China’s economic recovery will not be planned

Despite efforts to revive a construction sector ravaged by sweeping efforts last year to reduce the indebtedness of Chinese property developers, including lower interest rates and increased credit available for property purchases , the sector remains depressed and the income from property that local governments, in particular, rely on has dried up.

Revenue from land sales and the Chinese equivalent of stamp duty was about 28% lower in the five months to May compared to the same period last year.

China’s economy has been battered by its zero COVID policies. Credit:Bloomberg

With unemployment at uncomfortable levels and the uncertainties generated by COVID politics, Chinese consumers have become cautious. Despite the incentives, vehicle sales, for example, have fallen nearly 30% this year.

The World Bank has revised down its forecast for China’s GDP this year from 5.1% at the start of the year to 4.3%, mainly due to its COVID policies. That, however, could be optimistic given how the broader global economy is slowing as major central banks respond to soaring inflation by raising interest rates and withdrawing liquidity.

The war in Ukraine, while offering China the opportunity to buy cheap oil (compared to the world price) from Russia – it paid about $35 per barrel less than the world price – had repercussions on the prices of LNG and coal which are forcing China, the world’s largest consumer of energy, to compete with the Europeans in an environment where the supply-demand equation is very tight.

It doesn’t help that China is experiencing economically disruptive record rains and heavy flooding in its south and an intense heat wave in its north.

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Rising interest rates in Western economies and a divergence in monetary policies – the People’s Bank of China is in easing, not tightening mode – have also triggered an outflow of foreign capital. The yuan has depreciated against the US dollar, slipping about 5% in the past two months.

The challenges facing China explain why it has been reported that Beijing is considering a new set of policies to try to offset the impact of rising energy costs on its industrial base, revive consumer demand and increase production. incentives for new investments.

There is a sense of urgency, given Xi Jinping’s planned ‘coronation’ later this year, when he is set to secure an unprecedented third term as party leader at the Communist Party’s National Congress later this year. .

Although his quest for an extension of his term and a high position in China’s history is unlikely to be opposed, a faltering economy, with rising levels of urban unemployment and simmering discontent facing his approach to COVID would take away some of the shine from an event.

If the authorities’ response to the challenges is more stimulus, particularly more incentives for investment in infrastructure and real estate, the price of iron ore could rebound later in the year.

Australian producers are at the bottom of the cost curve and at the upper end of the quality curve, which insulates them from actions China might take.

Authorities must hope for an economic rebound as they are apparently pursuing the concept of a one-stop shop for iron ore purchases that was mooted earlier this year – a single or state-controlled monopoly Chinese buyer of transported iron ore. by sea.

China’s reliance on imports of iron ore – particularly Australian iron ore – has long irritated authorities wary of physical and derivative iron ore producers and markets whose prices are derived.

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Unless producers blink, however, China does not yet have the power to force them to accept anything other than prices that reflect supply and demand and the preference of factories for high-quality ore. (and cheaper) than they can get from Australian and Brazilian suppliers compared to what is available to them elsewhere.

At the end of this decade, when production from China-sponsored African mines may enter the market, the balance of power may shift at the margin, but Australian producers are at the bottom of the cost curve and at the bottom. upper end of the quality curve, which provides some insulation from any actions China might take.

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