China steel sector looks to gains from monetary easing

The Chinese government's 7 October move to add more stimulus to the economy, by freeing up banks' ability to lend more, could support the steel sector by pushing credit into the key real estate and manufacturing consuming sectors. Around 60pc of China's steel is consumed by construction projects, including real estate and infrastructure.

The People's Bank of China (PBOC) cut the statutory cash reserves banks have to hold by 1pc, releasing fresh liquidity of 750bn yuan ($108bn) in the banking system. China has put on hold for now its drive to rein in the excessive debts of provinces and corporations on hold, focusing on fiscal and monetary stimulus to contain the fallout of growing trade frictions with the US.

The monetary easing is also poised to weaken the yuan further versus the US dollar, which could support China's steel exports as it buoys yuan-denominated earnings of exporters.

The reserve ratio cut comes on top of Beijing's pledge to speed up infrastructure investments in the second half of the year.

"We will vigorously support the construction of major projects identified by the central government and strengthen the weak links in economic and social development," China's finance minister Liu Kun told state-run media yesterday. The minister said additional tax cuts are being planned to stimulate consumption in the economy on top of an estimated Yn1.3 trillion in tax reduction this year.

But provinces are reluctant to step up borrowing for major infrastructure projects after two years of pressure from Beijing to reduce their debts, Singapore-based DBS Bank said in a report. Intended infrastructure investments during January-August contracted by 35pc from a year earlier, the bank said, based on analysis of Chinese national bureau of statistics data.

"The transmission of looser liquidity may need more time to have effect on real activities," DBS said. Lending to the corporate sector too remains slow as rising loan defaults have made banks wary, it added. Easing loans to smaller companies was cited as a key reason for cutting the reserve ratio by the PBOC central bank.

The steel sector has performed robustly this year, although price gains for construction steel have outpaced those in flat steel products. Growth in real estate investment and new project start-ups has been over 10pc against a year earlier for most of 2018, largely on property development in smaller Chinese cities. These growth rates may slow in the fourth quarter but will possibly still remain quite high.

Manufacturing sector growth has been stable, with slower growth in key steel consuming sectors such as automobiles and equipment manufacturing over the past couple of months. Import taxes on almost half of China's $500bn exports to the US is expected to pressure manufacturing growth in the short term, although looser monetary policies and accelerated spending will offer support.

The IMF has forecast China's economic growth to slow to 6.6pc this year from 6.9pc in 2017 and hit 6.2pc in 2019. A large part of the slowdown is the result of the US-China trade friction. The IMF expects China's monetary and fiscal actions to substantially offset the negative effects of the tariffs on Chinese products, although it may increase financial imbalances in the economy.