By Ulf Bergman
The first sets of data measuring the health of the Chinese economy during the initial month of the year have been released. While the headline numbers remain bullish, a deeper analysis of the underlying data signal that the Chinese economy may sail into some headwinds, at least temporarily. The manufacturing purchasing managers index (PMI) released on Monday by Caixin/IHS Markit signals that Chinese manufacturing are still expanding, but at a slower rate and with the reading at the lowest since June last year. The index has indicated softening business conditions since its decade high in November, as the pandemic worsened in many parts of the world and put the global recovery under pressure.
The slowdown in economic recovery is greatly influenced by weaker export orders, with the New Export Orders Index falling into contraction territory below 50. The worsening of the pandemic situation saw external demand for Chinese goods fall and the current congestions in many container ports in export markets, with a resulting shortage of empty containers, are unlikely to have helped China’s export industry either.
The survey also highlighted rising prices for industrial inputs in China, which is hardly surprising given the recent surge in commodity prices. The rising prices, in combination with supply issues and shortages, could potentially be the trigger for a lifting of the current import ban on many Australian commodities. The recent outbreaks of COVID-19 in Mongolia have also seen Chinese coal imports from the country fall, amid border closures to limit the spread of the coronavirus. Since the unofficial ban on Australian coal imports was put in place, steel producers have been forced to find replacements elsewhere. The rising commodity prices and supply problems could potentially pose a threat to the ongoing industrial expansion. The Chinese leaders may, hence, deem the ban to be too costly, both economically and politically, to maintain and could allow Australian imports to enter the country yet again.
China has also seen an increase in COVID-19 infection rates in recent weeks, which has led to new restrictions in some parts of the country. The new outbreaks and restrictions are likely to limit the traditional increase travel during the upcoming Chinese Lunar New Year, with the Ministry of Transport expecting 40 percent less travel compared to 2019. The reduction will have a negative impact on the country’s demand for oil as well as the service industry, with less demand for leisure and travel.
Industrial output could on the other hand increase, during what is traditionally a quiet period. With new restrictions on travel and celebrations, many industries look set to maintain production through the holidays to keep up with their export demand. The year has so far been abnormal for commodity imports and dry bulk shipping, with the usual lull ahead of the Lunar New Year failing to materialise to the usual extent. The unusual high demand for commodities and tonnage have kept the Baltic Dry Index above the weak levels usually observed in January.
A continued industrial production through the Chinese holidays would maintain a healthy demand dry bulk shipping during what is normally the softest patch of the year. A further pick up in industrial activities in China after the holidays and stimulus driven recoveries in the US and Europe could see dry bulk charter rates doing their traditional recovery post the Chinese New Year, but from an unusually elevated level.