Shipping awaits Chinese stimulus salvation

Sales of diggers in China are leaping fast, a hopeful sign ahead of tomorrow’s National People’s Congress in Beijing where shipping could be set to profit from a giant stimulus package.

In the wake of the global financial crisis of 2008 shipowners looked to China for salvation – and Beijing delivered with a hugely important RMB4trn ($564bn) stimulus package that bolstered global seaborne trading volumes dramatically. Tomorrow, shipowners across the world will be watching closely for any news of a new stimulus as China convenes its annual party congress with speculation that the Xi Jinping administration will announce a package in excess of $1trn to get the Chinese economy back on track.

Following the financial crisis, the Chinese authorities in December 2008 enacted a two-year stimulus package heavily focused on steel-intensive infrastructure projects such as railways, roads and housing. As Lorentzen & Stemoco noted in a recent report this RMB4trn package caused a boost in commodity prices such as iron ore, and triggered a major upturn in the dry bulk market in the ensuing two years to peaks in the Baltic Dry Index of 4,340, the highest since the peak in May 2008 of 11,793.

During 2010, over 1,000 bulk carriers were ordered, which in turn sparked the next dry bulk downturn.

Shipping awaits another Chinese bailout with bated breath tomorrow. An intriguing data point ahead of Friday’s meeting comes from the China Construction and Machinery Association, which showed total excavator sales of the country’s top 25 manufacturers jumping 60% in April. Excavator sales have proved to be a good leading indicator for construction activity and steel demand in the past.

China’s economy has taken a major hit over the course of the coronavirus outbreak with the country’s GDP contracting by 6.8% year-on-year in the first quarter, according to official statistics and it is likely to remain weak in the second quarter.

Earlier this month, China’s finance minister Liu Kun revealed that China will increase fiscal expenditure in 2020 to help offset the damage to the economy resulting from the coronavirus outbreak.

China’s central bank, the People’s Bank of China (PBOC), also announced last week that it will implement greater policy support to stablise and boost the economy with measures to help businesses tide over difficulties.

Beijing has vowed to boost investment in infrastructure and authorise local governments to increase their borrowing to fund fixed-asset investment projects.China’s total fixed-asset investment (FAI) declined 16.1% in the first quarter of 2020.

Manufacturing FAI took the biggest hit, down 25.2% year-on-year as construction activities halted. Property FAI appeared to be the most resilient, and declined 7.7% year-on-year on support from contracted sales in 2019; infrastructure investments declined 19.7% year-on-year.

Optimists hope that much of the stimulus fund likely to be unveiled tomorrow will be injected into major infrastructure development projects, which is expected to drive up demand for commodities from iron ore to copper to diesel.

Wei Jie, director of the Institute of Cutural Economy at Tsinghua University, said infrastructure investment is expected to be the number one driver of GDP for China in 2020 and 2021 and the consumption will be back as the lead GDP driver after the economy has stablised.

“Although the coronavirus has slowed down the Chinese economy, the development demand for major cities remains solid. The targets of the government policies should be focus on livelihood, employment, major market entities, supply chain, grain and energy,” Wei said.

In the first four months, China has already approved a raft of transport infrastructure projects including nine airport projects and 13 railway and urban rail transport projects.

According to S&P Global Platts analysis, the projects will require 19.56m tonnes of steel, already 63% of the steel used by similar projects approved in 2019.

China’s largest steel producer Baowu Group has said it expects Beijing to provide stimulus around investments, such as large-scale projects, which will boost demand for construction and infrastructure-grade steels.

“With China’s crude steel output now at a higher level than a year ago, demand for iron ore is outpacing shipment arrivals. As a result, China’s iron ore port inventories are gradually eroding,” Morgan Stanley said in a recent report.

Not everyone is convinced that tomorrow’s gathering will be a bonus for industrial projects.

“Chinese financial institutions led by the policy banks have provided massive capital for Belt and Road Initiative projects, most of which are funded by loans. The repayment of these loans must be under pressure now, thereby limiting such institutions’ commitment on future stimulus capital,” said Lin Ziyu, an analyst from Citic Securities.

“Additionally, China has been gradually shifting its investment focus from traditional infrastructure projects to what it calls new infrastructure projects led by a 5G network and other new technologies as the country looks to transform its technology. Therefore, a huge investment package on traditional infrastructure projects like 2008 level is unlikely,” Lin suggested.

Researchers at Arrow Shipbroking Group have this week produced a report on how they see tomorrow’s political powwow in Beijing playing out.

“The policymakers are faced with a difficult trade-off; a large-scale stimulus would inflate debt, but the absence of it means weak economic growth and high unemployment,” the Arrow report notes, suggesting that unemployment figures are far higher than officially stated, likely running today at in excess of 10%, potentially sparking greater unrest in the communist country.

“There is strong evidence that China is already gearing up for another round of stimulus and that it will involve infra spending,” the Arrow report suggested, noting how the total amount of funds raised by local governments via special purpose bond (SPB) issuances reached RMB1.22trn during the first four months of the year, up 51% compared to the same period in 2019.

Moreover, the Ministry of Finance recently added RMB1trn to local governments’ preliminary bond quotas. This has to be utilised by the end of May, implying an acceleration in issuance this month.

The number of infrastructure projects awaiting central government approval increased in March for the first time since June 18, and the net increase in the monetary value of these projects – RMB487 bn – is the highest monthly amount since records began in 2016.

“The breakdown of the projects submitted so far indicate a substantial investment in construction-heavy sectors,” Arrow pointed out. Of the RMB487bn increase in the projects submitted for approval, about 80% is due to transportation and civil engineering related projects.

“While this may change in the coming months, such a distinct focus on labour-intensive sectors highlights the government’s intentions to boost employment,” Arrow observed.

Giving a flavour of how the Chinese economy is at present, award-winning author and economist Paul French sat down with Splash for a recent episode of the Maritime CEO Leader Series powered by Ocean Technologies Group.

“This has been a disastrous period for China,” French said, citing statistics from April which suggest the country’s economy might have suffered its worst monthly performance since 1976. The video is carried below.