1. Imported iron ore prices continue to decline. Stories abound of desperate sellers dumping at below official market levels and buyers defaulting on purchase agreements. Steel prices are at new recent lows as well and the steel industry is in deep trouble. Part of the problem has been overproduction by steel mills owned by local governments who are in desperate need of revenue.
FT: Steel traders are also finding themselves in a desperate position. “We have to try every possible means to sell [our steel] even if we lose money. We will lose more if we don’t sell,” says a trader with a large steel trading company in Henan province.
Another reason for the slump in China’s steel markets is the unique structure of China’s state-dominated steel sector. This year Chinese mills have maintained high levels of steel production – even when running at a loss – rather than shutting down their furnaces, because many state-owned mills are incentivised to maximise revenues instead of profit. Revenues from steel mills means more tax revenues for the local government, their ultimate owners.
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| China import Iron Ore Fines 62% Fe spot (CFR Tianjin port) USD/metric tonne (Bloomberg) |
2. Exports are slowing. The ISI Group combined the official and the Markit PMI numbers into a single set of indices. Here is the chart for the exports portion of the PMI.
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| Source: ISI Group |
3. ... While finished goods inventories are rising (also discussed here).
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| Source: ISI Group |
4. Housing prices have actually been rising (also see this discussion). At first glance this may be an indication of good news, but it actually points to an escalating battle between Beijing and the local governments. Beijing wants to keep housing prices under control to prevent a housing bubble driven by speculation. China's municipalities don't want the music to stop because land and housing has made politicians and their friends rich and continues to provide government funding. The central government will push even harder to tighten controls on housing sales practices in an attempt to arrest these increases. This will make implementation of stimulus programs more difficult (see this discussion).
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| Source: ISI Group |
5. China's banking sector is now under pressure as "bad
loans" begin to rise. On one hand local businesses are
complaining to their politicians that banks are refusing to
roll some existing loans - while politicians pressure banks
to do so. On the other hand bank regulators don't want to
see non-performing loans increase. Much has been swept under
the rug for now because the definition of "nonperforming" is
still in the eyes of the lender.
China Daily: - China's commercial banks are facing a high risk of increased bad loans, partly due to a lending spree to support massive economic stimulus three years ago.
That risk might worsen as local governments have attempted to unleash a new round of stimulus packages amid the current economic downturn, market analysts have warned.
Seven out of the 16 Chinese listed banks reported a rise in their Non-Performing Loan ratios in the first half of 2012, according to their interim reports.
6. Finally, China's stock market hit another post-09 low this morning, continuing this relentless bear market in domestically listed shares.
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| Shanghai Stock Exchange Composite Index (Bloomberg) |
Of course as data shows worsening economic conditions across the board, the propaganda machine from China's official media gets turned up.
People's Daily: - Rational economists are confident about the future of the Chinese economy. They believe that the internal factors driving China’s economic growth are expanding steadily. Rapid urbanization, huge consumption potential, and the rebalancing of China’s growth toward western regions will further unleash the country’s growth potential, and provide lasting impetus to its economic growth.
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