China’s economy is worse than you think

A worker cuts steel billets at an iron and steel enterprise on June 9, 2014 in Ganyu County, China.

A worker cuts steel billets at an iron and steel enterprise on June 9, 2014 in Ganyu County, China.

China’s steel and metals markets, a barometer of the world’s second-biggest economy, are “a lot worse than you think,” according to a Bloomberg Intelligence analyst who just completed a tour of the country.

What he saw: idle cranes, empty construction sites and half-finished, abandoned buildings in several cities. Conversations with executives reinforced the “gloomy” outlook.

“China’s metals demand is plummeting,” wrote Kenneth Hoffman, the metals analyst who spent a week travelling across the country, meeting with executives, traders, industry groups and analysts. “Demand is rapidly deteriorating as the government slows its infrastructure building and transforms into a consumer economy.”

The China Steel Profitability Index compiled by Bloomberg Intelligence barely rose in March, a time after the annual Lunar New Year when demand would usually surge, and so far this month has resumed its decline. Steel use this year is down 3.4 percent, after slumping as much as 4 percent in 2014, according to BI. It had steadily risen for more than a decade.

Prices for commodities from iron ore to coal are sinking as China’s leadership tries to steer the economy away from debt-fuelled property investment and smokestack industries, embracing services and domestic-led consumption. At the same time, President Xi Jinping is stepping up efforts to combat pollution, further squeezing industry.

Interest Rates

Deteriorating economic data has led traders and analysts to speculate that China’s central bank will act to revive growth. The bank has said it will keep an “appropriate balance between loosening and tightening” of interest rates. It has cut interest rates twice since November and lowered lenders’ reserve-requirement ratios once.

Economists are forecasting 7 percent growth in China for this year, in line with government targets and down from 7.4 percent in 2014, according to the median of 59 estimates compiled by Bloomberg. That’s about half the last decade’s peak rate of 14.2 percent in 2007.

The slowing steel and metals activity suggests the outlook could be grimmer.

“There is a big fear this is going to get worse before it gets better,” Hoffman said in an interview. “It’s as bad as the data looks, if not worse.”

Source: Bloomberg We Traveled Across China and Returned Terrified for the Economy


Categories: Finance & Economy

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