The escalating Sino-U.S. trade war is creating downward pressure on Beijing’s major steel consuming sectors such as machinery, automobiles, auto parts, and even home appliances.
While the consumption of consumer goods has slowed due to China’s deleveraging campaign that started in early 2018 in the wake of U.S. tariffs imposed on Chinese goods on last year and raised on May 10, the biggest dent on steel demand was due to retail vehicle sales, which fell 2.1% on year in April. Both auto output and sales slumped by 15% on year in April, accelerating from 3% and 5% year-on-year decreases in March, respectively.
China’s economic data for Jan-Apr was weaker than the market had expected, especially for fixed asset investment in manufacturing and total consumer goods retail sales while for May’19 the manufacturing data was also weak with NBS’s (National Bureau of Statistics) PMI coming in at 49.4 points, indicating a contraction in the sector.
However, the sectors that have positive steel demand and have been robust till date in 2019 is China’s property sector while infrastructure construction has also picked up steadily this year. The two sectors combined account for more than 50% of China’s total steel consumption.
After imposing tight restrictions on housing transactions and mortgages for the past two years, China has begun to relax its grip in an effort to stimulate the economy. In fact, amid the worries of the slowing economy, central authorities are allowing local government to relax property regulations.
As per the market study, at least 50 cities have eased the restrictions on residency permits this year to attract skilled workers as well as to support local real estate markets. Apart from this many banks in cities such as Shanghai, Xiamen, and Qingdao are also lowering mortgage rates for first-time home buyers. Dongguan, a manufacturing hub in Guangdong province, have lowered taxes on the home transactions in the month of Feb’19 resulting which its sales almost tripled in the subsequent month. The industry experts have predicted that real estate growth in China is estimated to be around 8% this year.
At present, although the country’s property sector has entered a seasonally slower period due to rains, the same is expected to remain strong for the remainder of the year given China’s proactive monetary measures, which could see the steel market recover in the latter half when construction picks up again.
China’s efforts to revive demand
In order to boost consumption and offset U.S. tariffs, China introduced proactive monetary measures, such as reducing reserve requirement ratios (the number of cash banks needs to keep on hand) four times in 2018 and twice to date in 2019. Fiscal stimulus has also been stepped up, from speeding up government spending to cutting value-added tax from 16% to 13% on April 1.
Apart from this, China had set out to stabilize vehicle consumption in 2019 by supporting new energy vehicles and subsidizing replacement purchases of old and outdated vehicles. It has also moved forward the implementation of stricter vehicle emissions standards to July 1 this year from July 2020. It is also expected that Beijing could ease its approach to deleveraging and credit schemes in the remainder of 2019, which could help support consumption.
The potential threat
Beijing is trying hard to present a stable economy to the world ahead of 1 October which marks the 70th anniversary of the People’s Republic of China and may continue to infuse fiscal measures amid trade tensions with U.S. to increase the consumers and investors’ confidence.
However, industry experts believe that the devaluation of China’s currency is a potential threat to property developers, as foreign currency debt typically makes up about 30% of total borrowing for Chinese developers. As a matter of fact, Chinese Yuan has depreciated by 4.2% against USD in the time span of one month from Apr to May’19. Also, the strong fiscal expenditure growth over January-April is unlikely to continue over the rest of 2019 as revenue growth is likely to keep slowing as a result of tax cuts and falling land sales.
Despite these threats, if the property sales remain strong supporting the revenue and profit margins, the sector has financial and liquidity buffers to withstand currency pressure.
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