By Ulf Bergman
The economic data coming out of China in recent weeks have painted a rather mixed picture of the current state of the Chinese economy. The GDP growth for the second quarter fell short of the consensus expectations of 8.1 per cent, prompting some pundits to question the momentum of the economy as we enter the second half of the year. While the second-quarter growth disappointed many observers, the 7.9 per cent growth achieved will allow China to comfortably meet its annual target of a GDP expansion of more than six per cent. That the Chinese economy can continue to grow at the spectacular rates seen in recent months seemed a bit farfetched, especially as base effects accounted for a large portion of the previous quarters’ strong growth and are now all but exhausted. A return to more normal Chinese growth levels is likely to be the case, which will also put less upward pressure on commodity prices with reduced inflationary pressures in the economy as a result. Additionally, a somewhat more sedate pace of economic expansion is likely to please the leadership in Beijing. One of the central goals of the current five-year plan is to maintain sustainable and stable growth, rather than seeking spectacular growth at any cost.
Despite failing to meet expectations, the Chinese economy ended the first half of the year with a quarter-on-quarter growth at just over a per cent. The continued strength of the Chinese economy was the result of a stronger-than-expected rebound in retail sales and increasing investments among manufacturers, suggesting that the country’s growth is becoming more balanced. The initial V-shaped pandemic recovery was fueled by surging exports and a buoyant property market while consumer demand was lagging, which was a concern for policymakers aiming for greater domestic resilience. With export sales likely to slow slightly in the second half as consumers globally start to spend more on services, the importance of the domestic economy is increasing.
The positive data for domestic consumption is likely to be welcome news in Beijing, but some economists have warned that the boost may be short-lived and more supporting measures need to be put in place. Last week’s lowering of the reserve requirement ratio in the banking system was met by some alarm among analysts, as it could potentially be seen as a warning signal and that the Chinese leadership was aware of more weakness in the domestic economy ahead. However, against a backdrop of softening exports and strengthening domestic consumption, it seems to have been a pre-emptive move to support the recovering domestic economy.
The mixed, but still decent, Chinese economic data suggest that there is not much room for reducing stimulus measures at this stage, with Chinese authorities looking more likely to have to continue to support growth during the second half of the year. The Chinese Premier Li Keqiang also struck a cautious tone this week about the nation’s economic outlook, warning the country needs to prepare for emerging cyclical risks and make counter-cyclical adjustments accordingly. As part of such initiatives, there is an expectation among analysts that local authorities will accelerate the issuance of bonds in the second half of the year to support infrastructure spending. The change in tone also highlights the danger of withdrawing stimulus measures too early, both in China and elsewhere in the world.
Alongside the economic data, it has been widely reported that Chinese iron ore imports dropped to a thirteen-month low in June. The efforts by Chinese authorities to reduce the steel output, both to control prices and pollution levels, have had an impact on the iron ore demand, leading some analysts to expect a further weakening of demand in the coming months. However, crude steel output rose by 1.5 per cent in June compared to the same month last year, begging the question of how effective the measures are. Port inventories of iron ore have also come under pressure during the last month. A softening economic outlook could make the case for continued weakness in the demand for iron ore and other commodities, but with the stimulus likely to remain in place the demand is unlikely to drop that far or at all.
Beyond China, demand for industrial commodities is likely to improve, with more and more economies regaining their momentum as vaccination rates are rising and extensive stimulus programmes are starting to take effect. The world’s second and third largest importers of seaborne iron ore, Japan and South Korea, will also add to the tonnage demand. According to data from Oceanbolt, South Korean imports of iron ore have since the end of last year been stable around the pre-pandemic levels, while Japanese volumes are still in the recovery phase. The third quarter has also started reasonably strong, with July looking set to match the 8.2 million tonnes imported by Japan in June. If that level is achieved it would represent a year-on-year increase of two million tonnes or 32 per cent.
The rising demand for iron ore outside China could offset a softening demand in China and provide some support to prices. However, a renewed Chinese focus on infrastructure investments would on the other hand contribute to an already tight supply situation. The extent of the upward pressure on prices would be dependent on the rate of recovery of the Brazilian iron ore production, with shipping benefitting from a rapid recovery due to the longer voyages involved.