Is recession looming over China? Jan-Aug'24 macro indicators signal bear territory ahead

• Manufacturing, infra investments slip
  
  
• Iron ore bucks trend but for how long?
  
  
• Global trade bracing for China impact?
  
  

Morning Brief: Three of China's key macro indicators-manufacturing & infrastructure investments and real estate development--continued to slide in August 2024, reveals data from the country's National Bureau of Statistics maintained with BigMint. That apart, crude steel production also recorded a decline over January-August, 2024. The jobless rate is also at its highest in six months. All indicators point to an impending recession, and which may have global repercussions.

BigMint takes a look:

Crude steel output dips amid weak demand, emission goals: Crude steel production fell a deeper 3.30% over January-August, to 691.41 million tonnes (mnt) 2024 against the -2.20% (613.72 mnt) seen in January-July, 2024. A combination of factors is pulling down output, the foremost of which is, of course, the lack of domestic demand, with real estate construction, manufacturing and infrastructure sectors continuing to slow down. Secondly, China has resumed its focus on decarbonisation goals after some setbacks seen in the post-Covid period. Regional administrations have been issuing production cut diktats, keeping emissions curbs in mind. Thirdly, anti-dumping investigations against China from regions/countries like the European Union, Vietnam, Turkiye and Malaysia are also impacting exports and in tandem production. Lastly, China's aging population, which typically consumes lesser per capita steel, is increasing, ultimately impacting domestic downstream demand.

With the drop in crude steel output, pig iron production naturally declined 4.30% to 578 mnt in the first eight months.

Iron ore imports sustain uptrend amid low prices: Imports of iron ore, surprisingly, held steady. Volumes over January-August, rose over 5% to 815 mnt. However, there was a 1.50% dip compared to January-July's 7% growth. But why is iron ore moving in an opposite direction despite the drop in crude steel production. The answer possibly is the slide in ore prices. Fe62 fines, CFR China, have been falling steadily since May 2024's $118/t to as low as $90/t in August. No wonder, Chinese ports have been flush with stocks. The slight dip in September indicates that port stockpiling is perhaps complete. So, will ore imports start dipping October onwards? Where will prices head in such circumstances? We have to wait and watch.

Steel exports sustain uptrend amid slack home demand: China exported around 71 mnt of steel in January-August, 2024, which is around 10 mnt more compared to 61.2 mnt over January-July 2024. The reasons for the sustained exports push are not far to seek. Slack domestic demand thanks to under-performing real estate construction, manufacturing and infrastructure sectors. Although China is dumping at rock-bottom prices, it is playing in volumes and the sliding yuan is raking in healthy foreign exchange for mills and traders. But the red flag is the slew of anti-dumping investigations under way.

Naturally, with domestic demand subdued, steel imports dropped over 8% in these eight months to less than 5 mnt.

Manufacturing shrinks amid weak business confidence: On a y-o-y basis, manufacturing investment is up at 9% over January-August 2024 from 7% seen in the same eight months last year. But the worry is that m-o-m the fall has been consistent since March this year. It fell to 9.1% in August from 9.3% in July. The official NBS Manufacturing PMI in China fell to 49.1 in August 2024 from 49.4 in the preceding month, missing estimates of 49.5. It was the fourth straight month of contraction in manufacturing activity and the steepest since February amid shrinking business confidence.

Automobile production growth also seems to be slowing down. The 2.50% growth in the first eight months is slower from the 3.40% seen in January-July. The largest exporter of electric vehicles may hit a roadblock as the US has slapped a 100% import tariff on EVs.

Infra investments decline amid strict debt curbs: Infrastructure investment growth has fallen y-o-y for the first eight months as well as m-o-m. Over January-August, the average growth was at 5.66% again almost 8% seen in the same period a year ago. August growth dropped to 4.4% against July's 4.9%. The government has emphasised, companies are strictly forbidden to raise hidden debts for municipal infrastructure assets when backed by nil or insufficient income. Also, increasing hidden debts will also not be allowed. Such diktats have had negative impact on infrastructure investment.

Realty still losing ground on low consumer confidence: The property construction sector has been de-growing for months now and the slide has been over 10% m-o-m since May 2024. Obviously, the several stimulus measures are yet to take effect although a slight recovery is expected in September. Property sales by floor area fell around 18.6% in the first seven months and by 19% in January-June despite the fact that new home prices have also been falling steadily and the government reduced mortgage rates. Lack of confidence and low purchasing power amid job cuts are holding back buyers. Many are waiting for prices to fall further before making purchases.

Naturally, in such a scenario, cement production dropped 11% to 1,159 mnt in January-August.

Coal output improves due to rising demand: The country's coal production slipped slightly y-o-y in the period under review to 3,050 mnt but improved 0.50% compared to January-July, 2024. A slew of mining accidents did tighten safety measures and impacted production. But rising power demand due to high summer temperatures and low hydro-power generation necessitated spike in domestic production. Demand and price viability also drove coal imports up 12% to 342 mnt.

Outlook

The outlook is somewhat gloomy with many indicating that China is indeed hurtling towards a recession and possibly the undoing could be its property construction sector. A slower tempo in the dragon dance could have reverberations across the global commodity matrix, impacting trade volumes and prices, including those of steel, iron ore and coal.