For Chinese economy and strengths are now weaknesses
China's exports of steel are soaring. But that is not a good sign for the economy.
China has far more steel mills than it needs, a problem made worse by the country's shrinking housing market, the most voracious consumer of the metal. Domestic steel prices have collapsed. Thousands of workers have been laid off as mills have scaled back or closed.
With scant demand at home, those mills still in business have turned to foreigners as buyers of last resort. China shipped a record 100 million MT of steel overseas in the 12 months to the end of February, a 55% increase from the previous 12 months.
Mr Louis Kuijs, the chief economist for greater China at the Royal Bank of Scotland said that "It's true that companies have dumped steel globally last year. I'm sure they are happy that at least somebody is buying it, but I don't think that this is a strategy that Beijing wants to follow."
The country's traditional drivers of growth manufacturing, real estate, local government infrastructure spending are now among the biggest threats to China's economy. A slowdown in those areas is expected, and even baked into the country's economic outlook. But economists and analysts say the net effect could be more painful than China and its leaders are ready to handle.
While Beijing has emphasized reorienting the economy toward consumer spending and market driven development, its policy goals around jobs, growth and inflation are still greatly dependent on heavy industry and manufacturing. But the health of industries like steel, railways or housing construction is highly interconnected and stress in one can put pressure on the others.
The latest economic data offer little respite.
Figures released showed industrial production increasing at its slowest pace since 2008, rising 6.8% in the first two months of the year compared with a year ago. The slowdown is being compounded by falling commodity prices, with the producer price index declining a further 4.8% last month from a year earlier, its steepest fall since 2009. Land purchases by developers plunged by nearly one third.
Mr Kuijs said that "If you look at what companies are suffering the most in China, it is heavy industry. So far, China's leaders have remained publicly sanguine. In a speech last week, Premier Mr Li Keqiang lowered the official growth target for this year to about 7% which would be the country's slowest expansion in a quarter-century. He drove home the importance of reducing China's reliance on traditional industry and credit fueled investment, replacing them with consumer demand as a pillar of the economy.
Mr Li said that in expanding consumption, we need to ensure that every drop of spending builds to create a mighty river, so that the potential contained in an ocean of private consumers will be channeled into a powerful force driving economic growth.
Policy changes, meanwhile, illustrate a more urgent approach. Last month the central bank cut interest rates for the second time since November and also freed up money for loans by reducing the amount of cash that banks are required to keep on reserve. And China's leaders have sounded a new note of caution about the impact on job creation.
Mr Yin Weimin, the minister of human resources and social security said that China added 13.2 million urban jobs last year, surpassing its target of 10 million. But the number of newly created positions fell in the first two months compared with a year ago. Against a backdrop of slower economic growth, increasing downward pressure on the economy and of industrial restructuring, this year's employment situation will be even more complex and grim.
The slowdown comes at a vulnerable time for China's rail industry, which is already facing overcapacity and is heavily indebted. China Railway Corporation, the main rail operator that was spun out of the Ministry of Railways in 2013, had total debt at the end of September of 3.5 trillion renminbi, or about USD 567 billion up 26% from the end of 2012.
China's economy and financial system remain dominated by the state, and the government can always nurture short-term growth by flooding the economy with credit. In the meantime, the state news media is trying to stoke enthusiasm and confidence in the economy.
After several years of castigating officials who seek promotion by focusing on gross domestic product growth at the expense of social issues or the environment, Communist Party controlled news outlets have changed course.
Source – CNBC