China’s cash flow injection not to boost much steel demand
Shortly after the escalation of the Sino-U.S. trade friction on September 1 with higher or new tariffs on each other’s goods, China’s State Council disclosed on September 4 that it will accelerate the execution of a series of measures to maintain a stable economic growth such as blanket and specifically-targeted cash deposit reserve ratio cuts.
On the same day, Beijing also disclosed to accelerate the issuance of special-purpose bonds by local governments and further reduction on taxation and fees, as “the exterior environment is with growing complexity and the domestic economy is facing a growing downward pressure”.
The statement has greatly supported the sentiment in the country’s various industrial sectors such as stocks, steel, and iron ore, with the China’s national average price of HRB400 20mm dia rebar, for example, gained Yuan 31/tonne ($4.3/t) in a single day to Yuan 3,841/t including the 13% VAT as of September 5.
The most traded iron ore January 2020 futures on the Dalian Commodity Exchange increased Yuan 7.5/t or 1.2% on day to Yuan 647/t as of September 5.
The signal from Beijing’s statement is rather loud and clear in that it has suggested that “downward pressure on China’s domestic economic growth has been much higher than expected,” a ferrous analyst from East China’s Shandong province commented.
So far this year, Beijing has cut the reserve ratio by 1 percentage point via a 0.5 percentage point reduction on January 15 and then the balance on January 25, Mysteel Global understands.
The impact on boosting steel demand, however, is deemed little, according to Chinese market sources.
“This has surely helped to ease the market concern on domestic economic performance, but it remains doubtful whether and how much the freed-up cash flow will be flown to the sector (property market),” a steel trader based in South China’s Guangdong province said.
His downstream buyers – many being property developers – have been suffering from lack of capital and therefore being slow in progressing with their property project developments, he observed.
A Shanghai-based industrial source interpreted the same, reasoning that prior to September, Beijing had refrained from adjusting its monetary policies even in July and August when the whole country felt the pinch of a slowing economy and both steel and iron ore prices slumped to their multi-year or multi-month lows.
The Shandong analyst pointed out that Beijing has clearly stated that the added cash flow will not be targeted to the property market, a key consumer of steel products.
Beijing sent a message to the property market at the end of July that the central government will not “utilize the property market as a short-term economic stimulus tool”, reiterating that “houses are for living not for speculative gains”, as Mysteel Global reported.
Over January-July, China's fixed asset investment (FAI) in property market grew 10.6% on year, down 0.3 percentage point from that for the first half of 2019, according to China’s latest available official statistics.
Written by Olivia Zhang, zhangwd@mysteel.com
Edited by Hongmei Li, li.hongmei@mysteel.com
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