141106 - China imports

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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
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