SteelOrbis Shanghai
After the release of China's economic data for April, a general awareness has hit home among the country's authorities of the urgent necessity of tightening up macroeconomic controls.
China's GDP growth of 11.1 percent in Q1 has aroused universal worries concerning the possible overheating of the economy, and has thus convinced the government to implement further macroeconomic measures. Back in March, the National People's Congress Conference and the Chinese People's Political Consultative Conference set eight percent as the goal for 2007 GDP growth, signaling the government's desire to avoid unduly high growth.
On May 11, China's Administration of Customs posted its import/export bulletin for January-April. During this period, the value of China's import and export trade totaled $635.73 billion with a year on year growth of 23.6 percent. Exports stood at $349.52 billion, up 27.5 percent, 0.3 percentage points lower than the growth in Q1; imports reached $286.21 billion, up 19.1 percent, 0.9 percentage points higher than the growth in Q1. Thus the trade balance was $63.31 billion, up 87.5 percent.
Against the background of protests and complaints from many countries, accelerating exports have not only made the international trade scene difficult for China, but have aggravated the internal situation to some degree, since such tremendous net exports causes excessive liquidity and increases the potential risk to the domestic market. If China's export strategy played a significantly positive role in the past, currently its negative effects have swollen up to the point that change is urgently required. China's steel exports amounted to 7.16 million mt in April, one more figure which reminds the domestic and overseas industry of the severity of the situation.
On May 14, China's central bank published financial figures for April. Up to the end of the month, the M2 surplus had increased 17.1 percent to RMB 36.7 trillion ($4.78 trillion), surpassing the expected growth of 16 percent set at the end of 2006. RMB loans lent by financial institutions increased by RMB 105.8 billion or $13.78 billion to RMB 422 billion ($54.95 billion), hitting a record high. The high level of currency supply plus the growth in loans has added fuel to the overheated economy.
Also on May 14, China's National Bureau of Statistics (NBS) announced CPI growth of 3.0 percent in April, a relatively high level, even though this rate falls 0.1 percentage points from that of March. CPI grew 2.8 percent year on year on average during the January-April period. With the one-year deposit interest rate at 2.79 percent and the interest tax rate at 20 percent, China is thus facing a negative interest rate.
On May 17, April's fixed asset investment figure was released by NBS. From Jan to April urban FAI increased 25.5 percent to RMB 2.2594 trillion; the growth was up 0.2 percentage points from that of Q1. This means a higher FAI growth in April than in Q1, which is accountable for higher FAI growth during January-April than in Q1.
One thing worth mentioning is that the Chinese stock market has jumped from 998 points in May 2005 to 4,030 points last Friday. In 2007 to date the stock market has gained 1,000 points. This hot market has drawn more and more money from medium or small investors and undermined social stability. The government is now worried about the heat in the stock market, and is concerned that the interest rate rise may freeze the stock market. Consequently, the conditions for all-round macro-control measures have already been prepared.
On May 18, China's central bank promulgated three policies: to raise the interest rate and deposit reserve rate, and to expand the floating range for the RMB against the USD. The first two are aimed at the domestic economic situation, while the third is meant to reduce the foreign trade surplus. Generally speaking, these measures will step up the appreciation of the RMB, so as to appease those lodging complaints in the US and create a favorable atmosphere for the forthcoming Sino-US Strategic Dialogue.
According to the new policies, from May 21 on, the daily trading price of the US dollar against the RMB in the inter-bank foreign exchange markets shall float within a range of 0.5 percent around the middle trading price of the US dollar announced by China's Foreign Exchange Trade System, versus 0.3 percent previously. As of June 5, the RMB deposit reserve rate for financial institutions will go up by 0.5 percentage points. As of May 19, the one-year deposit benchmark interest rate has risen 0.27 percentage points, the one-year loan benchmark interest rate has upped 0.18 percentage points, while the benchmark rates for other grades of loans or deposits will change accordingly.
Though the market had been anticipating such policy changes, their simultaneous announcement - fully demonstrating the government's determination.- has taken many by surprise. The central government will closely observe the effects before taking its next step. In the meantime, other complementary measures are being or will be carried out, such as eliminating outdated capacity and imposing export tax on high energy consumption products. The indication from China's Ministry of Finance is that the government will levy tariffs on some steel products as of June 1, around 10 percent on longs and five percent on flats.
All in all, these new policies will put more pressure on the domestic market which has been positive up to now, and steel prices may drop by a significant degree. However, export prices may not fall as much as the domestic market price, as the tax and license policy may limit the export volume.