Amid the forecasts that Chinese economy is set to cool down in 2019 as the country’s domestic demand has weakened and exports are being hit by U.S. tariffs, China has decided to take steps to stimulate the country’s domestic steel demand.
Changes in fiscal policy
As per the latest updates, Beijing is all set to cut its value-added tax rate from 16% to 13% for most industries and from 10% to 9% for the transport and construction sectors. Subsequently, the lower taxes could save companies several hundreds of billions of yuan and may translate to lower prices of some products including that of steel.
The government has also decided to ensure sufficient liquidity in markets, although it stopped short of promising further reductions in the cash reserve holdings of banks or a cut in policy lending rates. The government has ruled out any major infusion of cash to stimulate the economy and the yuan is expected to remain stable at a reasonable level.
Beijing will expand issuing special bonds to local governments by RMB 800 billion from a year earlier to RMB 2.15 trillion. These funds are used for the construction of new and continuing infrastructure projects. Also, the total investment in the railway sector is anticipated to be around RMB 800 billion this year.
Boost to the infrastructure sector
Steel markets expect a higher inflow of funds into infrastructure to translate into additional steel demand, offsetting an expecting slowdown in the real estate sector that is unlikely to repeat last year’s near 10% growth in investment.
However, any major reforms to boost demand from the real estate sector is unlikely. This is because the government has not talked about curbing real estate price gains or signalled any tightening of restrictions on home purchases that could have pressured steel demand. China’s policy of building new houses in urban shantytowns will continue this year and the government is likely to build 5.8 million such units in 2019 compared with 6.27 million units in 2018.
Apart from this, a dampener for broader financial and commodities markets is the projection of a slower gross domestic product (GDP) growth rate at 6-6.5% for 2019. While a broad GDP range gives the government flexibility of adjusting policies through the year to guide the economy towards the growth level it is comfortable with, there seems to be little doubt that the Chinese economy will grow at a slower pace this year compared with 2018. It has been acknowledged by the government that the US-China trade war has affected certain sectors of the economy and affected market perceptions.
In case of steel sector, the market forces will be allowed to play a bigger role in reducing steel capacity and adoption of ultra-low emissions for the sector will be accelerated. The key steel-producing province of Hebei has a 2020 deadline for all its steel mills to adopt these emissions regulations.
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