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Kallanish Kallanish

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September, 27th 2020

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MAY 22
12:07

China’s work report disappoints markets

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China’s government work report, given on the first day of the National People’s Congress on Friday, has disappointed steel markets despite injecting trillions of yuan into the economy. Expectation had been ramped up over the last week through a series of announcements and speculative reports, Kallanish notes.

Chinese premier Li Keqiang announced a number of outline policies in his speech to the National People’s Congress on Friday, which serves as the equivalent of an annual budget outline. Tellingly however, he did not announce a GDP target. A target for 2020 was always unlikely considering the hit due to the coronavirus. There had been speculation however that China could set an average growth target for two years. This would allow it to delay the goal of becoming a ‘moderately prosperous society’ to the end of 2021.

Steel markets reacted negatively to the speech. On the Shanghai Futures Exchange the October rebar contract had gained to CNY 3,594/tonne ($507/t) before the speech, but closed just off a session low of CNY 3,505/t. The same contract for hot rolled coil hit a high of CNY 3,498/t, but clumped to a low of CNY 3,411/t after the speech.

In normal times the speech would have been viewed as aggressively supportive of economic growth. China will boost its central government budget deficit to 3.6%, equivalent to adding CNY 1 trillion to spending. There will also be CNY 1 trillion in special bonds to focus on the response to the coronavirus. The regulatory burden on businesses will be cut by CNY 2.5 trillion, exceeding the record tax cuts offered in 2019. The local government special bond quota will be increased to CNY 3.75 trillion, CNY 1.6 trillion more than in 2019. The national railway construction budget will be increased by CNY 100 billion, equivalent to around 12.5%.

With steel demand down almost -20% in the first quarter however, this was viewed as insufficient. In particular, it was insufficient to match sentiment. Expectations had been built up by both official and unofficial means. Reports from senior economic commentators suggested a GDP target, a massive consumer voucher scheme and much more specific measures to boost infrastructure investment. This sense was added to by the read out of a politburo meeting which took place last Friday. This said that “… fiscal policy should be more active,” and that “… monetary policy should be more flexible.” 

As noted in last month’s China Steel Intelligence however, Beijing remains caught on the horns of its usual dilemma. Markets expect strong stimulus, and aggressive stimulus is necessary to prevent widespread defaults, bankruptcies and unemployment. But the long-term policy goal is to create a prosperous society. This will require control of the corporate and government debt burden, a move away from investment and towards consumption, and a focus on adding value instead of adding capacity. By treading between two extremes, Beijing is destined to disappoint on both sides.