a very useful 82% rise in its stock price last week. The 12% at pixel time fall off isn’t therefore all that much of a surprise. What goes up might come down, enthusiasm has been known to get away with stock prices before now. That’s what the whole concept of momentum is about after all.
However, it’s also worth noting that the major price risk for an awful lot of China stocks at present is the actions of the Chinese government. We could think of this as another form of political risk but not in the way that has been affecting the Big Tech companies like Alibaba (NASDAQ: BABA). Rather, the government’s management of the whole economy can and will affect how individual companies do. This being different from those specific actions to rein in the activities of those tech ones.
China Natural Resources might seem a strange company to be so affected. It produces non-ferrous metals from Anhui. The prices of the target metals – things like zinc – are set globally so the state of China’s economy wouldn’t seem all that relevant.
Except that state of the Chinese economy is entirely relevant for China is the swing consumer – and thus largely the global price determiner – of those non-ferrous metals. So, if the Chinese economy slows considerably we’d expect to have lower prices for those metals produced.
It is this which is, arguably, producing this volatility in the China Natural Resources stock price. It’s possible for all to see that the Chinese real estate market is in a spot of bother. Evergrande is not the only real estate developer possibly folding under its mountain of debt.
This then leads to two further issues. One is that the construction of real estate is – just as China is globally – the swing consumer of these non-ferrous metals. So, if that sector goes into a slump so would we expect global prices to. The second is well, what does the Chinese government do about the real estate market?
They’ve long been saying that it needs to be reined in. But how to do that without collapsing growth in the rest of the Chinese economy? Real estate is such a large part of the total economy that there would undoubtedly be effects right across that whole economy.
We thus get to that political risk for China Natural Resources stock. What is the Chinese government going to do about the real estate sector? If it is to be reined in then we might well see an economic contraction, lower non-ferrous metals prices and so a fall in CHNR stock. Or, if the boom is allowed to continue, perhaps China Natural Resources will boom itself?
The only firm prediction we might be able to make about China Natural Resources is that the stock price will continue to be volatile for as long as Chinese government action over the real estate sector is still being discussed.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.