China's Controlled Decline: Commodities in Limbo

China is experiencing a centrally planned balance sheet recession, characterized by a controlled deleveraging process, particularly in the real estate market, that is different from past global financial crises. Unlike Japan's past response, China's goal appears to be managing rather than fixing the economic slowdown, as evidenced by continuous cuts to interest rates that do not stimulate nominal growth. This situation leads to reduced demand for commodities, impacting countries like Australia and New Zealand that are heavily reliant on Chinese market trends. The commodity markets are reflecting this weakness, with notable declines in oil, copper, and iron ore prices, which serve as proxies for Chinese demand. While commodity sentiment often remains overly optimistic despite negative price trends, this disconnect highlights the challenging reality that commodities have seen negative returns over the past two decades. The prevailing narratives remain bullish, even amidst a downturn, suggesting a stubborn belief in eventual recovery that may not align with market realities.