CHINA’S ECONOMY: STUMBLING

The economic recovery of China after lifting stringent zero-COVID control measures is slowing down. Investors had high expectations at the beginning of this year that the world’s second-largest economy would rebound and help offset the global economic weakness. However, six months later, those hopes have turned into disappointments.

One of the earliest warning signs that investors are losing faith in the recovery story is the Hang Seng China Enterprises Index falling into a bear market on Tuesday, dropping about 20% from its peak on January 27.

While stocks are important to monitor, they may not provide as much information as sliding commodity prices. The reasons for the stumble could be a significant decline in business and private sector confidence due to policy volatility. It could also be attributed to an aging population, a shrinking workforce, supply chain disruptions, or a mounting debt burden — whatever is hindering China’s recovery efforts could indicate that the days of 6% to 8% annual growth are over, and 2% or 3% is the new normal.

In terms of commodities, two of the most crucial ones for China’s economy, copper and iron ore, have experienced price declines in recent months. However, five overlooked essential commodities for economic growth are signaling alarming economic distress.

GLASS

China accounts for over half of the world’s glass production due to rapid development in high-rise buildings and strong car sales in recent decades. Similar to other industries, low profit margins and oversupply have made manufacturers struggle for years, leading them to cut production in recent months.

The situation this year appears to be even more challenging. Glass futures contracts on the Zhengzhou Commodity Exchange have dropped nearly 20% in the past month, a period when demand typically increases. Reasons include a sluggish real estate market and lower-than-expected car output in April.

𝗟𝗡𝗚 Transportation

China has a high demand for natural gas, which is transported by sea from remote locations such as Qatar and Australia or through pipelines across Asia. However, the last few kilometers to reach consumers often involve trucks driving through Chinese cities, a barometer of the immediate needs of industries from glass manufacturers to ceramics factories. The price has dropped to the lowest level in nearly two years. The weak demand is so significant that natural gas importers using the country’s top maritime liquefied natural gas terminals have even proposed reselling their cargoes abroad.

𝗦𝘁𝘆𝗿𝗲𝗻𝗲

Fewer homebuyers also mean less demand for accompanying purchases of furnishings for a new place. The price of styrene monomer, a material used for plastics and rubber found in household appliances like refrigerators, has decreased. China has been the world’s fastest-growing market over the past decade, with capacity increasing to over 40% of the global total.

According to the National Household Appliance Information Center, the future price of this material on the Dalian Commodity Exchange dropped to the lowest level since February 2021 last week, following a nearly 5% decline in household appliance sales in the first quarter. Wu Haitao, the center’s director, cited slower income growth and a “low-frequency sales cycle” as contributing factors.

𝗖𝗼𝗿𝗻 𝘀𝘁𝗮𝗿𝗰𝗵

Cornstarch has various applications, including in beverages, as a thickening agent for sauces, and in the paper and textile industries. China produces nearly 50 million tons per year.

Although retail sales have outperformed other economic indicators in the months since China lifted its zero-COVID restrictions, they have increased at a slower pace in April than anticipated. China’s declining population is another headwind: cornstarch is a key ingredient in infant formula.

PAPER PULP

Futures prices for paper pulp in Shanghai plummeted in February after paper mills abruptly resumed production following the Lunar New Year holiday and were supported by increased imports. Domestic demand, which was expected to pick up as China reopened, has not kept pace.

Like many commodities, China is both a producer and a major consumer of paper pulp, which is used for packaging, publishing, and household goods. However, the market is so vast that a significant amount of paper pulp and paper also needs to be sourced from abroad.

The slow recovery has prompted the People’s Bank of China to announce an unexpected 25 basis point RRR cut in mid-May, pledging to maintain ample liquidity in the interbank system and provide better support for the real economy.

By Pham Sy Thanh

Collected via datalac.com