An Insider’s Look at China

An Insider’s Look at China

Freedom Financial Archive | Originally posted May 22, 2023
  • Chinese imports have slowed down
  • Consumer spending has NOT normalized
  • Another stimulus is NOT coming

Chinese imports have started to slow down from a seasonal record, and it’s likely a lot of their big purchases have wrapped up for the season.

When we look at seasonal spikes, April into May is usually the peak of buying until we get to the back half of August.

There is typically a sizable decline as we head into June that lasts around the end of July or early August.

The market is expecting China to maintain a consistent buying program, but that doesn’t match up with historical purchases and underlying refinery operations.

Chinese exports remain elevated, and the next leg of export quotas will be important to see what storage looks like internally.

We have already seen a broad problem with diesel demand driven by slowing economic activity, as we have seen on the manufacturing component and new orders.

Consumer Spending Has NOT Normalized

Consumer spending hasn’t normalized, but we did get a nice bump in Golden Week travel.

The big focal point now will be how traffic rebounds following the holiday.

So far, the activity has tracked closely to last year in terms of movements.

It will be important to see how it bounces back from the dip, and if it can move back to the upper levels achieved in April.

China announced the new export quotas, which came in at the high level of estimates.

The expectations were for between 9-13M tons with the following breakdown coming in:

  • Refined products quota set at 9 million tonnes
  • Marine fuel allotment at 3 million tonnes

This provides a broad opportunity for Chinese refiners to bounce between local or international markets more freely.

Even as Chinese exports have diminished, they still remained above expectations, and this increase in quotas provides more flexibility.

“This year, quota holders have greater flexibility to prepare export plans and capture arbitrage opportunities,” said Energy Aspects analyst Sun Jianan.

“Typically, the second batch of quotas is below the first, so it’s important to look at this against y/y.

“The quota was less than the first batch of 18.99 million tonnes in early January, but double the allocation of 4.5 million tonnes issued around a year earlier, Reuters records show.”

Chinese Demand Is Showing Cracks

Chinese demand is also showing cracks as manufacturing slows further.

There is a lot of “hope” around Chinese demand that we don’t expect to appear to the degree the market expects.

“So much for China opening the credit taps – after a jump in March, credit growth was much weaker than expected in April, and the credit impulse has been neutral for several months now.” – Macro Markets Daily

We have been saying that the PBoC has a goal of maintaining credit impulses between -1 and 0 as they try to gradually remove liquidity from the system.

Another Stimulus Is NOT Coming

We don’t see any massive stimulus coming to market, and instead- everything is pointing to more restrictive activity.

Another red flag for activity is the reduction in imports that also had VERY easy comps vs last year.

There is hope that the drop in imports and slowing industry will spark more support, but we don’t think that is likely given the level of liquidity that remains in their market.

SPBs (Special Purpose Bonds) have been massively front loaded, and the PBoC isn’t in any hurry to dump more on top of it.

Recently, the General Administration of Customs released April’s trade data.

The headlines:

  • Exports rose 8.5% y/y in dollar terms in April, compared with a 14.8% y/y increase in March.
  • Imports dropped by 7.9% y/y last month, versus a 1.4% y/y fall in March.
  • The trade surplus was USD 90 billion in April, compared with a surplus of USD 88.2 billion in March.

The sharp drop in imports puts the sustainability of China’s post-COVID economic recovery into the spotlight.

  • The median forecast among analysts was for a 0.2% y/y fall in imports.
  • April’s plunge also came from a low base, with shipments this time last year disrupted by COVID lockdowns.

Exports fared better, but a deeper dig into the data shows the growth was a little underwhelming.

  • The y/y growth rate comes from a low base due to COVID disruptions.
  • In m/m terms, exports fell 6.4% in April this year.
  • The official manufacturing PMI also highlighted weaker overseas demand, with the exports new orders index falling from 50.4 in March to 47.6 in April.

Get smart: As the favorable base from last year fades, exports will shift from being a boost to a drag on growth.

  • To offset that drag on growth, officials need to do more to lift domestic consumption.

Our take: This trade data may convince policymakers that additional support is needed to consolidate the post-COVID economic recovery.

Thanks for reading,

Freedom Financial News