China is trying to revive its economy. We just got a sign that it won’t work

Despite efforts to restart construction sector ravaged by last year’s heavy-handed efforts to reduce leverage from Chinese real estate developers, including lower interest rates and more credit being made available for the purchase of real estate, the sector remains under pressure and real estate revenues on which local governments in particular depend, dried up.

Land sales revenue and the Chinese equivalent of stamp duty were about 28 percent lower in the five months to May than in the same period last year.

The Chinese economy has been battered by its zero-COVID policy. Credit:Bloomberg

With unemployment at uncomfortable levels and the uncertainties associated with COVID policy, Chinese consumers have become cautious. For example, despite incentives, car sales have fallen nearly 30 percent this year.

The World Bank has revised his prognosis downwards for China’s GDP this year from 5.1 percent at the beginning of the year to 4.3 percent, mainly because of the COVID policy. That could be optimistic, however, as the entire global economy slows as major central banks respond to rising inflation by raising interest rates and withdrawing liquidity.

The war in Ukraine, which has given China a chance to buy cheap (relative to world price) oil from Russia — it paid about $35 a barrel less than the world price — has had spillover effects on LNG and coal prices that China , the world’s largest consumer of energy, to compete with Europeans in an environment where the supply-demand equation is very tight

It doesn’t help that China is dealing with economically disruptive record rains and severe flooding in the south and an intense heat wave in the north.

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Rising interest rates in western economies and divergence in monetary policy – the People’s Bank of China is in easing, not tightening mode – have also led to an outflow of foreign capital. The yuan has depreciated against the US dollar, falling about five percent in the past two months.

The challenges China faces explain why Beijing is reportedly considering a new set of policies to offset the impact of higher energy costs on its industrial base, boost consumer demand and boost incentives for new investment. .

There is a sense of urgency, given Xi Jinping’s planned “coronation” later this year when he is expected to win an unprecedented third term as party leader at the Communist Party National Congress later this year.

While his push for a tenure extension and elevated position in China’s history is unlikely to be thwarted, a floundering economy, with rising levels of urban unemployment and simmering dissatisfaction with his approach to COVID, could be part of the shine. take away from the event.

If authorities respond to the challenges with more stimulus, especially more incentives for investment in infrastructure and real estate, iron ore prices can be expected to bounce back later in the year.

Australian producers are at the bottom of the cost curve and at the top of the quality curve, providing some insulation against any action China could take.

Authorities must hope for an economic rebound as they apparently still pursue the concept of a single iron ore purchasing agency floated earlier this year — a single or monopoly declared controlled Chinese buyer of iron ore by sea.

China’s dependence on iron ore imports especially the iron ore of Australia – has long aroused the authorities’ suspicions about the producers and the physical and derivative markets for iron ore from which prices are derived.

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However, unless producers blink, China does not yet have the leverage to force them to accept anything other than prices that reflect supply and demand and the mills’ preference for the high-quality (and lower cost) ore they can get from the Australian and Brazilian suppliers relative to what is available to them elsewhere.

By the end of this decade, when production of China-sponsored mines in Africa could hit the market, the balance of power could shift in the margins, but Australian producers are at the lower end of the cost curve and at the top of the quality curve, which provides some isolation from whatever actions China might take.

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