Macro Focus A closer look at Chinese imports Group Economics Emerging Markets Arjen van Dijkhuizen, +31 20 628 8052 Casper Burgering, +31 20 383 2693 6 November 2014 • China’s reforms go hand in hand with a gradual slowdown. For some time now, the Chinese authorities have been working on rebalancing the economy by moving away from an export/public spending led growth model to a more sustainable alternative, marked by a rising share of private consumption. Meanwhile, the authorities also aim to contain shadow banking, halt the rise of the debt of local governments and state-owned (or state-backed) enterprises, strengthen the rule of law and fight corruption. These reforms have contributed to a slowdown of domestic demand, feeding into imports as well. This has caused some concern given China’s strong role in international trade. In this report, taking into account our base scenario of a gradual slowdown, we will analyse the development of total Chinese imports and also look at differences amongst sectors/product groups, with a particular focus on metal imports. Potential contagion effects to other regions/countries will be analysed in more depth in subsequent publications. • Import growth has fallen, but will not become structurally negative. With the economy gradually slowing, the growth rate of Chinese imports has fallen significantly. However, while flattening out in the course of 2014, total imports have continued to rise over the past years (even more so in volume terms), reflecting China’s still high growth rates. Looking forward, while our baseline scenario expects the gradual economic slowdown to continue, we do not expect import growth to become structurally negative in the coming years, although the high import growth rates reached in 2000-08 and 2010-11 will clearly remain out of reach. This picture will obviously change in case of a more adverse scenario; such downside risks will be analysed in other publications. • Despite these overall trends, there are clear differences between various product groups. Although total imports have continued to edge upwards, this is clearly not true for all sectors and product groups. We have found evidence that imports of gold in particular but also imports of other luxury products including jewellery and precious stones have fallen clearly over the past year. This partly reflects the anti-corruption campaign, which has hit the demand for jewellery and other high-end luxury products in particular. Imports of animal and vegetable oils (including soy bean oil) have also declined clearly since mid-2013. By contrast, imports of food/live animals, and beverages/tobacco have outperformed over the past years. Meanwhile, imports of ‘manufactured goods’ including metals showed a remarkable recovery since mid-2013. • Chinese investment crucial for metal demand. The level of investment in metal-intensive sectors such as real estate and infrastructure will remain critical for industrial metals demand from China. Construction and infrastructure investments are likely to slow gradually in the coming years, implying slower industrial metals demand growth. Still, the volume of demand will stay elevated from a historical perspective. Import demand for some industrial materials (such as coking coal, nickel ore and bauxite) have decreased this year, while demand for iron ore has stayed elevated. And import demand for industrial materials such as copper ore, alumina and zinc has risen strongly. Going forward, we expect demand for industrial metals to remain relatively high. 2 Macro Focus - A closer look at Chinese imports - 6 November 2014 Introduction strong position in international trade flows. These effects differ China is reforming its growth model and the Chinese economy among sectors and product groups. A consequence of the is gradually slowing. This is fuelling periodic fears that the authorities’ reforms is that several sectors faced with structural Chinese economy could be facing a ‘hard landing’. Given overcapacity – such as the property sector and parts of the China’s large size and strong position in global trade flows, industrial sector – are impacted more than proportional. such a scenario would have strong negative effects on the Shadow banking is also being hit by recent policy tightening. global economy. In our baseline scenario, we assume that the Moreover, the government’s intensification of the campaign to slowdown will remain gradual, as the authorities remain strengthen the rule of law and fight corruption will also hurt committed to add (targeted) stimulus to prevent a hard landing. some sectors more than others. In this report, we will focus at the effects on Chinese imports and at differences amongst sectors/product groups, taking into Economic growth and import growth account our base scenario of a gradual slowdown. Obviously, % yoy there are downside risks to this scenario stemming, for 16 100 instance, from the real estate sector, shadow banking and the 14 75 high debt of local governments and state-owned enterprises, 12 but these are out of the scope of this report. Moreover, potential contagion effects to other regions/countries will be analysed in more depth in subsequent publications. 50 10 25 8 0 6 China’s reforms and gradual slowdown … 4 For some time now, the Chinese authorities have been 2 working on rebalancing the economy by gradually moving away from an export and public spending-led growth model towards a more long-term sustainable alternative marked by a -25 -50 00 02 04 06 Economic growth 08 10 12 14 Import growth Source: Thomson Reuters Datastream rising share of private consumption. While this shift will probably take years, the authorities also aim to contain the Slowdown of GDP and import growth go hand in hand expansion of shadow banking and the rise of the debt of local As illustrated by the chart, GDP growth and import growth are governments and state-owned (or state-backed) enterprises. pretty much correlated, although at differing levels over time. Meanwhile, to With China’s growth rates trending upwards in 2000-2008, strengthen governance and the rule of law and fight corruption. import growth averaged 25% yoy (although with sharp This overall reform process goes hand in hand with a gradual fluctuations). During the global financial crisis, when China’s slowdown in economic activity. In the pre-crisis years 2000- economy slowed significantly, imports plummeted and import 2007, economic growth in China averaged 10.5%, and even growth was negative from November 2008 to October 2009. exceeded 14% in 2007. After the post-crisis recovery in After the global financial crisis, a strong recovery of GDP 2009/10, growth has fallen steadily since 2011. This slowdown growth coincided with import growth averaging almost 35% has continued into 2014, with economic growth falling to 7.3% yoy in 2010-11. Since then, import growth has obviously in Q3, the lowest level since the global financial crisis. slowed in parallel with falling economic growth. This year in the government has intensified efforts particular, annual growth of imports has been relatively low … leading to adjustment effects (averaging 1.8% yoy in the first nine months) and even In our baseline scenario we expect that economic growth will negative in several months. continue its gradual decline and a hard landing will be avoided, as the authorities will maintain their commitment to adding No structural contraction of imports expected targeted stimulus if needed. Hence, our (rounded) GDP Although the Chinese economy is undergoing a (gradual) forecasts for 2014 and 2015 remain 7.5% and 7.0%, slowdown, it continues to expand at – in global perspective – respectively. However, even if the authorities succeed in high growth rates of around 7%. Against that background, managing a gradual slowdown, some adjustment effects have import growth has obviously fallen in recent years compared to already been felt. In general, falling domestic demand, the periods 2000-07 and 2010-11, but has not become particularly investment, has already resulted in a slowdown in structurally negative. Chinese import values in nominal terms import growth. This is feeding some of the ‘hard landing have continued to trend upwards in recent years, despite some concerns’ given China’s role as global growth engine and its temporary corrections, nearing a historic high in September. 3 Macro Focus - A closer look at Chinese imports - 6 November 2014 Also after correcting for monthly fluctuations by taking 12- which includes inedible commodities like soy beans, crude months averages, import values have continued to rise in the rubber, pulp, wood and metalliferous ore, have been quite past years, flattening out in 2014 (see chart). Import volumes flattish over the past few years. Imports of food and live have done even better. Looking forward, while we expect the animals and – to a lesser extent – beverages and tobacco gradual economic slowdown to continue, we do not export have continued an upward trend in this period. By contrast, import growth to become structurally negative. In other words, imports of animal and vegetable oils (which includes soy bean we do not expect that Chinese imports will start to contract in a oil) show a clear decline since mid-2013. structural way in the coming years. Still, obviously, the high import growth rates of the periods 2000-08 and 2010-11 will Chinese import values – primary products clearly remain out of reach. Index, 12 months rolling, Jan-2012 = 100 180 Chinese imports: values and volumes 160 Indices, (12 months rolling, Jan. 2005 = 100) USD bn 500 200 140 120 400 150 300 100 100 80 Jan/12 200 100 07 08 09 10 11 Import value index (lhs) Nominal import values (rhs) 12 13 14 Jan/13 Jul/13 Primary products Beverages/tobacco Mineral fuels 50 06 Jul/12 Jan/14 Jul/14 Food & live animals Crude materials excl fuels Animal & vegetable oils Source: CEIC Import volume index (rhs) Chinese import values – manufactures Source: Thomson Reuters Datastream Import volume index derived from import value and import price indices Index, 12 months rolling, Jan-2012 = 100 130 250 Overall figures hide ‘sectoral differences’ 210 The effects of China’s slowdown on imports differ among sectors and product groups. We have attempted to analyse 110 170 these specific effects by looking at Chinese imports by product classification (SITC). The SITC classification distinguishes two main product groups, primary products and manufactures, which are both divided in 130 system several subcategories. Commodities are classified in several of these SITC subcategories. We have chosen January 2012 as the 90 Jan/12 90 Jul/12 Jan/13 Manufactures Manufactured goods 'Complex' manuf. products Jul/13 Jan/14 Jul/14 Chemicals & related products Machinery & transport Other commodities base period, focussing on the impact of the economic slowdown since early 2012. Our conclusion is that while total Source: CEIC Chinese imports have continued to rise over the past few years in absolute terms, imports of some products have indeed Manufactures fallen in absolute terms. This conclusion is illustrated by the Manufactures also shows divergence in import developments following charts, which show indices for several product among the various subgroups. Total imports of manufactures groups based on 12-month rolling figures. have trended upwards over the past years, rising by 16% since January 2012, flattening out this year. Imports of chemicals Primary products and machinery and transport equipment have shown a Looking at primary products first, overall imports for this generally similar pattern. For the subgroup manufactured product group have risen by 12% since January 2012, goods (including metals and metal products, paper, wood and although they have been flat this year. This pattern is also leather products), imports have fallen somewhat in the course visible for the subgroup “mineral fuels” (energy), for which of 2012-2013, but have staged a remarkable recovery since imports have risen by over 15% since January 2012, flattening mid-2013 despite China’s economic slowdown (see also out this year. Imports of “crude materials excluding fuels”, below). For the subgroup of the more ‘complex’ manufactured products we have seen some decline since mid-2013. This 4 Macro Focus - A closer look at Chinese imports - 6 November 2014 category comprises a wide range of products, including increase in steel production, iron ore and coking coal demand jewellery products, precious stones and other luxury products. have also risen strongly. China has sufficient domestic iron ore In our view, (concerns over) slower economic growth as well reserves, but the quality is very poor compared to international as the effects of the anti-corruption campaign have negatively standards. Due to this poor quality, many steel mills in China impacted the demand for high-end luxury products. have announced that they will continue to source good quality iron ore from abroad. Therefore, China will carry on sourcing The development of the subgroup ‘other commodities’ stands iron ore internationally, especially in low price environments. out: imports rose steeply in 2012 and 2013, but have fallen sharply since early 2014. This subgroup comprises special Chinese balance – commodities transactions and commodities including gold. In our view, the import decline for this subgroup is largely explained by falling gold imports, as these are also impacted by the anti-corruption campaign and (concerns over) slower economic growth. Hong Kong exports to China, a proxy for China’s gold imports, have clearly trended down since last year (although from an historic perspective remain quite high in value terms). While China is an important gold producer (with 14% of global mine supply in 2013), it overtook India in 2013 as the largest gold consumer (with roughly 30% of global demand). Hong Kong gold exports to China Source: IISI, Metal Bulletin, Thomson Reuters Datastream, various sources Kilogrammes, 12 months rolling 300000 Chinese imports – big four industrial materials 250000 yoy % growth 200000 150000 100000 50000 0 08 09 10 11 12 13 14 Source: Thomson Reuters Datastream A closer look at Chinese industrial metals imports China has a very dominant share in global commodities Source: Thomson Reuters Datastream markets, especially in industrial metals markets. Clearly, this makes highly The trend in imports of industrial materials into China is up and dependent on (economic) developments in China. In global international industrial metals markets that has been the case for quite some time, especially in iron base metals demand (aluminium, copper, nickel and zinc ore, coking coal and copper ore. The strong growth in imported together) China accounts for almost 48%. In comparison, industrial materials into China started in 2001, when China Europe’s share is 15%, while the US accounts for 9% of entered the WTO and was appointed the Olympic Games of demand. Meanwhile, China’s average share in global base 2008. From that point onward, China imported higher volumes metals production, however, is 44%, making it dependent on of industrial materials in order to build infrastructure, stadiums, imports of base metals in order to satisfy domestic demand. buildings, etc. Together with the trend of further growth in China only has some overcapacity in the aluminium industry. urbanisation and industrialisation, demand for industrial materials remained solid throughout the years following 2001. Steel production has exploded since early 2000. That year, During the crisis of 2008-2009, however, demand dropped China’s share in global crude steel production was 15%. strongly and prices for all industrial materials decreased also. Today, that share is almost 50%. Alongside the strong But soon, demand for industrial materials by China recovered 5 Macro Focus - A closer look at Chinese imports - 6 November 2014 quickly. China proved itself as a strategic buyer of materials on level of investments. It is likely that investment growth (in real price dips and imported volumes of raw materials increased estate and infrastructure) will soften, but we expect the level of quickly again. imported volumes of industrial materials to remain elevated from a historical perspective. Trend in total imports of industrial materials China In conclusion Index, 2007 average = 100 • index 2007 avg = 100 350 The gradual slowdown of the Chinese economy in recent 300 years is going hand in hand with a decline in import 250 growth. However, while import growth has clearly fallen in 200 recent years compared to the periods 2000-07 and 2010- 150 11, it has not become structurally negative. This reflects 100 China’s still strong growth dynamics. Hence, total imports 50 have continued to rise over the past few years, flattening out 0 96 98 00 02 04 06 08 10 12 14 Total Chinese industrial materials import this year. Since 2012, import volumes have outperformed import values. • 12 mnth moving avg total imports industrial materials Despite these overall trends, there are clear differences between the various product groups. Among the primary products, food/live animals and beverages/ tobacco have Source: Thomson Reuters Datastream outperformed, while animal and vegetable oils (including Until now, the trend of volume growth has not softened for soy bean oil) have underperformed. Among manufactures, most industrial materials and we expect that this trend to ‘other commodities’ including gold have fallen sharply in continue, given the ongoing urbanisation and industrialisation. 2014 after a steep rise in 2012/13. Imports of ‘complex’ In fact, until September 2014, industrial materials imports manufactured products including luxury products such as increased by 6.8% compared to the same period in 2013. On a jewellery and precious stones have also fallen recently. In year-to-date basis, China sourced more copper ore, refined our view, this reflects (concerns over) slower growth as copper, copper products, alumina, rolled aluminium, zinc and well as the effects of the anti-corruption campaign, which iron ore. By volume, however, iron ore is by far the biggest has hit the import demand for jewellery and other high-end imported dry bulk commodity. Up to September, China luxury products in particular. By contrast, imports of imported almost 700 million mt, which is approximately 15 manufactured goods including metals have staged a remarkable recovery since mid-2013; times more than the second-biggest imported dry bulk commodity, coking coal. Imported volumes of iron ore • The level of Chinese investments in metal-intensive increased 16% yoy until September, while the imported sectors such as real estate and infrastructure will remain volumes of the second, third and fourth biggest imported critical for industrial materials dropped in the same period. The decrease Construction and infrastructure investments are likely to in nickel ore imports was caused by Indonesian government’s slow gradually in the coming years, which implies slower ban on exports of unprocessed materials. The Philippines industrial metals demand growth. However, the volume of have replaced Indonesia as a top supplier of nickel ore, but demand will continue to be elevated from a historical chances are that it will follow the same path as Indonesia. The perspective. Import demand for some industrial materials strong drop in bauxite imports which plummeted 39% yoy until (such as coking coal, nickel ore and bauxite) have September, was also due to the Indonesian export ban. There decreased this year, while demand for iron ore has stayed are still some bauxite inventories left at Chinese smelters, but elevated. concerns about supply have started to mount. As a result, the materials such as copper ore, alumina and zinc have imported volume of alumina has increased strongly, by 58% increased strongly. Going forward, we expect demand for In addition, import demand for industrial industrial metals to remain relatively high; yoy until September. Smelter demand for alumina in China is high and some port stockists have started hoarding alumina, the country’s industrial metals demand. • Looking forward, while we expect the gradual economic because of fears for higher prices. Chinese imports of refined slowdown to continue, we do not export overall import copper dropped sharply in September. However, shipments in growth to become structurally negative. In other words, we the nine months of this year increased by 17% yoy. Shipments do not anticipate that total Chinese imports will start to of copper ore were also up in September (by 26% yoy). Until contract in a structural way in the coming years. Still, September, total imported volumes of copper ore increased by obviously, the high import growth rates of the periods 20% yoy. Industrial materials imports are closely linked to the 2000-08 and 2010-11 will clearly remain out of reach. 6 Macro Focus - A closer look at Chinese imports - 6 November 2014 Find out more about Group Economics at: https://insights.abnamro.nl/en/ This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on [ONDERWERPDOCUMENT]. 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