By Ulf Bergman
The Chinese central bank, the People’s Bank of China, moved swiftly following Premier Li Keqiang’s suggestion to cut the major commercial banks’ reserve requirement ratio (RRR) at an appropriate time. The reduction is the second of the year and highlights Beijing’s increasing concerns over the direction of the country’s economic growth. The half a per cent decrease in RRR will inject approximately 1.2 trillion yuan (188 billion US dollars) of long-term liquidity into the interbank market next week to support the Chinese economy in the face of increasing headwinds.
In parallel with the central bank’s decision, the Politburo, China’s primary decision-making body chaired by President Xi Jinping, stated following its meeting on Monday that economic stability will be at the top of the agenda for next year. In addition, the statement omitted the optimistic language regarding the economy used following the previous meeting in July. While the Chinese authorities are pivoting towards easing fiscal and monetary policies, there are signs that Beijing is ready to accept lower growth rates than what has been the norm in recent years. The Politburo also called for the creation of an “effective investment” environment to boost the growth in private consumption and rely less on investments and exports. As part of China’s dual-circulation strategy, the leadership wants to expand domestic demand to drive future growth.
The beleaguered property sector looks set to continue to weigh on the economic sentiment next year after the earlier crackdown on the industry triggered a credit crunch for many developers. Despite being given a month-long grace period, the troubled developer Evergrande has yet to distribute coupon payments to some bondholders. The failure to do so may signal the possibility of an imminent default for the company. Another large real estate company, Kaisa Group Holdings Ltd, is also on the brink of bankruptcy, with coupon payments overdue and a group of investors proposing a formal forbearance to buy some time. Stricter mortgage requirements have also led to falling demand, with property sales down by forty per cent in November compared to the same month last year.
Despite the darkening outlook for the Chinese economy, its international trade continues to go from strength to strength. According to official data released this week, exports and imports grew more than economists had expected in November, with both data sets reaching new record levels. Surging global demand for Chinese products ahead of the year-end holidays saw exports growing by 22 per cent year-on-year to 326 billion dollars. A 32 per cent rise in imports, to 254 billion dollars, saw the Chinese trade surplus moderating somewhat compared to the previous month. Rising prices and imports of coal and LNG, as a result of the energy crisis, contributed to a large part of the growth.
The volumes of imported dry bulk commodities have also remained strong in the first eleven months of the year. Despite the Chinese authorities’ clampdown on many commodity trades during much of the year, aggregate imports could be on course for yet another annual record. According to cargo tracking data from Oceanbolt, 1.9 billion tonnes of dry bulk commodities were discharged in Chinese between January and November, some 80 million tonnes, or four per cent, more than the same period last year. The first week of December also showed robust volumes, suggesting that last year’s record remains firmly under threat.
However, the robust aggregate data hides a somewhat mixed picture across the different commodities. In the wake of the extensive restrictions on steel production, iron ore imports have gone against the flow with a three per cent decline in volumes. The drop has also led to the steel-making ingredient losing close to a tenth of its share of total bulk imports. On the other hand, coal volumes jumped by almost thirty per cent during the period, as the energy crunch drove demand higher for the fossil fuel. The energy-intensive nature of aluminium production is likely to have contributed to two per cent less bauxite being discharged in Chinese ports compared to the same period in 2020. Imports of other significant commodities, e.g. grains and non-ferrous ores, grew by around ten per cent year to date.
With the importance of domestic stability being paramount for the Chinese leadership, there will be extensive efforts to insulate the general population against any economic shocks. Hence, the move towards more expansionary monetary and fiscal policies will likely support the ailing real estate sector in the coming year, with iron ore and steel demand recovering parts of the lost ground as a result. However, seaborne coal imports may not sustain their impressive rates of recent months, as increasing domestic production volumes will likely offset some of the growth seen this year.