Category Archives: Economy
China Daily today reported that there is to be a new tax on coal beginning December 1 this year. The newspaper did not report a tax rate, but said that the new tax would be on sales of the coal, rather than on production as is the case now. The existing tax is to be scrapped.
Analysts quoted by the newspaper suggested that the tax would cause a rise in coal prices of some 3%-5%.
Interestingly, the newspaper says that to the end of August, China had produced 2.52 billion tonnes of coal, for a 1.4% reduction over 2013, but sales of coal were registered at 2.4 billion tonnes. This suggests that coal inventories across plants, hubs and power stations has risen by 120 million tonnes this year. In the meantime, coal imports this year have dropped by about 5% year-on-year, so there is a definite slowdown in coal consumption. Whether this translates into a slowdown in the economy is a moot point, because China is also building the use of clean energy sources including hydroelectricity, nuclear and others.
A rise in cost of 3-5% is not likely to cause much of a change in demand patterns, especially since demand and prices are both in decline. But what’s also interesting is that the announcement from the government also talks about a 2-tier pricing system for coal. There were no details on this, but it would be interesting to see if coal for power stations for aluminium consumption are adversely affected or not.
We will keep you posted as more details emerge.
China’s recent weak economic data for August increased worries about a further slowdown. Although the Central Government confirmed that reform and restructuring would continue, their determination seems in doubt and faltering this morning. Market rumours are that the authorities may allow non-listed property developers to raise finance via issuing debts on the Shanghai Exchange.
Although this remains under review and will not directly support the real estate sector, it will greatly relieve the developers currently under financing pressure, by adding another financing channel option on top of the loan and trust. More importantly, it provides a foundation for the government to release additional bailouts, like direct credit easing.
That said, the financing policy won’t be released quickly as the authorities are studying its potential impact and balancing the necessary powers between the NDRC (National Development and Reform Commission) and the CSRC (China Securities Regulatory Commission), to decide who will eventually get the power to approve any future applications.
We’ve reported in our latest client publications that Chalco Guizhou Branch is restarting part of its idled capacity. It is doing so despite the fact that its cash costs remain over its selling price due to high power prices in the southwest of China. However, the smelter was urged to restart by the local government, with inducements in the form of subsidies.
It’s clear that the local government is violating the order from central government again. Last December, the National Development Reform Council (NDRC) jointly with the Ministry of Industry and Information Technology released an order about conducting tiered power prices. In that notification, it clearly stated that local governments should strictly obey the national power policy and could not solely reduce the power price. Any violation should be corrected as soon as the order took effect.
But it seems economic growth remains the most important driver. GDP growth and employment are still regarded as the first priority and reform is facing headwinds. This kind of growth supported by subsidy cannot be sustained, and can easily bring the economy into vicious circle that producing more, losing more and draining treasury funds and/or increasing debt loads at government level.
Premier Li recently called for a meeting with eight provincial leaders to cement the intention of reform and restructure. We hope that wisdom and a longer view of economic policy will eventually prevail.
There are reports circulating inside China that several provincial governments lowered GDP targets in their 12th five-year plans including Shanxi, Hainan, Beijing and Suzhou. After the adjustment, the GDP growth target of Shanxi, Hainan and Suzhou all decline to 10% compared to 12-13% previously, and Beijing to 7.5% from 8%.
The adjustment on GDP growth targets strongly signals that the slowdown of China economy will possibly continue. Restructuring will be the main theme in the following years, even though Premier Li Keqiang may fine tune monetary policy to boost growth. Certainly we will not see any stimulus package like the one released in 2008.
This may not be a good story for China aluminium industry. As per NBS, China housing starts fell over 22% YoY in the first 4 months this year. The on-going tight credit condition holds back the development of real estate sector heavily, especially in second and third tiered cities. The auto sector continues to grow, but with a much slower pace - 8% compared to 15% in the same period last year.
This has been reflected by the recent performance of aluminium price. After a sharp rebound starting from last week, aluminum price stagnated at about RMB13,300/t (USD2180/t) in both the physical and futures market. The long side tested RMB13,400/t several times, however, faced severe resistance from the short side. Consequently, the aluminium price scaled back to below RMB13,300/t level again.
It would be hard to judge where the aluminium price will go, but we are not quite positive at the moment, especially when the idle capacity restarts.
The Chinese government today announced that Q1 GDP came in at 7.4% on a year on year basis. Immediately, markets jumped, and the Australian dollar, which is highly dependent on the Chinese economy, rose almost half a cent.
Yet, the real story is not the 7.4% number, but the quarter on quarter one. Taking the GDP growth for Q1 compared sequentially and extrapolated to a full year, GDP came in at 5.7%.
In other words, if China keeps growing at the rate of Q1, it will end up nowhere near its stated target of 7.5%.
So why did the markets respond positively to something that was decidedly negative? It’s because mainstream economists and commentators had predicted that the YoY number would be 7.3%. The tiny over-achievement compared to predictions by foreign commentators was seen as good news. Yet the real news in the GDP numbers was missed.
What’s more likely to happen is that the QoQ number will cause Beijing to increase its rhetoric about more railways, housing developments and other infrastructure. While we will not see a fully-fledged stimulus package, we may see slightly more spending announced, to keep the economy ticking over until trade and domestic consumption improve enough.
By the way, those of you who subscribe to our monthly Black China report will know that the lower GDP should not have been a surprise. As we said in that report just a few days ago, all the signs pointed to a slow-down.
And the slow-down is there, despite the mainstream press and some markets misunderstanding the numbers.
Along with the possibly weaker Q1 GDP growth figure, China’s news media has been focusing on the government’s “Steady Growth” strategy recently. Several provincial governments have released local stimulus plans, and when added together, these individual programs amount to 7 trillion RMB.
You might wonder whether those stimulus plans will be fruitful or not, whether they are the same as last 4 trillion stimulus package or not, and whether these programs will lead to the same problems that originated in 2008’s package. The key points in the government’s plan go some way to answering those concerns.
1. China won’t tolerate a hard landing, and doesn’t expect one, so stimulus plan must be applied to keep the economy growth.
2. Investment will remain the major momentum in driving China economy growth.
3. 7 trillion investment refers to key project investment in 5 province including Guangdong, Hainan, Tianjin, Jiangxi, and Guizhou.
4. Different from the last 4 trillion stimulus package, this 7 trillion won’t be invested instantly but gradually injected over several years. The growth rate for those key project investments in 2014 is only about 11%.
5. The investment will be centered on railway network expansion, shantytown redevelopment and tax cuts for small companies.
6. With the heavy local debt, more private funds will be introduced into the investment.
It’s anyone’s guess to what extent these programs will be successful or not, but if they can be implemented as pronounced without any delays, it would be good news for commodities including aluminium.
According to a Forbes article, China’s railway network will reach 120,000Km in 2015, but is still a long way behind countries such as the USA. With a great increase in railway network length, and more pervasive aluminium alloy applications in high speed train and rail cars, aluminium will be very likely well consumed by this sector. Shantytown redevelopment will build another root on commodity consumption, so coupled with other similar infrastructure projects, current over-capacity of aluminium will also be somewhat relieved. Perhaps the impact would not be big enough to ease the glut completely, but we could still expect some support on aluminium price from this positive news.
We will monitor the progress of these programs, and their impacts on primary aluminium.
For registered attendants of AZ China’s 4th International Aluminium and Carbon Conference, on the night of Tuesday, May 6, 2014 there is an option: to Gala, or not to Gala? That is the question.
But what is the measure of our decision?
If our minds long to be entertained, dulled by the weary excuses for conference entertainment we so often see – we say yes! Our pre-dinner traditional Chinese entertainers are as charismatic as they are alluring.
If our hearts yearn for delectable cuisine so scrumptious our watering mouths flood the lands – we say yes! Guests will dine at 7:30pm in picturesque Houhai, a reclusive lake smack dab in the middle of Beijing surrounded by enticing nightlife.
Diners will be served a scrumptious assortment of seasonal dishes, basted and broiled to perfection.
If our bodies long for an adventure we haven’t had since our misspent youth – we say, why certainly, yes! A convenient adventure that is; guests will be promptly and safely delivered to and from each stage of the Gala journey and still get back to the hotel early enough for a good night’s sleep before the final day of the conference. If you’re a night owl, you’ll also have the option to stay and kick back at the surrounding neon-lit guitar bars for a lakeside beer or wander around the lake at your own pace.
But don’t be fooled by the guise of just a great meal and environment! The evening has cunningly disguised networking opportunities for the benefit of guests’ business development as well as their enjoyment and relaxation.
How to get on board the Gala Dinner train?
On the registration page of the conference, there is an added option to attend the Gala dinner. For those who have already registered and did not check the option but would like to attend, you may pay for the Gala dinner at a later point, although we can’t guarantee available seats. There are already a very limited number of remaining spaces available. Register soon for a great night in the heart of Beijing!
Unlike this divisive Gala occasion, AZ China’s Gala Dinner won’t be half as awkward!
Much has been made about the conflicting priorities and imperatives facing China’s leaders these days. The credit bubble, bling investment in bridges to nowhere, corruption, pollution, and the need for continuing economic growth. How do we as foreigners understand the picture, when the picture is so confusing, so contradictory and so lacking in clarity?
The government has now stated that it wants to achieve economic growth in the order of 7.5% for this year. Yet at the same time, it talks of controlling over-capacity, reducing pollution, and reining in the mounting bad debts of the last 5-6 years. Any one of these campaigns could lead to a slowdown in the economy, which in a Communist country is anathema. So what will really happen?
The first thing to do when trying to understand the picture is to block out the words. Beijing is good at talking the talk, but walking the walk is another skill entirely. It’s a little like a President of a country giving his State of the Nation address, speaking all sorts of lofty ideals, but with no connection to the reality of making these dreams become true. Beijing must make these calls and edicts, for not to do so would invite anarchy in business and commerce, grass roots politics, social structures and other parts of society. But making the calls and issuing the edicts doesn’t mean that things will happen.
(As a corollary to that, treat any numbers that come out of Beijing with suspicion. Numbers can be made to fit the need.)
Which leads to the second rule for understanding China’s path forward. While Beijing is good at making rules, the apparatus for carrying out these rules is piecemeal, unprofessional and at times simply non-existent. Take the aluminium industry as an example. Various government departments have been issuing edicts about restricting over-capacity for at least 3 or 4 years. Yet the tentacles of government that are supposed to carry out these instructions are via the China Nonferrous Industry Association. In other countries, an “industry association” would mean just that. But in China, the industry associations have the duty of enforcing government edicts. But the CNIA is the ‘Special Projects” department of the Chinese aluminium industry. If you are working in the CNIA, or most other Chinese industry associations, it’s because nobody else wants you on their payroll. As a consequence, the CNIA has little clout among its constituent members, and aluminium companies in China have tried to set up alternative organisations from time to time.
One example of the toothless nature of the CNIA is in the campaign to close Soderberg plants. Beijing issued that directive in 1999, but it took until 2005 for the CNIA to get it done. More recently, the campaign to close pots running at less than 160KA. That edict has been floating around in various guises since 2010, but there are still plenty of pots out there running at that level or below. (CPIC just announced that they would close some 120KA and 160KA pots. Why? Not because of the CNIA, but because of the market conditions.)
Making the most of what you have
Clyde Russell from Reuters made a very good point in his recent piece on China’s “quo vadis”. He points out that China already has many of the tools it needs. Take pollution for example. Many of China’s more modern coal-fired power stations have scrubbing technology installed. These scrubbers clean any emissions from the plants of sulphur dioxide, a major contributor to acid rain and the pollution problem. But scrubbers cost money to operate, and electricity prices are set by the government, restricting the power companies from making too much money, so they simply turn off the scrubbers in order to reduce costs (turning them on again when the inspectors come by.)
It could be argued that China also has the tools to allow over-capacity in aluminium and steel and other industries to be weeded out. China has the world’s largest aluminium market, with 24 million tonnes of primary metal being consumed last year. If market forces were allowed to operate as they should, small, inefficient, high cost smelters would be forced to close. But local and regional governments use another tool at their disposal to keep these plants alive. Subsidies, tariff reductions, and easy loans from local banks all work against the natural market forces.
Qu nar?
It’s an expression you will here every time you get into a taxi in Beijing, roughly meaning “where to?” And it’s a question that commentators, China watchers and economists are asking of China right now. But just as you need to go on a ring road to get anywhere in Beijing, probably we will see China’s economic indicators pointing to a circuitous route forward. Expect more conflicting data points, more words that don’t match actions, more ham-fisted actions, and more unsustainable growth.
Precisely what sort of growth do we at AZ China expect? That’s something we will share with our clients, and at our upcoming conference in Beijing.
China’s Premier Li Keqiang today announced that the 2014 target for GDP growth would be 7.5%.
This is the same target as was set for 2012 and 2013. Against that target, China achieved growth of 7.8% and 7.7% respectively.
It is no simple matter to adjust an economic growth target when you are the second largest economy in the world, and when you are a communist country to boot. One only needs to recall the clamour when previous premier Wen Jiabao took the target down from 8%. Back then, there were rumblings about the ship of state running aground.
On the other hand, today’s announcement that the target remains unchanged will cause as much concern, and with good reason.
Here is a chart from Bloomberg’s Tom Orlik:
As you can see, Premier Wen had it easy in the early part of his time as Premier. He regularly over-achieved his 8%. But the new leadership has no wriggle room here. Any sort of slow down caused by controlling liquidity or spiralling credit growth will cause GDP to slip below the blue line.
And that is one thing that the Communist Party cannot afford to allow to happen. There is no doubt that today’s target was well workshopped before being announced. The leadership would have been confident that the number would be achieved, as they simply cannot afford to be seen to have missed such an important indicator.
Which leads to two possible conclusions, neither of which is palatable for a rebalanced economy. Either the Party will continue the program of “bridges to nowhere” - housing, construction and infrastructure development, or they will do what many commentators think they do already - fudge the numbers to suit.
China still lags the developed world when it comes to “capital stock per head.” That’s the measure of the amount of investment in roads, bridges, rail, and other projects that makes a modern country look modern. China also lags the developed world when it comes to urbanisation, and indeed, Premier Li announced that 100 million more rural dwellers would be moved into cities (though he gave no timeline or budget.) But China does not need these activities to be the driver of GDP. It needs more consumer confidence and domestic consumption. It needs to balance its economic activities.
What’s more, if the 2014 GDP target is achieved by means of infrastructure projects, if these are funded the same way as the previous 5 years, it will only lead to an impossible situation in the credit market.
The alternative is to fudge the numbers, but this too is already wearing on the Chinese people, who see the pronouncements from Beijing with increasing incredulity. Not to mention China’s reputation in the global economic community would also be severely tarnished - not that Beijing cares too much what other people think.
A recent Ernst&Young report reveals that 48% of companies in China have experienced declining profit margins in the last two years. This was due to slowing revenue growth and cost-driven inflation.
Let’s just dig into this a little deeper. Declining revenue is no surprise given the sort of economic environment we have been in. Cost driven inflation is the part that brings on interesting arguments.
Many would associate rising costs with the media-popular wage inflation in China. That deserves some clarification. From talking to manufacturers, many would tell you that the rise in labor-related cost is social security and medical insurance costs. That cost has drastically increased over the last 2-3 years since the new labor rules came into effect. Many manufacturers would complain that the government has simply pushed a substantial part of what should be more of the State’s burden onto businesses.
Wage inflation is quite different from social security and medical insurance, because businesses can manage a progressive inflation in wages, and simply pass that onto the final consumers, who are the wage earners. Because of huge labor supply and urbanization in manufacturing bases, wage growth has been more progressive and manageable. Social security and medical insurance however, increases the variable costs on a more structural basis, and tends cuts into margins permanently.
However, it is important to remember this is precisely the kind of macro reform that should happen, because it facilitates the transfer of wealth from the investment side to the demand or consumption side. Putting on an economist’s hat, one would invariably see this development as a net positive to the purchasing power of citizens, who are sponsoring the rise of China’s middle class or what I like to call ‘new wealth’. The name is intuitive to foretell what will likely happen in China: a wealth-led consumption boom, which generates a new engine to China’s growth.
Perhaps it is necessary to understand that the social security- and medical insurance-led margin cuts work on a macro scale. It will generate opportunity to players that have good exposure to the consumers, such as retailers. This is going to increase the probability of higher return on investment in the long run.
‘To localize’ is another way of saying ‘made in China for China’. The immense market resulting from higher consumption will see demand for goods and services domestically and from imports. The self-reinforcing cycle Ford understood so long ago will come into full gear. Higher purchasing power will lead to higher consumption, this will likely see the most competitive and innovative players reap the benefit of this ‘new wealth’.
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