By Ulf Bergman
After “dual-circulation” comes “cross-cyclical” as a motto for Beijing’s latest economic policy initiative aiming at creating a more resilient and independent domestic economy. Like its forerunner, the term is unlikely to be found in any textbooks in Economics, as it must be seen in the context of the distinctive nature of the Chinese economy. According to some economists with links to the Chinese government, the purpose of the new programme is for the authorities to take action sooner, but in smaller increments and with a more long-term outlook. This marks a departure from the traditional counter-cyclical approach, where central banks and governments add stimulus to stimulate a decelerating economy and tighten when the growth starts accelerating. It has been suggested that the new approach will focus less on present statistics and volatility, with more emphasis on the effects that any policy moves will have in the coming years. Hence, at least in theory, it is supposed to create an environment for stable and sustainable growth. The new approach is also likely to give officials the option of easing policies in some areas while keeping restrictive guidelines in place elsewhere.
The recent move by the Chinese central bank, which caught many pundits off-guard, to lower the reserve requirement ratio for the banking system to increase liquidity, is likely to be seen in hindsight as the first policy under the new scheme. Especially in light of policies for controlling rising real estate prices remaining in place at the same time. There are also suggestions that the policy shift will allow for greater amounts of private capital to be invested in the supply side of the economy, where quality investors have been in short supply. The disappointing recovery for the domestic economy after the pandemic has increased the country’s dependence on the export industry, despite the current five-year plan aiming for the opposite effect, and is likely to be the cause of the new policy initiative.
It has been an expectation in many quarters that the Chinese economy, which in its current state is a hybrid between market and command economy, would see an increasing influence of market forces as the economy evolves. However, recent developments and policy initiatives suggest that the pendulum may not swing any further towards a capitalist system, as the leadership in Beijing is increasingly seeking to assert authority over the economy. The recent attempts to control the surging commodity prices serve to highlight an increasing unwillingness to submit to the conditions dictated by the markets. Speculators have also been blamed for much of the price increases seen during the first half of the year, with iron ore seen as particularly problematic. The rising iron ore prices also had a political dimension in light of the ongoing diplomatic rift between China and Australia. Despite the deteriorating relationship between the two countries, the imports of Australian iron ore remain vital to the health of the Chinese economy with no viable alternative. Hence, the high prices have seen a considerable wealth transfer from China to Australia, which under the circumstances must have added to Beijing’s irritation regarding the conditions in the commodity markets.
News that China is looking to merge two of its largest steel mills, Ansteel and Benxi, which will create the world’s third-largest producer, is further evidence of a desire to exert more influence over the markets. The Chinese steel sector has already seen a series of mergers following the country’s ambition to pivot towards larger and higher-quality producers, with better economies of scale and greater sway in the market. A consolidation of the steel industry in China could also drive greater compliance with future production targets, something that was a problem in the early stages of Beijing’s clampdown on rising iron ore prices and steel production. However, recent weeks have seen extensive falls in iron ore and steel prices as Chinese authorities have imposed more stringent measures targeting production and exports. In addition, the recent Covid outbreak tempered steel demand further, with many construction sites being forced to close as restrictions were imposed. Reports that the Chinese efforts to control the resurgent pandemic appear to have been successful have seen steel and iron ore prices stabilise, with demand expected to recover.
Steel Rebar– Shanghai Futures Exchange (CNY/tonne)
There has been much focus on Chinese attempts to limit surging demand for many commodities in recent months, most notably iron ore. However, there is also a degree of contradiction in the policies as authorities are increasingly eager to support the flagging domestic economy. On one hand, there are policies to limit the country’s emissions, but at the same time, President Xi Jinping has been suggesting that environmental restrictions should be applied with reason and that the country should avoid a "campaign-style" decarbonization programme. Hence, Chinese commodity demand is likely to remain firm, as the importance to support the domestic economy remains paramount to maintain political stability.
With the double impact of steel output restrictions and a resurgent pandemic, Chinese seaborne iron ore imports dropped in July by over ten per cent compared to the same month last year and were marginally below the volumes recorded in 2019 and 2018 as well. According to cargo tracking data from Oceanbolt, Chinese imports have recovered during the current month and, assuming a degree of linearity in the deliveries, could be on track for a new record for August at around 106 million tonnes.
Much to the delight of Capesize owners, Brazilian iron ore exports are continuing to recover and large parts of the increasing volumes are finding their way to the Chinese shores. The volumes shipped from Brazilian ports during August look set to be marginally below last month’s and also lower than in the same month in previous years. Nevertheless, this month’s exports can be expected to be well above 30 million tonnes. A level that is likely to provide continued support for freight rates in the larger tonnage segment.
