Small step in right direction for Chinese economic data

China’s economic re-opening from the harsh Covid lockdowns of 2022 is going to be a slow and steady process, judging by the first trade data for 2023.

At the same time February’s consumer and producer price inflation showed more signs of disinflation with both slowing from January’s level.

The January-February trade data in fact confirms why the government led by President Xo Jinping set this year’s economic growth target at what seems to western economists as a low estimate “around 5%.”

China might be re-opening but the big question is anyone really awake, yet.

Judging by the trade report for January and February issued by China’s Customs Administration, the answer might be, ‘please turn on the lights with news that trade contracted again in January and February, following similar experiences in late 2022.

Economists blamed weaker demand from the US and European economies as they battled interest rate rises, high inflation and slowing consumer demand.

China’s exports sank 6.8% from a year earlier to $US506.3 billion, an improvement over December’s 10.1% but imports fell 10.2% to $US389.4 billion, steeper than December’s 7.3% slide.

It was the 4th month in a row that Chinese imports contracted and as a result China’s global trade surplus for the two months barely moved compared to a year earlier, rising by just 0.8% to $US116.9 billion.

That’s still a lot of money but the fact it hardly moved from the January-February figure of 2022 tells us that domestic demand inside China remains hesitant on top of the weakening demand from foreign buyers for Chinese exports.

The GDP target for this year looks more like a ‘political’ estimate, designed to make the Communist party government of President Xi look good, not an economic assessment about the prospects for growth this year.

National Australia Bank economists said in a note on Thursday “…the relatively modest – and apparently easy to achieve – target may reflect a desire within the government to avoid stimulus. The National Development and Reform Commission has noted that domestic consumption will be the key driver of growth in 2023, however the majority of policy measures outlined are designed to improve goods supply (once again avoiding providing direct fiscal support to households).” Similarly Premier Li’s report explicitly noted concerns around local government debt and seeking to avoid building up new debts.

Like the US, Australia and other major economies, household consumption remains the key uncertainty for China’s growth in 2023 (and demand for commodities and services from countries like Australia).

Western central banks are trying to suppress household spending in the mistaken belief that will help cap inflation.

China is in a different situation – household spending has been capped by the blow to confidence from 2021 and 2021’s harsh zero Covid policy of President Xi.

That’s despite Chinese officials making it clear this will be the key driver of growth in 2023 and yet there are no signs of any direct Government support to encourage householders to spend more.

Very weak inflation data for February confirm that consumers are not spending. China’s Consumer Price Index (CPI)for February slowed to an annual rate of just 1% in February, less than half the January rate of 2.1% and a much sharper than forecast fall despite measures of economic activity in manufacturing and services jumping to recent highs in February.

The CPI fell half a per cent from January thanks to continuing disinflationary pressures which also impacted the Producer Price Index (PPI) which fell 1.4% on year, much larger than the 0.8% contraction in January. There was no change month to month.

The core CPI rose 0.3% after January’s 1% rise and half the 0.6% increase forecast by the market and economists say that despite the rise in sales of some consumer goods such as passenger cars and more travel, cost pressures remain absent in the economy, indicating that households and many small and medium businesses remain cautious about spending.

The import data added to the uncertainty about the strength of demand in the Chinese domestic market.

Imports of iron ore, coking coal (but not seaborne) mostly from Mongolia and thermal coal (seaborne) were solid. Oil and gas imports were weaker and seasonal factors can account for that (the move from winter to spring when construction steps up and demand for steel rises.

(China reports January and February trade data together to try and remove the effect of the Lunar New Year holiday, which begins at different times each year during those two months. Factories shut down for up to two weeks.)

Exports to the US fell 21.8% from a year earlier to $US71.6 billion while imports of American goods fell 5% to $US30.3 billion.

That saw the politically sensitive trade surplus with the US narrow 31% to $US41.3 billion.

Exports to the EU and Japan fell 12.3% and 1.6%, respectively. By contrast, sales grew to ASEAN (9%) and Russia (19.8%, to $US 15 billion).

Among major trading partners, imports fell from the EU (-5.5%), Japan (-23%), and ASEAN (-8.3%).

Conversely, arrivals from Russia, primarily oil and gas, jumped 31.3% from a year earlier to $US18.6 billion.

That’s because China again stepped up purchases from Russia to take advantage of price discounts after Washington, Europe and Japan imposed sanctions to punish President Vladimir Putin’s government for its attack on Ukraine just over a year ago.

Forecasters expected trade to remain weak as the likelihood as the pace of activity in Western economies slow

“We don’t expect exports to rebound,” Iris Pang of ING said in a report.

The key import for Australia is iron ore and the story there was upbeat, according to the data.

The Customers data showed imports totalled 194 million tonnes in the first two months of the year, up 7.3% from the same period in 2022, and a contrast to fall of 1.5% for all of 2022.

Chinese steel mills have been restocking ahead of the busier construction period that starts as winter ends, and Beijing’s efforts to stimulate growth through infrastructure spending have stoked optimism.

Iron ore prices are still up on the end of 2022 – this week year to date gains were around 12% with the price of 62% Fe fines around $US126 a tonne (though they have been above $US131 a tonne briefly in February) this week.

Coal imports were 60.64 million tonnes in the first two months, up 71% from the same period a year earlier, but they were unusually weak at the start of 2022.

On a monthly basis, coal imports were largely in line with December’s figure of 30.91 million tonnes and November’s 32.31 million with most of the imports coming via land from Mongolia and perhaps Russia. Seaborne imports were lower.

Premium Australian coking coal prices have also risen this year in Singapore and remain around $US350 a tonne, up sharply from the $US275 a tonne at the end of December.

Chinese oil imports though sagged in January and February to 84.06 million tonnes for the first two month, which Reuters said was equivalent to 10.40 million barrels per day (bpd), according to the data.

This was 1.3% below the same period in 2022 and was also lower than the 11.32 million bpd seen in December and the 11.37 million bpd in November.

Chinese economists point out that it takes a couple of months to buy, ship and unload oil in step with refinery needs, so any upturn in demand from the re-opening won’t appear until April-May.

But with sales of New Energy Vehicles running at one in three at the moment, demand from petrol refineries is going to remain under downward pressure.

Natural gas imports – via pipelines and as liquefied natural gas (LNG), eased 9.4% in the first two months of the year to 19.93 million tonnes. The mild winter and high prices in late 2022 saw LNG prices in particular tumble in January and February because of weaker demand.

Imports of unwrought copper were also soft, slipping 9.3% in the January-February period to 879,000 tonnes, down from rom 969,289 tonnes in the first two months of 2022.

But imports of copper concentrate, or partially processed copper ore, jumped nearly 12% to 4.64 million tonnes for the first two months of the year, and a record high for the period as smelters ramp up production for anticipated growth in copper demand.

Copper is always watched by western analysts to check the health of the Chinese economy – that suggests it’s still awakening.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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