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Chinese Fiscal Easing On The Cards As Winter Slowdown Bites

A deteriorating steel market in China is spooking the dry cargo market as the risks are growing that the world's biggest importer is losing its appetite.

Whilst official GDP figure show China’s economy growing at 4.9% y/y in Q3, Capital Economics' China Activity Proxy (which tracks GDP using a set of low-profile indicators) puts Q3 y/y growth at 0.6% and October y/y growth at -1.9%. Weaker construction and industrial output are weighing on growth as the property market slowdown alongside the power shortage is causing growth to fade. Covid-19 flare-ups are also causing ache to the services sector as the recent outbreak hit 21 provinces. However this latest outbreak caused a smaller impact on passenger traffic than previous outbreaks, indicating that infection control measures are improving.

Winter heating is in full swing now, which may begin to take some electricity away from industry, deepening power cuts. Additionally, the La Nina is pushing down winter temperature forecasts across China, suggesting heating demand will be stronger than usual. Air pollution restrictions are also starting to pop up, recently visibility in parts of Beijing was less than 200 meters due to thick smog. Plus Tangshan just had a week of heavy steel output cuts to combat heavy air pollution.

Given the huge drop in steel output over the past 6 months, the crash in steel prices is indicative of the current demand environment as subsiding industrial output has exhausted consumption. We believe Chinese steel prices will be an interesting barometer of the recovery in construction and industrial output.

These short-term headwinds are likely to prevail until the end of Q1, but from then onwards the outlook improves.

Special Purpose Bond issuances by local governments in Q3 was 33% higher than the total issuance in 1H. Bond issuance picked up in October, with funds raised during the month totaling CNY 541bn (about $85 billion), the highest monthly level since August 2020.

Special Purpose Bonds are widely used to fund infrastructure projects by local governments and a sharp rise in new issuances signal that the Chinese government may be gearing up for another round of fiscal easing.

Additionally, China announced that property firms will be allowed to resume asset-backed security issuance after a 3-month freeze.

Authorities have made it clear that they do not want the property sector to be a source of inequality and speculation, and so it’s unlikely we will see the market going back to ‘normal’. Yet authorities are making it clear that they do not want a total property crash that some China-Watchers have theorized about, they will step in and ease financial conditions to ensure stability.

It's worth noting here that the real estate sector and its connected industries makes up around 30% of Chinese GDP, and therefore remains critical for meeting growth targets in the years ahead.

Qinhuangdao port coal stocks have rebounded significantly from earlier this year, and as a key transshipment hub, provides a useful indicator of domestic supply. Additionally, the Coastal Dry Bulk Freight Index is at an all-time high, this is even with international freight rates dropping. This rally in domestic freight indicates that demand is strong for North-South coal cargoes. Furthermore, effective national coal supply has bounded higher in October, data from Sxcoal shows. These signs point to domestic coal supply picking up and forebodes an end to the power rationing in the spring.



We must not forget how important sentiment is as a driver of freight, but also wider dry bulk markets. Iron ore, coal, steel and Capesize rates have synchronously slid lower over the past 2 months, and are now slowly on an uptrend in the past week. A gentle improvement in broader dry commodity sentiment over the winter could provide support to freight during the Q1 slump.

The short-term headwinds in the Chinese steel sector remain strong, it doesn't look like demand is going to bounce back over the winter months and this could cause Capesize rates to surprise to the downside this winter. Despite calls of impending doom, the Chinese housing market is unlikely facing Armageddon and will most likely benefit from policy easing throughout 2022. Having fallen sharply following Evergrande’s demise, property sales are bouncing back, suggesting that the confidence among homebuyers is being restored. The Chinese steel market will likely not witness the mammoth impulse seen during 2021, however a return to steady growth should be expected.



The opinions expressed herein are the author's and not necessarily those of The Xinde Marine News.

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