China: More Dark Clouds On The Horizon
China’s recent release of disappointing data for industrial production during April has triggered a new round of downgrades to growth projections among economists and other China watchers. While the first-quarter growth was more robust than expected, it did not reflect the period of extensive restrictions that the Chinese economy has faced in light of the recent flare-up of Covid infection rates. However, with last month dominated by lockdowns in Shanghai and other Chinese provinces, the industrial production data for April could serve as a leading indicator for the second-quarter growth.
The extensive lockdowns have also seen Chinese bank lending falling drastically, as both consumers and companies lost their appetite for credit last month amid mounting disruptions in the Chinese economy. The slowdown has prompted the Chinese central bank to put pressure on the country’s banks to increase lending and speed up approval processes, as the lack of such activities could put further pressure on the already flagging growth rates.
While the restrictions in Shanghai are on course to be eased amid limited new infections outside the quarantines, other parts of China are not quite so fortunate as new cases are reported. Hence, industrial production looks set to face continued disruptions throughout the current quarter, with snarled supply chains due to the lengthy lockdowns adding to the challenges the Chinese economy faces. The Chinese government unveiled a 33-point programme on Tuesday to support the economy through the current disruptions and avoid further weakness. Still, markets have so far been less than enthusiastic about the proposals. The latest initiative focuses on stimulating domestic consumption and supporting companies hit by the pandemic primarily through fiscal means. High global inflation levels and an aggressive US interest rate hike cycle have left China’s central bank with little room for manoeuvre for monetary easing.
The Chinese government has maintained its official economic growth target of around 5.5 per cent for this year, despite the extensive restrictions imposed on large parts of the country’s population as part of its Zero Covid policy. However, even with the repeated pledges from Chinese officials that the government will support the economy, the target looks increasingly unrealistic. Recent days have also seen a flurry of downgrades of forecasts for Chinese growth, with several investment banks now expecting the Chinese economy to expand by around four per cent this year. However, the longer the current Covid outbreak continues to disrupt the Chinese economy, the more likely it is that we will see additional rounds of downgrades.
As the world’s preeminent importer of commodities, any disruptions to Chinese demand should, under normal circumstances, weigh heavily on prices. However, continued tight supplies across the commodity spectrum, aggravated by the disruptions from the war in Ukraine, have offset the weakening demand from China. Volatility has, nevertheless, been present as infection rates have fluctuated. While the outlook for the Chinese economy is looking increasingly grim, the tentative signs of an easing of the restrictions in Shanghai should provide the commodity markets with something to cheer about. The likelihood of returning to the dizzy heights of Chinese commodity demand observed in recent years remains slim. Still, seaborne volumes of commodities destined for Chinese ports look set to rebound, albeit from low levels, as manufacturing recovers from a near standstill in and around Shanghai.
Chinese seaborne dry bulk imports have been on a steady decline since well before the latest resurgence of the pandemic in the country. The country was the first to emerge from the initial chokehold that the pandemic imposed on the global economy two years ago and entered an economic recovery that rapidly surpassed the activity levels observed prior to the original outbreak. The robust growth that commenced as the initial lockdowns were lifted drove Chinese commodity imports to unprecedented levels. Both commodity producers and dry bulk shipowners benefited handsomely from the bonanza. However, the uneven recovery of the Chinese economy, with weak domestic consumption, highlighted the country’s increasing dependency on exports for growth. The development went against Beijing’s desire to create a strong and independent economy which is not overly dependent on the global supply chains. In combination with rapidly increasing commodity prices and a clampdown on pollution levels, Chinese imports of raw materials started to decline during the second half of last year as authorities focused on the domestic economy.
However, the country’s strict Zero Covid policy and a domestic vaccination programme that has been less than capable of combatting the more contagious Omicron variant have weighed on the country’s fortunes in recent months. As a result, the country’s appetite for imported commodities has dwindled as manufacturing has faced increasing restrictions in the face of rising infection rates. Monthly order volumes for dry bulk cargoes discharging in Chinese ports have been trending downwards since the middle of last year, according to Shipfix’s data. Ordering activities in April fell below the volumes observed in the same month in 2019, the last year before the pandemic. However, with a week left in May, there is still a remote possibility of a reversal of the recent trend.
While aggregate order volumes for dry bulk cargoes have been trending lower amid weakening demand among Chinese manufacturers, there are some positive signals that could bode well for the near future. Copper, traditionally seen as a bellwether for the economy's health, has recently seen a pick up in cargo ordering activities. Volumes shipped as dry bulk cargo so far in May are already twice as high as for the whole of April and could be on track for the highest level since late last year. Weekly volumes were on a downward trajectory until early April but have shown considerable strength since, potentially providing a leading indicator for the Chinese economy.
Like for copper, orders for coal discharging in Chinese ports saw a decline earlier in the year. However, the dynamic was somewhat different. Part of the explanation for the falling volumes was that Chinese domestic production expanded as authorities approved more mining concessions and pressured miners to increase output. Imports of coal only account for a minor part of the country’s total requirements, but the trade still contributes to a considerable portion of the global tonne-mile demand. The recovery in Chinese seaborne imports of coal can also be explained to some extent by the country taking the opportunity to benefit from discounted prices on Russian coal, which faces sanctions in other parts of the world. Trade flow data highlight a substantial increase in the flow of coal from Russia to China, which suggests that China is opportunistically expanding its inventories of the fossil fuel. The more forward-looking cargo order data have also seen a substantial recovery in recent weeks, with cargoes destined for Chinese ports on the rise.
The outlook for the Chinese economy is looking increasingly sombre, with the current year’s growth rate likely to fall well short of the official target. However, extensive stimulus programmes, as President Xi seeks a third term in office, could support a recovery in seaborne imports of commodities. Increasing investments in infrastructure projects to help the flagging growth rates would keep commodity prices elevated and support dry bulk freight rates amid tight tonnage supply.