Market participants harbor mixed sentiment over the impact of the policy measures
. Here are eight key factors to consider for those watching China in the global commodities trade:
1. China increases deficit rate to over 3.6%
China will increase its deficit rate to more than 3.6% in 2020, an increase of 1 trillion yuan ($139.71 billion) compared with 2019. Another 1 trillion yuan of special anti-pandemic government bonds will be issued, which will add more than 2 trillion yuan of liquidity to provinces and grassroots levels to benefit domestic enterprises. The Communist Party has cautioned provincial and grassroots authorities, however, from building "extravagant halls and buildings" to control fiscal expenditure.
2. Looser monetary policy
China will increase its use of quasi-rate reductions, interest-rate reductions and financing to increase monetary supply and scale up social financing, while also planning to keep the yuan exchange rate stable. China will also facilitate easier access to bank loans for domestic enterprises - especially for small and medium enterprises - and cut interest rates.
China will also lower its value-added tax (VAT) and insurance rates to 500 billion yuan after already excluding public transport, tourism, entertainment and sports sectors from VAT earlier this year and reducing civil aviation development and port construction fees. China’s government expects the annual tax burden to fall by at least 2.5 trillion yuan, while industrial and commercial electricity prices will be cut by 5%.
One Shanghai-based trader said inflation may increase if the country cuts its reserve requirement ratio and interest rates further, which would increase the attractiveness if the cuts cause the Chinese yuan to depreciate. Importers will need to spend more on overseas products, however.
3. Grand infrastructure plans
China will pump 100 billion yuan into national railway construction, plans to issue 3.75 trillion yuan worth of special bonds this year, up by 1.6 trillion yuan from 2019, and will allocate 600 billion yuan for domestic investments in:
- Constructing infrastructure
- Boosting transportation and water conserving networks
- Building 5G networks
- Promoting new energy vehicles
- Encouraging urbanization and improvements of public facilities in the rural areas
A second Shanghai-based trader believes China's steel demand could weaken in the next few months if the government does not put these continuous policies in place to revive the economy.
A third Shanghai-based trader said that although China's steel inventory has been dropping in recent months following a demand recovery, stock levels are still high and market uncertainty will remain if the inventory does not drop to the level reached before the Covid-19 pandemic outbreak.
4. Support for steel demand
Market participants still expect support for steel demand in 2020, although it may not increase at the same rate as 2019 due to the Covid-19 pandemic. China reported an apparent consumption of 1.15 billion tonnes of finished steel in 2019, up 9.91% year on year, National Bureau of Statistics data shows.
Steel demand in the infrastructure and manufacturing sectors will remain steady following these economic and financial policies, an industry analyst in eastern China said.
“A large part of funds raised by the local special bonds is, typically, invested into infrastructure construction, which is a large consumer of steel products,” a rebar trader in eastern China said.
The government work report also stated it would increase capital flow through financial tools, including reducing reserve requirement ratios and interest rates as well as offering refinancing.
“The higher capital flow will help manufacturers’ and residents' consumption to recover from its low point in the first quarter,” an industry analyst in northern China said.
5. Speedier urbanization and development
China plans to continue developing all of its major cities in the east, west, northeast and centre of the country. It will continue to develop the Beijing, Tianjin and Hebei belt, as well as the Guangdong-Macau-Hong Kong bay area and the Yangtze River delta. Chengdu and Chongqing are also a key focus of China’s 2020 development plans, which will increase urban agglomeration and cultivate more industries within these regions to increase employment.
6. Pollution governance
China will continue to clamp down on pollution and increase air pollution controls in key areas, including energy conservation and environmental protection. Market sources expect this will continue to have large ramifications for China’s giant steelmaking complex, which has been under strict controls to reduce emissions from blast furnaces, iron ore sintering plants and coke ovens.
7. Fair treatment for both domestic, foreign enterprises
China will also continue to develop its free trade zones, including speeding up the construction of the Hainan free trade port and comprehensive bonded zones in the central and west of the country, and will create a business environment where both domestic and foreign companies are treated fairly.
China also plans to continue driving the "Belt and Road" initiative through mutual consultation, joint construction and sharing with its partner countries.
China also plans to maintain its multilateral trading system and participate in World Trade Organization reforms to increase trade and investment opportunities in the country. China’s government will focus on signing regional economic partnerships and promoting free trade negotiations between China, Japan and South Korea as well as pushing through the first phase of the trade agreement between China and the United States.
8. Re-opening ferrous scrap imports
Li Lizhang, the president of eastern China steel mill Sangang Group, proposed resuming imports of steel scrap during the two sessions to save energy, reduce emissions and balance international trade.
The China Association of Metalscrap Utilization (Camu) and Metallurgical Information & Standard Institute (Misi) are working together to revise the standards for ferrous scrap imports, although no details have been released. Their new standard aims to minimize the possibility of importing ferrous scrap with hazardous substances and inferior products, markets sources said.
China’s imports of ferrous scrap have sharply decreased since import quotas were introduced in July 2019. Up to May of this year, a total of 11,540 tonnes of ferrous scrap was approved to import, China Solid Waste & Chemicals Management data shows, which is much lower than the record high import volume of 13.69 million tonnes in 2009, according to customs’ data.
“Reopening the opportunity to import ferrous scrap will hedge domestic prices and lower the dependence on imported iron ore,” a scrap trader in eastern China said.
Fastmarkets’ assessment for steel scrap heavy scrap domestic, delivered mill China
averaged 2,607 yuan ($365) per tonne from January 1 to May 22, while Fastmarkets’ price assessment for steel scrap HMS 1&2 (80:20 mix) US material import, cfr main port Taiwan
averaged $232 per tonne, also over the year so far to May 22, 2020.
“If China's mainland mills could import scrap at similar prices to Taiwan mills, they will pay $70-80 per tonne less than domestic materials,” a second scrap trader in eastern China said.
Li Min in Shanghai contributed to the story.