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China’s Economy Booms While U.S. Continues Decline Into Recession

Factory activity expanded strongly in September as the recovery in sector demand and production sped up. China’s Economy Booms While U.S. Continues Decline Into Recession

China’s economy gathered more steam in September as a rebound in global demand and the government’s supportive measures bolstered factory activity and helped push sentiment in the service sector to its highest level in nearly seven years.

China’s official manufacturing purchasing managers index rose to 51.5 in September, according to data released by the National Bureau of Statistics on Wednesday, higher than both the 51.2 forecast by economists and August’s reading of 51.0.

A separate private gauge of manufacturing activity, the Caixin China manufacturing purchasing managers index, stood at a robust 53.0, roughly in line with the previous month’s level. Readings above 50 suggest an expansion in activity, with higher numbers pointing to a broader-based trend.

China’s service sector, a weak link in the economy for much of the summer due to lingering coronavirus concerns, also turned in a strong September. China’s official nonmanufacturing PMI, which includes both the service and construction sectors, jumped to 55.9 in September, its highest result since November 2013 and better than the previous month’s reading of 55.2.

The improvement in the service sector, which Goldman Sachs says accounts for about 80% of the weighting in the nonmanufacturing PMI, was boosted by a bounce back in the transportation, hotel and restaurant industries, as consumers appeared more willing to travel and spend, China’s statistics bureau said.

Officials on Wednesday expressed hope that an eight-day holiday, which begins Thursday, will further lift consumer spending nationwide, as localities launch promotion campaigns.

Lu Ting, chief China economist at Nomura, told clients in a note Wednesday that the holiday will “likely present good numbers for retail sales and tourism due both to a pent-up demand, government promotions, and restrictions on overseas travel.”

China’s retail sales, a major measurement of domestic consumption and the last holdout in negative territory among China’s major economic indicators for much of the year, finally returned to growth in August for the first time this year, logging a 0.5% increase from a year earlier. The consumer sentiment had been depressed by infection concerns and elevated jobless rates.

On the manufacturing side, both the official and private measures pointed to improving demand from overseas markets. The official export-order subindex climbed into expansionary territory for the first time this year, while the Caixin survey showed export orders hitting a three-year high.

“Improving external demand added fuels to China’s recovery which could not rely solely on domestic demand,” said Serena Zhou, an economist with Mizuho Securities.

China’s export machine has beaten economists’ gloomy expectations repeatedly this year. The country’s relatively quick resumption in factory activity in the spring made it possible to churn out medical equipment and work-from-home electronic goods as the rest of the world struggled with the pandemic.

While some economists expect demand for pandemic-related goods to wane in the coming months, Ms. Zhou said she believes the rebound in global demand will continue to buoy China’s exports.

On the labor front, both the official and Caixin PMI reports showed further gains in hiring in September.

Separately, Beijing’s measures to support small businesses and boost domestic consumption began to yield positive results in September, helping small-factory activity to climb back into expansionary territory for the first time this year. An official subindex of small-factory activity rose to 50.1 after Beijing ordered state banks to extend billions of dollars worth of cheap loans to the small companies that were hardest hit by the pandemic.

Updated: 11-2-2020

World’s Top Hedge Fund Soars 275% With Bets On China Schools

Long before he ran the world’s best-performing hedge fund, Qian Yongqiang chaired China’s biggest online dating service.

The Yale graduate would spend hours tracking down attractive users with suspicious profiles, sifting through accounts and deleting thousands of scammers to improve the site’s authenticity and ensure its success.

Now he’s betting that same attention to detail and strong returns will help turn his Singaporean firm into a wealth management giant. Between January and September, QQQ Capital Management posted gains of 275%, making it the top hedge fund in the world, according to Eurekahedge data.

QQQ says assets under management rose to about $1 billion last month, with most of the money coming from Qian.

The gains have come with concentration risks that many fund managers would balk at: QQQ has more than a third of its assets invested in Chinese education companies.

While those stocks had soared this year, they’ve been hit with concerns about regulatory crackdowns and allegations of accounting fraud, and one has plunged in recent weeks amid downgrades from analysts.

“When we invest, we know everything about an industry, its top five people, their personality, their weakness, their greatness, everything about them,” Qian said in an interview.

Qian’s experience with the Chinese education system runs deep. Born in 1972 – the same year U.S. President Richard Nixon visited China – Qian grew up amid the rapid economic growth that followed the Cultural Revolution.

After graduating from North China University of Technology, he joined a teaching center, specializing in helping students prepare for universities abroad.

Then he took the leap himself, earning an MBA from the Yale School of Management in 2000, where he now sits on its Greater China Board of Advisors.

After returning to China, Qian was coaxed back to the teaching center and made a co-founder as it expanded. It later became the New Oriental Education & Technology Group, a giant in the space with a market capitalization of almost $26 billion on the New York Stock Exchange.

After leaving New Oriental, he helped build and sell mobile content provider Atop Century Ltd. and bought a substantial stake in online dating service Jiayuan.com. But as Beijing’s haze got worse and his children developed asthma, he moved to Singapore in 2013.

“I wanted to start an internet company in Singapore but it wasn’t feasible because you couldn’t find enough talented technology people,” he said. “So the only thing I could do was the financial industry.”

After five years running his own account, Qian, 48, turned professional in 2018 – seeding QQQ with $100 million of his own money. That year the fund returned almost 40% despite only running for three quarters.

In 2019 it gained 31%, outpacing the S&P 500 Index both years. The fund was granted an upgraded license by Singapore in August, removing a S$250 million ($183 million) asset cap.

Botanic Gardens

QQQ trades almost exclusively in U.S.-listed stocks, so Qian gets up at noon and eats before exercising around Singapore’s Botanic Gardens. The rest of the day is spent catching up with friends and family before starting work by 8 p.m., 90 minutes before the New York market opens.

Over the next eight hours he lives online, absorbing news and company reports while trawling social media and trading stocks.

Like other hedge funds, his team of six people does plenty of alternative data analysis. They frequently trade Tesla Inc. shares, so it checks satellite pictures of car lots and shipping manifests.

QQQ also has people attend after-school tutoring classes in China to gauge attendance, and buys calls and puts on the indexes to help hedge tail risk. Qian also taps his contacts and former students for their views on the businesses.

Qian says his edge is entrepreneurial experience from running companies, adding that every business QQQ bets on represents thousands of hours of research – giving it the confidence to make massive bets in selected areas.

It currently has about 55% of assets in cash ahead of the U.S. election, betting that stimulus negotiations would fail and roil markets. The S&P 500 dropped in four of five sessions last week, hitting a five-week low.

Forged Sales

The concentrated calls have paid off so far. Over the past year, New Oriental Education has risen 31%, while GSX Techedu Inc. has soared almost fourfold and TAL Education Group is up 55%.

“In large part the superior performance could be attributed to good stock selection in the edu-tech space,” said Eurekahedge head analyst Mohammad Hassan in an email, noting the fund has returned 444% since June 2019. So far this year, the Eurekahedge Long Short Equities Hedge Fund Index is up 4.7%.

The bets come with plenty of risks. TAL in April admitted that an employee may have forged sales contracts. GSX announced last month it was being investigated by the U.S. Securities and Exchange Commission. Regulators demanded financial records dating to 2017 following reports by short sellers including Muddy Waters.

When Credit Suisse Group AG — one of the banks that took GSX public last year — downgraded the company to sell on Oct. 21, the stock plunged 31%. The recent declines could topple QQQ from the No. 1 spot among hedge funds.

“Under diversification can go both ways – if you’re right in your investment thesis you could potentially make a lot of money, but if you’re wrong there’s a big downside,” said Melvyn Teo, a finance professor at Singapore Management University. The concentration may also deter blue-chip investors from QQQ’s funds, as they tend to prefer more diversification, Teo added.

A QQQ spokesman said there had been a “small drawdown” recently but the fund’s positions were hedged and it was still doing well.

Qian declined to comment on claims against the education companies, though he said he trusts many of the key leaders and understands the fundamentals. QQQ is open with clients about the risks, at times declining money from investors that he feels can’t handle the potential losses.

“I haven’t given my team any targets for fundraising – we’re only two-and-a-half-years old and the track record is the most important thing,” he said.

Beyond that, he’s not afraid to set lofty goals: “We want to be the biggest wealth management firm in the world,” he said.

Updated: 11-16-2020

U.S. Crop Prices Are Rising, and China Is Buying

Investors pile into bullish wagers on agricultural commodities after the coronavirus had cast doubt on demand.

Dry weather, China’s push to fatten its pigs and the lockdown-induced baking bonanza are lifting prices for U.S. row crops.

Futures prices for soybeans, corn and hard red winter wheat—the kind used for baking bread—have risen by about a third since a rally began Aug. 10. Soft red winter wheat, found in animal feed and processed foods, is up 22%.

The gains are a sharp reversal of fortune for farmers. The global coronavirus pandemic had cast doubt on demand, from the corn that finds its way into motor fuels to the wheat that winds up as restaurant dinner rolls.

In June, investors held a large short position in U.S. agricultural commodity futures, betting that prices would fall. Now they have piled into a historically large wager that prices will rise, said Tracey Allen, agricultural commodities strategist at JPMorgan.

“These markets could extend much higher,” Ms. Allen said. “We’ve drawn down considerable inventory at the same time that China’s demand appetite has stepped up.”

Dry weather in the U.S. Great Plains, Argentina, Russia, Ukraine and Brazil have reduced yields and expectations for what were forecast to be bumper crops.

Meanwhile, China has been restocking its grain bins and rebuilding its hog herds after culling millions of pigs last year to combat an outbreak of African swine fever.

The U.S. Agriculture Department predicts that China this season will import record volumes of coarse grains, which are mostly corn, and buy more foreign wheat than it has in a quarter-century.

China’s buying has been particularly bullish for soybeans. U.S. soybean sales to China have doubled since the countries signed a bilateral trade agreement earlier this year. Though China has bought more than $23 billion of U.S. agricultural goods, it has billions yet to spend to fulfill the terms of the countries’ so-called phase-one deal, according to the Office of the U.S. Trade Representative.

China’s big orders are opening up other markets for U.S. growers as well. China bought so many soybeans from Brazil that the world’s largest exporter is running low at home. Last month, Brazil lifted import tariffs on soybeans and corn.

Earlier this month a ship loaded with 38,000 metric tons of soybeans left the U.S. bound for Brazil, taking a rare trade route, according to Randy Giveans, a Jefferies shipping analyst.

At home, Americans are eating into wheat stockpiles. A sourdough craze and a banana-bread binge helped make up for the shutdown of cruise ships, hotels and restaurants that buy flour by the pallet.

From July through September, 234 million bushels of wheat were ground for flour, up 7% from the second quarter and 1% higher than in the third quarter of 2019, according to the National Agricultural Statistics Service’s quarterly survey of millers.

“That’s literally people sitting at home baking,” said Sal Gilbertie, president of Teucrium Trading, which operates exchange-traded funds that buy agricultural commodity futures.

The Agriculture Department last week said it expects U.S. inventories of wheat and corn to end their current marketing years 15% lower than in the prior ones. It slashed expectations for soybean production following poor yields in Ohio, Indiana and other states and expects season-end stockpiles to be about a third of what they were a year earlier.

Farmers and traders are watching the weather in Argentina and Brazil, where a lack of rain threatens harvests.

“If South America has weather issues and production issues, that’s how you get beans in the teens,” said Craig Turner, a podcasting commodities broker at Daniels Trading in Chicago.

Soybeans for January delivery ended Monday at $11.535 a bushel, a fresh four-year high.

Andy Huston, who grows corn, soybeans and hemp in Warren County, Ill., is among those betting on even better prices.

Not long ago, Mr. Huston was counting on losing money on this year’s crop. He was trying to decide where to skimp on the next crop when prices shot up. The rally prompted him to hold back on his soybean harvest in hopes of higher prices.

“Definitely changed the attitude of a lot of farmers out here,” he said. “We’re doing the gambling thing. This could be the start of the rally.”

U.S. Exporters Coming Up Empty In Scramble For Outbound Containers

A surge of Asian imports to feed retailer restocking efforts has shipping lines rushing boxes back to China, leaving equipment shortages in the U.S.

A surge in Asian imports bound for U.S. retailers stocking up for the holidays is leading to an acute shortage of shipping capacity for U.S. exporters, with agricultural producers now struggling to find the containers they need to send their products to overseas buyers.

Container shipping companies seeking to keep pace with the strong demand for goods from China are rushing to unpack and return to Asia the containers, industry officials say. That leaves fewer boxes available for American exporters to stuff with soybeans, lumber, cotton and other products.

“Right now we are grappling with a true emergency—carriers refusing bookings for trans-Pacific agricultural exports and canceling those already booked,” said Peter Friedmann, executive director at the Agriculture Transportation Coalition, a trade body representing U.S. farmers. “We are getting locked out of foreign markets.”

The shortage is in part the result of the steep imbalance in the value of the goods moving across the Pacific. U.S. imports from China, for instance, include big volumes of electronics, apparel, toys and other manufactured goods. U.S. exports lean heavily toward bulky agricultural goods, along with food and beverages, which have a lower market value.

Container shortages aren’t uncommon during the busy summer months, but it is more intense this year and has spread to ports around the world as demand swung sharply from record lows to record highs within a few months.

The high demand in the U.S. for imports has pushed container freight rates from China to the U.S. West Coast seaports beyond $4,000 per container while average prices to ship goods by container from Los Angeles to Shanghai in recent weeks was $518.

For carriers, that means it makes more financial sense to hustle boxes back to Asia rather than wait for them to travel inland for several weeks to reach exporters and then return to the coastal gateways.

“Demand is driven by U.S. consumers who are ordering goods like sports equipment, entertainment devices and furniture,” said Nils Haupt, spokesman for German container line Hapag-Lloyd AG . “Ships from China to the U.S. are full and there is high demand for empty boxes in China. We expect that to continue into the first quarter.”

The U.S. import surge took off in midsummer after global trade nosedived from extended city closures because of the Covid-19 pandemic. Big U.S. retailers rushed to replenish inventories that were depleted earlier in the pandemic and started pulling in more goods from Asia to stock shelves and e-commerce warehouses as consumer sales rebounded.

The Global Port Tracker report by the National Retail Federation and Hackett Associates LLC said major U.S. ports imported 2.11 million containers in September, 12.5% more than the year before and the highest monthly total in records going back to 2002.

“We are seeing more imports than ever for the replenishment of inventories and they can’t be processed fast enough,” said Gene Seroka, the executive director of the Port of Los Angeles. “We have containers stacked six-units high and the dwell time at the terminal has almost doubled to more than four days. It’s a one-way traffic and empty boxes are the very last to be processed.”

The neighboring Port of Long Beach handled 88,903 more empty outbound containers in October than loaded container exports.

Mr. Seroka said the Covid-19 pandemic is exacerbating the situation because fewer people are working at warehouses and terminals because of social-distancing guidelines.

The trade imbalance is affecting ports and cargo owners around the world. In South Korea, government officials on Thursday called in container line executives to warn them against violating contracts with Korean exporters after complaints empty boxes were sent to China on the back of the stronger freight rates there.

Freight brokers in China and Singapore said they are flooded with requests for more outbound shipments. “There is a race to book any empty container that comes in. We’ve not seen such demand in more than a decade,” said a middleman in Shanghai.

With retailers continuing to bring in goods in record numbers, industry executives expect the imbalance and the shortage in outbound equipment to continue through the holidays.

Peak season for shipping runs from August to early October, but this year “we got a peak season on steroids, that started in July and is still going,” said Steve Ferreira, the chief executive of New York-based consulting firm Ocean Audit Inc.

China Economy Gathers Steam, Setting Stage For A Strong End To The Year

Investment and consumer spending grew faster year over year in October, while industrial production held firm.

China’s economic activity posted a broad-based recovery in October, paving the way for a faster economic rebound in the final quarter of the year.

Both investment and consumer spending grew at faster year-over-year rates in October than the month before, while industrial production, the first sector to emerge from this year’s coronavirus-induced slump, remained solid.

Industrial output, which has led the nation’s economic recovery in recent months, rose 6.9% in October from a year earlier, on par with September’s pace and higher than market expectations for a 6.5% increase, according to data released Monday by the National Bureau of Statistics.

Fixed-asset investment rose 1.8% in the January-October period, accelerating from 0.8% growth in the first three quarters of the year and coming in higher than the 1.6% increase expected by economists polled by The Wall Street Journal.

Retail sales, a key gauge of Chinese consumer spending, rose 4.3% in October from a year ago, accelerating from a 3.3% increase in September, but lower than a 4.6% increase expected by surveyed economists.

The Chinese government’s main unemployment measure, the urban surveyed jobless rate, which excludes migrant workers who were once employed in cities but returned home for various reasons, also fell slightly to 5.3% in October, compared with September’s 5.4%.

“Economic growth in the fourth quarter is expected to be even faster than that of the third quarter,” Fu Linghui, a spokesman for the statistics bureau, said in a briefing Monday, adding that the growth in China’s imports and exports will outpace that of the world as a whole, even though uncertainties hover over the overseas economy.

China’s economy rebounded to 4.9% year-over-year growth in the third quarter, compared with a 6.8% contraction in the first quarter and a 3.2% expansion in the second quarter. Economists widely expected growth of between 5% and 6% in the fourth quarter, putting the world’s second largest economy on track to record an expansion of about 2% for all of 2020.

While expecting China’s growth to remain strong overall, Li Wei, an economist at Standard Chartered PLC, warned that momentum may slow in the coming months as new concerns about coronavirus infections exert pressure on domestic consumption and manufacturing investment. Industrial output, Mr. Li said, has limited room to grow further.

With lingering concerns about the coronavirus, China’s domestic consumption has lagged behind the broader recovery and only returned to last year’s levels beginning in August. Travel, shopping and entertainment spending during the eight-day-long National Day holiday in early October helped lift retail sales and boost consumer confidence, said Mr. Fu, the spokesman for the statistics bureau.

Overall domestic consumption likely got a further boost in November when China’s e-commerce giants, led by Alibaba Group Holding Ltd. , staged a longer version than usual of its annual Singles Day shopping festival.

While deals and spending have historically been confined to Nov. 11, Alibaba and its competitors this year offered Singles Day deals for several days in November, helping Alibaba set a new sales record by raking in $75.1 billion.

Morgan Stanley economists expect private consumption in China to emerge as a key growth driver next year, as the job-market recovery continues and as Chinese households release more of their savings.

The fall in China’s urban jobless rate to 5.3% in October sustains a trend line that has seen unemployment taper off since hitting a high of 6.2% in February. The statistics bureau said separately Monday that the country hit its job creation target of 10 million jobs for the full year in the first 10 months of the year, during which 10.09 million jobs were created

China’s robust recovery also helped attract more overseas investors. Foreign direct investment rose to $11.83 billion in October, an 18.4% increase from a year earlier, extending the string of monthly year-over-year gains to seven months, according to data released by the Ministry of Commerce on Monday.

As the economy picks up steam, Beijing policy makers are considering unwinding the stimulus policies introduced this year to offset the impact of coronavirus lockdowns.

Liu Guoqiang, a vice governor of China’s central bank, said this month that it was “a matter of time” before China withdrew its stimulus. Former finance minister Lou Jiwei also said at a forum Friday that it was time for Beijing to consider withdrawing its monetary stimulus in an orderly manner.

Mr. Li, the Standard Chartered economist, said Beijing may stop short of a full unwinding of its stimulus, given uncertainties in the global recovery and rising default risk in the corporate sector.

Updated: 11-18-2020

With Covid Under Control, Travel Recovers In China

In China, the travel and transportation industries are showing signs of life as the coronavirus pandemic heads toward the end of its first year.

Jean Liu, president of Chinese ride-hailing company Didi Chuxing Inc., said in a panel at the Bloomberg New Economy Forum. That business fell “off a cliff” when the pandemic started in January and February. But Liu gradually saw a recovery in April, and Didi is now racking up 60 million rides every day. “Right now we are fully back,” she said.

Liu said she is most proud of the initiative her company came up with to shuttle healthcare workers around the city when there was no public transportation. Around 140,000 drivers volunteered, she said.

Neil Shen, founding and managing partner at Sequoia Capital China, said business travel in China got back to normal by the second quarter and leisure travel has also been picking up. “The good thing is Covid is well under control,” he said. “We see travel coming back pretty quickly.”

Updated: 11-18-2020

China Borrows At Negative Rates For The First Time

Including bonds with positive yields, the euro-denominated deal raised about $4.7 billion.

Superlow interest rates in Europe helped China to sell its first negative-yielding debt, as it raised about $4.7 billion in a three-part deal in euros.

The debt sale drew robust demand, aided by China’s rapid return to economic growth after tackling the coronavirus and the relative scarcity of Chinese bonds denominated in the common currency.

The deal was worth €4 billion, the equivalent of $4.74 billion, and split between 5-, 10- and 15-year bonds. The 5-year bonds were priced late Wednesday to yield negative 0.152%, while the 10- and 15-year securities were sold with positive yields of 0.318% and 0.664%, respectively.

This is the first time that China has sold negative-yielding debt, according to Dealogic.

Investors placed total orders of about €18 billion, said Samuel Fischer, head of China onshore debt capital markets at Deutsche Bank, one of the banks that handled the deal.

“People want more exposure to China,” Mr. Fischer said. “China’s financial markets are opening, but there is still a broad scarcity of the sovereign [debt] among investors. The story of China’s Covid turnaround and the resilience of its economy are also things people like.”

James Athey, an investment manager at Aberdeen Standard Investments, said borrowing in euros had other benefits, as well as low interest rates. “China also wants to be less reliant on the U.S. and U.S. dollar markets,” he added.

Debt with a market value of some $16.9 trillion is trading at negative yields, according to the ICE BofA Global Broad Market Index, a benchmark for the world bond markets.

China has become a more active international borrower recently. Last November, it sold bonds in euros for the first time since 2004. And a month ago, it raised $6 billion by selling new dollar bonds, matching a record set last year.

China’s economy grew 4.9% in the third quarter from a year earlier, moving back toward its pre-coronavirus trajectory. The International Monetary Fund said in October it expected China to be the only major economy to grow this year, expanding 1.9%.

Public debt has ballooned around the globe as countries raise funds to fight the pandemic. Moody’s projects that China’s public-sector debt, including borrowings by governments and state-owned enterprises, will rise to 185%-190% of gross domestic product in 2020-2021 from 167% in 2019.

Andrew Mulliner, a bond portfolio manager at Janus Henderson, said most countries’ debt-to-GDP ratios had increased substantially, so it was important to focus on a country’s ability to control and pay off the debt. “What’s become increasingly apparent is that these high debt loads aren’t necessarily a problem if you’ve got a captive central bank,” he said.

International bond-index compilers Bloomberg LP, FTSE Russell and JPMorgan Chase & Co. have all moved to add Chinese government debt in yuan to some key indexes. That has helped fuel international appetite for China’s domestically issued sovereign bonds.

“China’s also benefiting currently from big inflows from people being forced to own their bonds anyway through indexation,” said Mr. Mulliner.

Updated: 11-22-2020

China Is Set To Eclipse America As World’s Biggest Oil Refiner

Earlier this month, Royal Dutch Shell Plc pulled the plug on its Convent refinery in Louisiana. Unlike many oil refineries shut in recent years, Convent was far from obsolete: it’s fairly big by U.S. standards and sophisticated enough to turn a wide range of crude oils into high-value fuels. Yet Shell, the world’s third-biggest oil major, wanted to radically reduce refining capacity and couldn’t find a buyer.

As Convent’s 700 workers found out they were out of a job, their counterparts on the other side of Pacific were firing up a new unit at Rongsheng Petrochemical’s giant Zhejiang complex in northeast China. It’s just one of at least four projects underway in the country, totaling 1.2 million barrels a day of crude-processing capacity, equivalent to the U.K.’s entire fleet.

The Covid crisis has hastened a seismic shift in the global refining industry as demand for plastics and fuels grows in China and the rest of Asia, where economies are quickly rebounding from the pandemic. In contrast, refineries in the U.S and Europe are grappling with a deeper economic crisis while the transition away from fossil fuels dims the long-term outlook for oil demand.

America has been top of the refining pack since the start of the oil age in the mid-nineteenth century, but China will dethrone the U.S. as early as next year, according to the International Energy Agency. In 1967, the year Convent opened, the U.S. had 35 times the refining capacity of China.

The rise of China’s refining industry, combined with several large new plants in India and the Middle East, is reverberating through the global energy system. Oil exporters are selling more crude to Asia and less to long-standing customers in North America and Europe.

And as they add capacity, China’s refiners are becoming a growing force in international markets for gasoline, diesel and other fuels. That’s even putting pressure on older plants in other parts of Asia: Shell also announced this month that they will halve capacity at their Singapore refinery.

There are parallels with China’s growing dominance of the global steel industry in the early part of this century, when China built a clutch of massive, modern mills. Designed to meet burgeoning domestic demand, they also made China a force in the export market, squeezing higher-cost producers in Europe, North America and other parts of Asia and forcing the closure of older, inefficient plants.

“China is going to put another million barrels a day or more on the table in the next few years,” Steve Sawyer, director of refining at industry consultant Facts Global Energy, or FGE, said in an interview. “China will overtake the U.S. probably in the next year or two.”

Asia Rising

But while capacity will rise is China, India and the Middle East, oil demand may take years to fully recover from the damage inflicted by the coronavirus.

That will push a few million barrels a day more of refining capacity out of business, on top of a record 1.7 million barrels a day of processing capacity already mothballed this year. More than half of these closures have been in the U.S., according to the IEA.

About two thirds of European refiners aren’t making enough money in fuel production to cover their costs, said Hedi Grati, head of Europe-CIS refining research at IHS Markit. Europe still needs to reduce its daily processing capacity by a further 1.7 million barrels in five years.

“There is more to come,” Sawyer said, anticipating the closure of another 2 million barrels a day of refining capacity through next year.

Chinese refining capacity has nearly tripled since the turn of the millennium as it tried to keep pace with the rapid growth of diesel and gasoline consumption. The country’s crude processing capacity is expected to climb to 1 billion tons a year, or 20 million barrels per day, by 2025 from 17.5 million barrels at the end of this year, according to China National Petroleum Corp.’s Economics & Technology Research Institute.

India is also boosting its processing capability by more than half to 8 million barrels a day by 2025, including a new 1.2 million barrels per day mega project. Middle Eastern producers are adding to the spree, building new units with at least two projects totaling more than a million barrels a day that are set to start operations next year.

Plastic Driven

One of the key drivers of new projects is growing demand for the petrochemicals used to make plastics. More than half of the refining capacity that comes on stream from 2019 to 2027 will be added in Asia and 70% to 80% of this will be plastics-focused, according to industry consultant Wood Mackenzie.

The popularity of integrated refineries in Asia is being driven by the region’s relatively fast economic growth rates and the fact that it’s still a net importer of feedstocks like naphtha, ethylene and propylene as well as liquefied petroleum gas, used to make various types of plastic. The U.S. is a major supplier of naphtha and LPG to Asia.

These new massive and integrated plants make life tougher for their smaller rivals, who lack their scale, flexibility to switch between fuels and ability to process dirtier, cheaper crudes.

The refineries being closed tend to be relatively small, not very sophisticated and typically built in the 1960s, according to Alan Gelder, vice president of refining and oil markets at Wood Mackenzie. He sees excess capacity of around 3 million barrels a day.

“For them to survive, they will need to export more products as their regional demand falls, but unfortunately they’re not very competitive, which means they’re likely to close.”

Demand Trap

Global oil consumption is on track to slump by an unprecedented 8.8 million barrels a day this year, averaging 91.3 million a day, according to the IEA, which expects less than two-thirds of this lost demand to recover next year.

Some refineries were set to shutter even before the pandemic hit, as a global crude distillation capacity of about 102 million barrels a day far outweighed the 84 million barrels of refined products demand in 2019, according to the IEA. The demand destruction due to Covid-19 pushed several refineries over the brink.

“What was expected to be a long, slow adjustment has become an abrupt shock,” said Rob Smith, director at IHS Markit.

Adding to the pain of refiners in the U.S. are regulations pushing for biofuels. That encouraged some refiners to repurpose their plants for producing biofuels.

Even China may be getting ahead of itself. Capacity additions are outpacing its demand growth. An oil products oversupply in the country may reach 1.4 million barrels a day in 2025, according to CNPC. Even as new refineries are built, China’s demand growth may peak by 2025 and then slow as the country begins its long transition toward carbon neutrality.

“In an environment where the world has already got enough refining capacity, if you build more in one part of the world, you need to shut something down in another part of the world to maintain the balance,” FGE’s Sawyer said. “That’s the sort of environment that we are currently in and are likely to be in for the next 4-5 years at least.”

Updated: 12-07-2020

China Foreign Reserves At Highest Since 2016 As Trade Booms

China’s foreign exchange reserves rose by more than $50 billion in November to the highest since August 2016, likely boosted by the weaker dollar and a trade surplus at record highs.

Reserves gained for the first time in three months, reaching $3.1785 trillion at the end of November, the People’s Bank of China said Monday. The value of gold assets declined to $110.4 billion.

China’s foreign exchange market is expected to be basically stable, the State Administration of Foreign Exchange said in a separate statement. The reserves rose mainly due to changing exchange rates and asset prices, SAFE spokesman Wang Chunying said in a statement, noting that the dollar index had fallen and non-dollar currencies rose in general.

The yuan has already appreciated more than 6% against the dollar this year and is one of the best performers in Asia.

Updated: 12-07-2020

China Exports Generate Record Trade Surplus

With November exports up 21% from a year earlier and import growth slowing, surplus hit $75.42 billion.

China’s trade surplus widened to a record in November, as global demand for the country’s goods grew even more robust.

November exports were up 21% from a year earlier, the General Administration of Customs reported Monday, accelerating from October’s 11.4% and beating economists’ 12% forecast. Imports were up 4.5%, slowing slightly from October’s 4.7% and short of the 5.3% expected by economists. The resulting $75.42 billion trade surplus topped the record set in May, when a drop in imports was the major factor.

China’s exports have topped market expectations since the second quarter, when Beijing moved to restart the world’s second-largest economy after lockdowns and Covid-19 outbreaks at the start of the year. During the pandemic, protective gear and work-from-home tech products have served as pillars for China’s overseas trade, helping it gain global market share.

“Outbound shipments remained strong thanks to a surge in global demand for Chinese-made consumer goods such as electronic products. Exports of other goods were still much more subdued,” said Julian Evans-Pritchard, an economist with Capital Economics.

China’s November shipments to the Association of Southeast Asian Nations and the U.S., its No. 1 and No. 3 trading partners, respectively, were up 10% and 46% from a year earlier, beating October’s pace. Exports to the European Union, its No. 2 trading partner, were up 8.6% after being down 7% in October, according to calculations made by The Wall Street Journal.

Louis Kuijs, an economist with Oxford Economics, said that though he expects a global economic rebound to underpin solid export growth for China in 2021, the country’s performance would likely be less impressive as pandemic purchases taper off once vaccines reduce the need for social distancing.

China’s November imports of goods from the U.S. were up 33% from a year earlier, on par with October’s pace. But purchases of American farm, energy, and other products and services are far below levels promised in the trade deal with the U.S. earlier this year.

Through October, Chinese imports of goods covered in the agreement were 55% of the year-to-date targets, according to a calculation based on Chinese figures by Chad Bown, a senior fellow at Peterson Institute for International Economics. Many economists say it would be almost impossible for China to close the gap by the end of the year.

China’s purchases of services from the U.S. and other parts of the world have been depressed this year because of the sharp drop in tourism and education spending during the pandemic.

President-elect Joe Biden said last week that he wouldn’t immediately remove President Trump’s tariffs on China when he takes office next month.

In a two-year trade spat, the Trump administration imposed a series of tariffs on China. They were left in place on about $370 billion in goods after the two countries signed a trade deal in January to pressure Beijing to buy the agreed-on amounts of U.S. goods and services.

Updated: 12-07-2020

Chinese Arms Industry Ranks Second Behind U.S., Report Says

The country’s global sales are larger than those of Russia and European nations.

China has boasted the world’s second-largest arms-manufacturing industry for the past five years, ranking behind the U.S. in sales but outstripping Russia and the top European nations, according to a report released Sunday by a Swedish think tank.

In its annual study of arms sales, the Stockholm International Peace Research Institute (SIPRI) for the first time released figures for individual Chinese defense firms.

The study found that sales of arms and military services by the global sector’s 25 largest companies for which data are available totaled $361 billion last year, an 8.5% increase over 2018. SIPRI is an independent arms-trade analyst.

Among those companies, four are Chinese and 12 are American. Those Chinese companies had combined sales of $56.7 billion in 2019, compared with $221.2 billion from the U.S. companies. Two of the top 25 firms are Russian, with combined sales of $13.9 billion.

SIPRI figures showed that revenues for Chinese defense manufacturers have failed to keep pace with the global growth, with the top four Chinese firms growing by 4.8% last year. However, SIPRI’s data on Chinese firms excludes inaccessible sales figures from major companies in missile manufacturing and shipbuilding.

“Those with access to additional data likely see even greater [People’s Republic of China] arms-sales activity,” said Andrew Erickson, a professor at the China Maritime Studies Institute at the U.S. Naval War College. “After all, China already enjoys the world’s second-largest defense spending by any measure and is pursuing rapid military development and expansion of influence.”

The China Electronics Technology Group Corp., which has been caught in China’s trade war with the U.S., saw its sales increase 11% last year, attributable to Beijing’s effort to limit its dependence on foreign suppliers of electronics, said Lucie Béraud-Sudreau, the study’s lead researcher.

Sales for China’s top-ranked defense manufacturer for the last four years, aerospace firm Aviation Industry Corp. of China, increased by 0.8% in 2019, while China North Industries Group Corp., China’s largest producer of tanks and armored vehicles, had a 0.3% decrease.

“This is in line with the Chinese government’s military priorities,” Ms. Béraud-Sudreau said. “They are developing their aerospace and maritime programs, and tanks and military vehicles are less of a priority.”

While the Chinese state is the top client of the Chinese defense industry, Chinese defense exports rose 38% between 2008 and 2017, second only to Israel, according to an earlier SIPRI report, despite its inability to offer a Western standard of sophistication and aftermarket servicing, Mr. Erickson said.

Internationally, China tends to compete on price, while taking advantage of market irregularities—providing aerial drones, for example, to countries to which Western countries have agreed not to sell, said Mr. Erickson.

Vasily Kashin, a military expert at the Higher School of Economics, in Moscow, noted that the study appeared to exclude major Russian defense corporations such as Roscosmos, a space-related firm that also manufactures ballistic missiles. Nevertheless, Mr. Kashin said the figures that the study includes for Russian companies are “reflective of major industry trends.”

The revenues of the two largest Russian defense firms on the SIPRI rankings, Almaz-Antey and United Shipbuilding, decreased by a combined total of $634 million. Sales for the Russian company United Aircraft decreased by $1.3 billion, dropping the firm from SIPRI’s top 25.

“What they show can be extrapolated in line with the general state of the Russian defense industry now,” Mr. Kashin said. “They are experiencing a certain decline of domestic sales, with their external sales more or less stable.”

The Russian Defense Ministry’s spike in procurement during the initial years of the war in Ukraine leveled off in 2017, with state expenditures pegged to between 2.5% and 2.8% of gross domestic product, Mr. Kashin said.

“There is a rebalancing in Russian defense procurement, but not a dramatic one,” Mr. Kashin said. “There is a shift of more resources to ground forces from other areas. The procurement of aircraft is gradually decreasing.”

The SIPRI study showed that in 2019, the top five overall arms companies by sales— Lockheed Martin Corp. , Boeing Co. , Northrop Grumman Corp. , Raytheon Technologies Corp. and General Dynamics Corp. —were based in the U.S. and accounted for $166 billion in sales. A dozen U.S. defense firms ranked among the top 21 companies and represented 61% of the combined arms sales of the top 25.

Lockheed Martin registered the largest one-year increase in sales, 12.6%, to $53.2 billion from $47.3 billion in 2018.

EDGE Group, a United Arab Emirates company formed last year in a merger of more than 25 smaller companies, became the first Middle Eastern firm to make the list, entering at number 22.

“We are gradually moving into a new arms-race period,” Mr. Kashin said. “The sector is growing. Defense budgets are also growing. We are living in an increasingly militarized environment. It’s a very long-term trend already.”

Updated: 12-07-2020

Shares Of Chinese Companies On U.S. Blacklist Fall As Index Eviction Looms

FTSE Russell’s decision hits shares of companies including Hangzhou Hikvision Digital.

Shares of some companies the U.S. government says support China’s military fell Monday, after index compiler FTSE Russell said it would drop the stocks from major indexes.

Late Friday, FTSE Russell said it would remove securities of eight Chinese companies from the FTSE Global Equity Index Series, the FTSE China A Inclusion Indexes and other associated benchmarks on Dec. 21. These stocks can only be reconsidered for inclusion a year after removal, it said.

Hong Kong-listed shares of China Communications Construction Co. 1800 -2.23% and China Railway Construction Corp. 1186 -2.16% both fell about 2.2%, exceeding a 1.2% decline for the city’s Hang Seng Index. Shares of a third company on the list, CRRC Corp. 1766 0.33% , bucked the trend, rising 0.3%.

Shares in all the other five companies, whose stock trades in either Shenzhen or Shanghai, also fell. Shares in surveillance specialist Hangzhou Hikvision Digital Technology Co., the largest of these companies by market value, fell 2.3%, outpacing a 0.9% drop in China’s CSI 300 index.

Last month, President Trump signed an executive order barring Americans from investing in Chinese companies that the U.S. Defense Department says supply and otherwise support China’s military, intelligence and security services.

FTSE Russell’s statement didn’t mention some other state-backed groups whose unlisted parent companies were named by the Pentagon.

The listed arms of China’s big telecommunications providers, China Telecom Corp. , China Mobile Ltd. and China Unicom, fell sharply last month after the executive order was signed, but analysts have queried to what extent the ban extends to subsidiaries.

The index provider didn’t immediately respond to an emailed request for comment.

On Saturday, the U.S. State Department said U.S. investors were funding “malign” Chinese companies whose securities were included in major indexes. It said some companies produced technologies for the surveillance of civilians and the repression of human rights, citing the case of Uighurs and other Muslim minorities in China’s northwestern Xinjiang province.

“The Chinese Communist Party’s threat to American national security extends into our financial markets and impacts American investors,” the State Department said.

China’s government has said the measures are malicious and unreasonable, and will damage the interests of both foreign investors and Chinese businesses.

JPMorgan Chase & Co. and MSCI Inc. also said last month they were rethinking their stance on securities blacklisted by the U.S., and are seeking feedback from investors.

Updated: 12-15-2020

China Just Showed How Much The World Needs It

Strong finish to the year comes as recoveries in the U.S., Japan and Germany show signs of faltering.

The world needs China more than ever. Thank goodness it’s showing up: Economic data released Tuesday all looked strong and in line with forecasts. The upbeat projections for a strong global rebound in 2021 depend on Beijing maintaining this momentum.

Most of the traffic from other consequential economies is going the wrong way, owing to restrictions aimed at suppressing the current wave of Covid-19 infections. There’s a prospect of double-dip recessions in Germany and Japan, and the U.S. rebound has been losing steam. With big question marks over three of the four biggest commercial powers, China is the indispensable player.

China may be the only major economy to notch any growth at all this year. The new data showed industrial output climbed 7% in November from the previous year, and retail sales advanced. Fixed-asset investment increased 2.6% in the first 11 months of 2020, compared with the same period in 2019.

These numbers all matched economists’ forecasts; that does nothing to detract from their importance. The solid 5% rise in retail sales from a year ago is particularly encouraging, given consumers came late to the recovery that began in the second quarter.

In reviewing the global scene, the world’s second-biggest economy stands out all the more. Contrast it with German Chancellor Angela Merkel’s decision, with state leaders, to impose a hard lockdown that will shut down most retailers from Wednesday.

That’s an especially heavy blow, considering the comeback from the first one hadn’t taken firm hold. Schools have been encouraged to take long holiday breaks. A fourth-quarter contraction is in the cards after declines in gross domestic product during the first half of 2020.

Things are looking grim in Japan, too, where new daily infections topped 3,000 for the first time on Saturday. Prime Minister Yoshihide Suga has been forced to suspend his signature economic initiative, a subsidized domestic travel program called, “Go To.” Few people are heading anywhere. Tokyo asked restaurants and bars to continue with shortened hours until Jan. 11.

The blow to the economy, which never really recovered from a consumption-tax hike in 2019, will be significant. It bodes equally poorly for Suga, who has struggled to reverse a slide in the government’s standing since taking over from Shinzo Abe a few months ago.

In the U.S., improvements in the labor market look to be stalled. Figures last week showed applications for jobless benefits surged, topping estimates with the highest level since September.

If Congress can’t agree on an additional federal relief package by the end of the December, millions of Americans could start the new year with lapsed unemployment benefits. As if President-elect Joe Biden won’t have enough to contend with.

Critics contend that President Xi Jinping was able to shut down China and reopen at a whim earlier in the year because of the authoritarian political system; there’s some truth to that.

Or that its statistics are fiction, though few economists quibble with the overall direction of numbers published these days. What matters most is that the economy is at the very least hanging in there, and likely doing much better than that.

Updated: 12-21-2020

China’s ‘Unstoppable’ Global Luxury-Market Share Nearly Doubles Amid Pandemic

High-end brands target younger customers to help drive a recovery in luxury goods.

Milennials and Gen Z shoppers have helped China to double its overall share of the global luxury market in 2020, with the market on track to become the largest in the world by 2025, even after the world economy returns to pre-pandemic levels.

The Chinese luxury market will grow by 48% this year to 346 billion yuan, despite the COVID-19 pandemic, according to a report by Tmall, the shopping platform Alibaba, and consulting firm Bain & Company, published on Dec. 16.

The global luxury market shrank by 23% in 2020, noted the report, titled “China’s Unstoppable 2020 Luxury Market.” However, China’s market share nearly doubled, growing from about 11% last year to 20% in 2020.

Bruno Lannes, senior partner in Shanghai at Bain, identified four factors driving the rebound in the mainland China market: further repatriation, millennial and Gen Z shoppers, continuing digitalization, and the Hainan duty-free stores. Sales of the latter rose 98% compared with 2019, to reach RMB 21 billion by the end of October 2020.

Several international luxury-goods groups have highlighted the growing importance of sales in China to offset dependence on tourism, amid an unprecedented collapse in global travel.

Gucci, the fashion label owned by French group Kering, announced last week that it will open two flagship stores on Alibaba’s online luxury-shopping platform, which has more than 750 million Chinese consumers.

The first store, selling fashion goods, will open on Dec. 21, while a second store focused on beauty products will launch in February 2021 and will be operated by Gucci’s license partner Coty COTY.

“Gucci has strategically invested in and cultivated a ‘digital first’ approach globally, including the establishment of a dedicated Chinese digital ecosystem over the past years,” said Marco Bizzarri, president and chief executive of Gucci, in a statement on Friday.

Shares in Kering, which are down almost 7% so far this year, were more than 2% lower in early European trading on Monday.

U.S. jeweler Tiffany & Co, which is being bought by French luxury giant LVMH for $15.8 billion, in November beat Wall Street expectations for quarterly profit, as it benefited from a rise of more than 70% in sales in China.

“One of the most exciting trends to come out of the luxury market in 2020 has been the ways that brands have actively developed and strengthened their connections to consumers both online and offline,” said Chris Tung, chief marketing officer of Alibaba Group.

“Global luxury brands have embraced new digital tools such as live streaming for consumer education or product presentation,” Tung added.

Further growth of China’s market is expected through 2025, as Gen Z — those born after 1995 — and millennials — those born between 1980 and 1995 — continue to spend on luxury.

Nearly three-quarters of existing consumers in those cohorts have said they would increase or maintain their luxury spending in 2021.

However, global conditions are unlikely to return to normal before 2022 or even 2023. “Chinese consumers are also likely to remain cautious about international travel even after borders reopen,” the report noted, adding that, as a result, most luxury brands believe that domestic growth will continue in 2021 at about a 30% level.

Updated: 12-25-2020

Chinese Stocks Have Banner Year, Gaining Nearly $5 Trillion

Surge aided by country’s rapid recovery from Covid-19, string of initial public offerings, rally in shares of consumer and technology companies.

Chinese stocks have gained nearly $4.9 trillion in value this year, aided by the country’s rapid recovery from the new coronavirus, a string of initial public offerings, and a blistering rally in shares of consumer and technology companies.

Chinese businesses listed on exchanges from New York to Shanghai have added 41% to $16.7 trillion, according to S&P Global Market Intelligence data for the year through Dec. 22. That outpaces a 21% run-up for American companies to $41.6 trillion.

“It’s been a very strong year” for China, said Brendan Ahern, the chief investment officer for KraneShares in New York. He said the country’s economic rebound, global investors’ appetite for high-growth stocks, and a robust IPO market had all worked in China’s favor: “The end result is a pretty dramatic growth in the size of capital markets.”

China accounts for nearly a third of world-wide increases in stock-market capitalization in 2020, the S&P data shows. Global stocks have gained 16% to $104 trillion.

The surge comes despite heightened friction with the U.S.over technology, trade and finance—and attempts by the U.S. government to discourage American pension funds and other institutions from holding Chinese stocks.

Legislation signed this month by President Trump could force Chinese companies to delist from exchanges in New York if their audit papers aren’t inspected by U.S. regulators for three consecutive years.

The Trump administration has also moved to stop Americans investing in firms it says help the Chinese military, leading MSCI Inc. and other index providers to drop some stocks from their benchmarks.

The advances have cemented China’s position as the foremost emerging market. At the end of November, shares of Chinese companies made up more than 40% of two popular stock indexes tracking developing countries, from under 30% five years ago.

“If you buy global emerging markets, you are buying disproportionately Asia, and disproportionately China,” said Herald van der Linde, head of equity strategy for the Asia-Pacific region at HSBC.

E-commerce giant Alibaba Group Holding Ltd. alone accounted for nearly 7% of the 26-country MSCI Emerging Index—or more than Brazil’s entire contribution to the benchmark—at the end of November.

The importance of China, in particular Alibaba, in the indexes became a negative on Thursday when Beijing said it was taking action against the company as well as its financial-technology affiliate, Ant. Alibaba shares fell 13% in New York trading on Thursday, pulling down the index modestly. Alibaba shares are down more than 25% since their late October peak.

There are several drivers of China’s outperformance. For one, the country has proved resilient in 2020, becoming the first major economy to return to post-coronavirus growth.

That has shored up confidence in Chinese equities and in companies serving Chinese households, such as distiller Kweichow Moutai Co. Foreign holdings of shares in yuan leapt more than 30% in the first nine months of 2020, to $404 billion, central bank data shows.

China’s currency has also gained more than 6% against the dollar in 2020, boosting the dollar value of yuan-denominated shares.

Meanwhile, shares in internet groups such as Tencent Holdings Ltd. , Pinduoduo Inc. and Meituan have soared, as Chinese consumers have shifted even more of their spending and habits online. Globally, low interest rates and a financial system flush with funds have also fed investors’ enthusiasm for high-growth businesses that can flourish even in a pandemic.

Emerging Leader

China’s weighting in emerging market stock indexes has risen sharply in recent years. That in turn has lifted its standing in exchange-traded funds tracking these benchmarks.

China Inc.’s listed value has additionally been swelled by a new generation of market debutantes, in businesses including telemedicine, electric cars and bottled water. Chinese companies that went public this year together accounted for nearly $1.3 trillion in market value, the S&P data shows.

The rally has further boosted China’s standing in indexes, which are used by portfolio managers to benchmark performance, helping steer trillions of dollars in investment.

The indexes also determine the makeup of exchange-traded funds such as BlackRock’s iShares $28 billion MSCI Emerging Markets ETF and Vanguard’s $95 billion FTSE Emerging Markets ETF, which are held by many individual investors.

Chinese companies traded in New York, Hong Kong, Shanghai and elsewhere made up 41% of MSCI’s widely followed Emerging Markets stock benchmark in November and 45% of the equivalent for FTSE Russell, a unit of London Stock Exchange Group PLC.

China’s importance to global investors, and its share of benchmarks, is likely to grow in 2021 and beyond. For now, its huge onshore markets still punch below their weight relative to their dollar values. That is because indexes assign lower importance to harder-to-access markets and to companies where large chunks of stock are held by major long-term shareholders.

The value of yuan-denominated stocks listed in Shanghai and Shenzhen was recently close to $11 trillion, making mainland China’s stock market second only to the U.S. in size.

But so-called A shares were added to major indexes only in recent years, and their influence is scaled back. MSCI, for example, treats a company worth $10 billion as if it is worth $2 billion, by applying a 20% “inclusion factor” to limit the importance of A shares. Altogether China’s onshore stocks constitute about 5% of its main emerging markets gauge.

Alexander Treves, an investment specialist for emerging markets and Asia-Pacific equities at J.P. Morgan Asset Management, said that at the margin investors were considering boosting their holdings of shares that trade in mainland China. “Compared to the size of its companies, it’s still underrepresented” in benchmarks, he said.

Inclusion factors for A shares could rise to 100% within a few years, while more Chinese companies will go public, and free floats at others would increase, all adding to China’s influence, said Mark Makepeace, the former head of LSE’s index business and co-author of “FTSE: The Inside Story.”

“Everyone will have to take a view on China,” Mr. Makepeace said. “Making a call on China and the U.S., in five to seven years’ time, will be what determines your success. Get ‘em wrong and then you’ll underperform.”

Updated: 1-1-2021

China Finishes Off A Wild Year With More Manufacturing Growth

The economy also showed strength outside its factories.

China finished 2020 with a 10th consecutive month of expansion in its manufacturing sector, capping a dramatic year that saw the country’s factories incapacitated by the pandemic, only to roar back as a growth engine for China and the world.

Beijing’s official gauge of factory activity finished the year at 51.9, in line with expectations and remaining above the 50 mark that separates expansion from contraction, extending a streak that dates back to March. The reading was slightly lower than November’s 52.1 reading.

The Chinese economy also showed strength outside its factories. China’s nonmanufacturing PMI, which covers services like retail, aviation and software as well as the real estate and construction sectors, came in at 55.7 in December, the National Bureau of Statistics said Thursday. Though that reading was down from 56.4 in November, it marked a 10th month of expansion and remains near the highest levels in more than a decade.

Taken together, the robust finish to the year is likely to affirm economists’ forecasts for gross domestic product growth in the fourth quarter and full year of more than 6% and 2%, respectively. It also suggests a strong start to 2021, with economists both inside and outside the government projecting economic growth of 8% or more in the coming year.

Earlier this month, Goldman Sachs economists raised their GDP growth forecast for the fourth quarter to 6.8% from a previous estimate of 5.2%, citing expectations for “stronger momentum heading into the new year.” For the full year, Goldman raised its GDP estimate to 2.4% for 2020 from 2.0% previously, and to 8.0% for 2021, up from an earlier forecast of 7.5%.

Also likely to improve the overall statistical picture was a downward revision by China’s statistics bureau on Wednesday, which cut the country’s official GDP figure for 2019 to 6.0% from a previous reading of 6.1%. The lower base could provide a small boost to China’s GDP number for 2020. The statistics bureau is set to publish full-year figures on January 18.

Thursday’s PMI data showed some reasons for concern below the surface. The manufacturing subindexes measuring production, total new orders and new export orders all fell in December.

Even so, the subindex for new export orders stood above 50 for a fourth straight month, suggesting continued overseas demand for Chinese-made goods. A subindex measuring Chinese exporters’ business outlook rose for an eighth consecutive month in December to its highest level this year, reflecting manufacturers’ increased confidence in the global recovery, said Zhao Qinghe, an economist with the statistics bureau.

Even with the slight December retreat in the headline manufacturing number, Mr. Zhao said the pace of the manufacturing recovery picked up for the fourth quarter as a whole.

China’s manufacturing PMI didn’t fall by as much as it might have in December, given that several Western countries launched another round of large-scale coronavirus lockdowns in mid-December, said Iris Pang, an economist with ING Bank in Hong Kong.

Ms. Pang credited China’s continued strength to the fact that other exporting nations in Asia were also hit by a resurgence in the pandemic.

“Many orders flowed back to China,” she said. “China, once again, has played a complementary role in exporting.”

On the nonmanufacturing side, subindexes measuring business activity in the service sector and new orders for the entire nonmanufacturing sector both fell, though another measuring construction activity rose to 60.7 from the 60.5 in the previous month.

Updated: 1-18-2021

China Is The Only Major Economy To Report Economic Growth For 2020

GDP rises 6.5% from a year earlier in the fourth quarter.

China’s economy expanded by 2.3% in 2020, roaring back from a historic contraction in the early months of the year to become the only major world economy to grow in what was a pandemic-ravaged year.

China’s ability to expand, even as the world struggled to control a deadly virus that has killed more than two million people, underscores the country’s success in largely taming the coronavirus within its borders and further cements its place as the dominant economy in Asia.

China’s growth makes it an outlier among large economies. The World Bank expects the U.S. economy to have contracted by 3.6% and the eurozone’s to have shrunk by 7.4% in 2020, contributing to a global economic pullback of 4.3%.

China’s economy, the world’s second largest, finished the year on a high note. Gross domestic product rose 6.5% in the fourth quarter from a year earlier, according to data released by the National Bureau of Statistics on Monday, marking China’s best quarter of year-over-year growth in two years.

By comparison, China’s GDP rose by 3.2% and 4.9% in the second and third quarters of the year, respectively, after suffering a historic 6.8% contraction in the first.

“In an extraordinary year, China’s economy was able to record an extraordinary achievement, handing over a result that satisfied the Chinese people, attracted the attention of the world and which can be written in the annals of history,” Ning Jizhe, head of the statistics bureau, said Monday. Mr. Ning said in 2020 the size of China’s economy surpassed 100 trillion yuan, or the equivalent of $15.4 trillion, while GDP per capita topped $10,000 for the first time.

The results also beat analysts’ expectations. Economists polled by The Wall Street Journal expected growth of 6% in the fourth quarter and an expansion of 2.2% for the full year.

China’s full-year growth rate of 2.3% marked the country’s weakest annual economic expansion since Mao Zedong’s death in 1976. Before 2020, the worst economic year of China’s “reform and opening” era that began in the late 1970s came in 1990, the year after the Tiananmen Square crackdown, when the economy grew by 3.9%.

By logging 6.5% growth in the final quarter, China’s economy has reclaimed the growth trajectory that it had been on before the coronavirus first began to spread across the city of Wuhan around a year ago. In the last three months of 2019, the last full quarter before the coronavirus began disrupting the global economy, China’s GDP rose 6% from a year earlier, contributing to a 6.1% expansion for the full year.

This time last year, Chinese authorities in and around Wuhan began reporting large numbers of people who were infected with what was then a mysterious viral pneumonia. After Beijing took the unprecedented step of locking down Wuhan on Jan. 23 last year, economic activity across the country ground to a virtual halt for much of the following months until the virus was largely stamped out.

Unlike governments in Western countries like the U.S. that focused their stimulus efforts on lowering borrowing rates and handing out money to consumers, Beijing focused on restarting factories while keeping interest rates relatively higher.

China’s factories began to come back online in April, just as much of the rest of the globe’s manufacturing capacity was taken out by the spreading pandemic. That allowed China to produce and export mass quantities of medical equipment, like face masks, and work-from-home equipment, such as laptops and computer monitors.

Domestic consumption, however, continued to languish well into the summer, as Chinese consumers were worried about a resurgence in infections. Retail sales didn’t return to their pre-coronavirus levels until August and have remained relatively weak as a contributor to the overall economy as outbreaks have continued to pop up.

On Monday, China’s statistics bureau said retail sales rose by just 4.6% in December from a year earlier, lower than November’s 5% increase and a 5.5% expansion expected by economists. For the full year, retail sales fell 3.9% in 2020 from a year earlier, compared with 2019’s 8% growth.

A current wave of new cases across northern China, centered in Hebei province—which surrounds Beijing—is the worst in more than half a year, with hundreds of local infection cases showing symptoms in recent days. The outbreak threatens to derail consumer spending during next month’s long Lunar New Year holiday.

Even so, many forecasters expect China to grow by another 8% or more in 2021 as other parts of the economy continue to make up for the lost time last year. Data released Monday showed employment and wages remain robust, which could help support consumption.

China’s headline measure of joblessness, the official urban surveyed unemployment rate, held steady at 5.2% in December, on par with the pre-virus level a year earlier, according to the statistics bureau.

Migrant workers’ wages rose by 2.8% in the final three months of 2020, compared with a 2.1% increase in the previous quarter.

For now, the economic data released Monday reveals a Chinese economy that continues to be driven primarily by industrial production and investment rather than consumption.

Industrial output rose 7.3% in December from a year earlier, accelerating from 7% growth in November and beating expectations for a 6.8% increase among economists polled by The Wall Street Journal. For the full year, industrial production increased 2.8% from a year earlier in 2020, weaker than 2019’s 5.7% increase.

Fixed-asset investment grew 2.9% in 2020 from a year earlier, speeding up from a 2.6% year-over-year increase recorded for the first 11 months of the year but slower than 2019’s full-year growth of 5.4%.

Any further recovery will likely have to take place without additional aid from the government, said Xing Zhaopeng, a Shanghai-based economist at ANZ.

With local governments in China still swimming in unspent stimulus money left over from last year, which Mr. Xing estimates to be about 2 trillion yuan, the equivalent of around $300 billion, he argues Beijing will likely restrict the amount of debt local governments can issue this year.

“Given the stronger-than-expected economic growth in the fourth quarter, China’s policy exit could come sooner than expected,” Mr. Xing said, pointing to recent remarks by officials indicating a withdrawal of stimulus measures introduced last year.

China’s Growth Beats Estimates As Economy Powers Out Of Covid

 

China’s economy roared back to pre-pandemic growth rates in the fourth quarter as its industrial engines fired up to meet surging demand for exports, pushing the full-year expansion beyond estimates and propelling its global advance.

Gross domestic product climbed 6.5% in the final quarter from a year earlier, pushing growth to 2.3% for the full year. That leaves the world’s second-largest economy driving global growth and potentially passing U.S. GDP sooner than previously expected.

The V-shaped recovery from the biggest slump on record was engineered by getting Covid-19 under control and deploying fiscal and monetary stimulus to boost investment. Growth accelerated as the nation’s factories revved up to meet demand for medical equipment and work-from-home devices in an export bonanza that saw it ship 224 billion masks from March through December — almost 40 for every man, woman and child on the planet outside of China.

While the revival makes China the only major global economy to have expanded last year, it didn’t come without cost as long-term imbalances worsened. Consumption lagged industry as workers tightened their belts and income inequalities widened, as they have elsewhere around the world.

“There’s a huge discrepancy between production and consumption,” said Bo Zhuang, chief China economist at TS Lombard. “I am not very optimistic about domestic demand, as wage growth is not back to pre-pandemic levels.”

The stimulus to support the economy through the pandemic has been accompanied by a surge in debt which authorities are now seeking to curb as the recovery takes hold. At a December meeting to lay out economic goals for 2021, the ruling Communist Party signaled that stimulus would be gradually withdrawn, although it would avoid any “sharp turns” in policy.

The Chinext Index of small caps closed 1.9% higher, while the yield on the most actively traded contract of 10-year government bonds rose 3 basis points as of 4:12 p.m. in Shanghai to 3.17%, set for the highest in two weeks. The onshore yuan weakened 0.07% to 6.4864 per dollar as the greenback rebounded.

Emerging from the pandemic larger than when it started is a capstone to a dramatic year for the world’s second-largest economy, which began 2020 with a historic first-quarter slump when the coronavirus lockdowns brought most activity to a halt.

What Bloomberg Economics Says…

“The Chinese economy accelerated to a strong finish to 2020, though challenges at the start of 2021 could put a damper on growth.”

Data for December suggests that the gap between demand and supply is opening up again, and this may reflect the impact on consumption from recent viral outbreaks.

— Chang Shu, chief Asia economist

 

Even though China’s annual growth was the slowest in four decades, a global contraction in output means China increased its share of the world economy at the fastest pace on record, according to World Bank estimates. Based on projections from the International Monetary Fund, China will now overtake the U.S. by 2028, two years earlier than previously predicted, according to Nomura Holdings Inc.

“China is the only major economy to squeak out growth last year, a testament to their successful pandemic containment efforts,” said David Chao, global market strategist for Asia Pacific (ex-Japan) at Invesco Ltd. “Looking forward to 2021, all eyes will be focused on whether China’s dual-circulation strategy — relying on internal consumption-driven growth — will take off.”

Economists expect China’s GDP will expand 8.2% this year, continuing to outpace global peers even as they begin to recover due to a roll-out of vaccines.

Growth this year will depend on whether China can prevent a large-scale resurgence of virus infections, and on whether it can pass the baton of spending from local governments and large state companies to consumers and private businesses. The government has recently imposed travel restrictions on several northern cities due to small-scale virus outbreaks, including locking down the capital of Hebei province, a city of 11 million people near Beijing.

Consumption Lags

Consumption spending per capita fell 4% in 2020 from a year earlier after adjusting for inflation, while investment in fixed assets such as real estate and infrastructure grew 2.9%, according to the statistics bureau. Industrial production surged, with China producing more than 1 billion tons of crude steel in 2020, an annual record.

“There is relatively large room” for China to raise the contribution rate of final consumption to economic growth, the head of the statistics bureau Ning Jizhe said after the data was released at a press conference in Beijing. For 2021, “it is necessary to improve the consumption ability of residents, improve consumption policy and environment, and cultivate more consumption growth drivers.”

China’s increasingly tense relationship with the U.S. could also weigh on the outlook. In his final weeks in office, President Donald Trump has tightened restrictions on Chinese businesses to curb the nation’s dominance in high-tech industries, roiling financial markets. It’s still unclear if the incoming administration under Joe Biden will maintain those measures.

Updated: 1-24-2021

China Overtakes U.S. As World’s Leading Destination For Foreign Direct Investment

Flows into America nearly halved as Covid-19 dragged on the economy in 2020.

China overtook the U.S. as the world’s top destination for new foreign direct investment last year, as the Covid-19 pandemic amplifies an eastward shift in the center of gravity of the global economy.

New investments by overseas businesses into the U.S., which for decades held the No. 1 spot, fell 49% in 2020, according to U.N. figures released Sunday, as the country struggled to curb the spread of the new coronavirus and economic output slumped.

China, long ranked No. 2, saw direct investments by foreign companies climb 4%, the United Nations Conference on Trade and Development said. Beijing used strict lockdowns to largely contain Covid-19 after the disease first emerged in a central Chinese city, and China’s gross domestic product grew even as most other major economies contracted last year.

The 2020 investment numbers underline China’s move toward the center of a global economy long dominated by the U.S.—a shift accelerated during the pandemic as China has cemented its position as the world’s factory floor and expanded its share of global trade.

While China attracted more new inflows last year, the total stock of foreign investment in the U.S. remains much larger, reflecting the decades it has spent as the most attractive location for foreign businesses looking to expand outside their home markets.

Foreign investment in the U.S. peaked in 2016 at $472 billion, when foreign investment in China was $134 billion. Since then, investment in China has continued to rise, while in the U.S. it has fallen each year since 2017.

The Trump administration encouraged American companies to leave China and re-establish operations in the U.S. It also put Chinese investors on notice that acquisitions in the U.S. would face new scrutiny on national security grounds—cooling Chinese interest in American deal making.

The sharper drop in foreign investment in the U.S. last year reflects the broader economic downturn due to the effects of the coronavirus pandemic, said Daniel Rosen, founding partner of Rhodium Group, an independent research firm in New York, who has long analyzed the U.S.-China economic relationship.

“I don’t think one can say anything confidently about the impact of the FDI downturn in the U.S., compared to all the other hits on the U.S. economy,” he said.

It is natural that foreign investment would decline sharply in the U.S. under the circumstances because it has an open, market economy, while China doesn’t, Mr. Rosen said. Looking ahead, he said, “There is no reason to be concerned about the outlook for the FDI in the United States providing that the U.S. is sticking with its basic open-market competitive system.”

Foreign direct investment captures things like foreign companies’ building new factories or expanding existing operations in a country or their acquisitions of local companies.

In China, the flow of investments by multinational companies continued despite the upheavals of the pandemic, with companies from U.S. industrial giant Honeywell International Inc. and German sportswear maker Adidas AG expanding their operations there.

Unctad doesn’t expect to see a significant revival of foreign direct investment this year, globally or in countries that saw falls in 2020.

“Investors are likely to remain cautious in committing capital,” said James Zhan, Unctad’s director of investment and enterprise. He doesn’t expect a real rebound to come until 2022. Even then, he said, “the road to full FDI recovery will be bumpy.”

While the sharp drop in foreign investment in the U.S. was due to the pandemic, it also is making companies rethink future investments, said Joseph Joyce, professor of international relations and economics at Wellesley College.

“Companies are reassessing their policies about global supply chains, about foreign markets, about their own use of technology,” Mr. Joyce said. “The pandemic is making all these companies rethink the most basic assumption about where they are located.”

The Unctad numbers show a stark divide between East and West in the global economy. In 2020, East Asia attracted a third of all foreign investment globally, its largest share since records began in the 1980s. India saw a 13% increase, driven largely by rising demand for digital services.

In the West, the European Union suffered a 71% drop. The U.K. and Italy, which have suffered high mortality rates and deep economic contractions, attracted no new investment. Germany, which has fared better on both counts, saw a 61% drop.

When the pandemic first struck at the beginning of last year, Unctad expected China to experience a large drop in foreign investment and the U.S. to be largely unscathed. But China’s economy reopened in April just as the U.S. and Europe started a series of continuing lockdowns and disruptions.

Beijing’s ability to quickly control the coronavirus within its borders helped its economy rebound relatively quickly and reinforced China’s appeal—even before President Biden’s inauguration, which some investors hope could usher in a new period of less tempestuous U.S.-China ties.

After FDI into China plunged in the first few months of 2020, Chinese officials scrambled to reassure foreign investors and accommodate any concerns they might have. “We must implement targeted policies to arrest the slide in foreign trade and foreign investment,” China’s premier, Li Keqiang, told the country’s cabinet in March.

Some foreign companies put their China expansion plans on hold and in some cases began withdrawing their investments. But as China’s recovery gained steam and the rest of the world began to look increasingly rocky, foreign companies moved to pour more money into China, viewing the country as a production base and as a critical growth market for its products.

Walmart Inc. said at an investment conference hosted by the city government in Wuhan, the city that was the first center of the pandemic, that it would invest 3 billion yuan, equivalent to $460 million, in Wuhan over the next five years. Starbucks Corp. is investing $150 million to build a roasting plant and innovation park in the eastern Chinese city of Kunshan.

Tesla Inc., meanwhile, is expanding capacity at its plant in Shanghai and adding a research facility, while Walt Disney Co. is continuing construction of a new theme area for its Shanghai Disneyland park—despite a second straight year of lower attendance at the park.

Medical and pharmaceutical investments have been especially active as the coronavirus hit the global economy. Chinese state broadcaster Chinese Central Television reported in April that several global pharmaceutical companies are pushing ahead with their expansion in China, including AstraZeneca PLC, which is in the midst of setting up regional headquarters in at least five Chinese cities.

The resilience of foreign investment in China is contrary to earlier expectations that foreign businesses would seek to reduce their heavy reliance on the country as a key part of their supply chains, having seen some disruption as the results of new tariffs on trade between the country and the U.S.

Seoul Semiconductor Co. , a South Korean chip maker with extensive operations in China, illustrates the difficulty of exiting China, despite numerous incentives to do so. The company in 2017 began looking at moving some production of its light-emitting components to Vietnam.

“We were very dependent on China,” said Hong Myeong-ki, the company’s co-chief executive officer. But though the company manufactures roughly half of its products in Vietnam, Mr. Hong now has no plans to move out of China.

The same trend can be seen among Japanese companies operating in China, just 9.2% of which said they were moving or considering moving production out of China in a September survey by the Japan External Trade Organization, the lowest such level in five years.

“They need to reduce overreliance on supply chains in one single market,” said Ding Ke, a Tokyo-based researcher with Jetro. “But the bigger risk they identified is losing the China market.”

Updated: 1-25-2021

China’s Comac Aims To Rival Boeing And Airbus In The World’s Biggest Market

As the pandemic continues to weigh on the aviation industry, Chinese aircraft manufacturer Comac has been pushing ahead with testing a new passenger jet. If successful, the C919 could rival Boeing and Airbus in the largest aviation market in the world. Photo illustration: Sharon Shi.

Yi Says PBOC Will Balance Stabilizing Growth And Curbing Risks

The People’s Bank of China will seek to balance supporting economic growth and curbing emerging risks, Governor Yi Gang said, signaling a continuation of the central bank’s existing policy stance.

“Going forward, China’s monetary policy will, on one hand, adjust to new economic developments in a timely manner, and on the other hand maintain policy stability to avoid a policy cliff,” the central bank chief said at a virtual conference hosted by Hungary’s central bank on Monday.

He added that “China will try to maintain normal monetary policy for as long as possible and keep our yield curve upward sloping.”

China’s economy recorded growth of 2.3% last year despite the coronavirus slump, making it the only major economy to post an expansion. It did so without a major increase in monetary-policy stimulus, with officials attempting to keep control of debt levels.

With the recovery picking up speed, authorities have signaled they want to further scale back on stimulus and curb debt. Yi said the country’s total debt-to-output ratio climbed to around 280% at the end of last year — up 20 percentage points from the previous year — and he expects it to stabilize in 2021.

The central bank has vowed there won’t be any sharp turn in monetary policy as it seeks to maintain enough support in areas where the recovery is still fragile. Top PBOC officials recently said the nation’s interest rates are appropriate, indicating they are unlikely to make an adjustment anytime soon.

While the PBOC’s priorities for this year include stabilizing the country’s debt ratio and bringing credit growth in line with the expansion in nominal gross domestic product, Yi also pledged to promote the development of green finance.

Yi said areas for improvement include revamping the system for green financial standards, improving supervision and disclosure requirements for green-finance-related information, and enhancing policy incentives and support tools for reducing carbon emissions.

Updated: 3-4-2021

China Sets 2021 GDP Growth Target At Over 6%

Premier Li Keqiang says nation aims to create more than 11 million new jobs this year.

Chinese leaders said they would target gross domestic product growth of 6% or more this year, a relatively modest goal that nonetheless signals continued optimism after a year in which the coronavirus eviscerated the global economy.

The growth target of 6% or more, announced Friday in Beijing by Premier Li Keqiang, is comfortably lower than most economists’ consensus expectations for the world’s second-largest economy to grow by 8% or more this year.

Even so, many economists had predicted that Beijing would forgo the numerical target altogether, after a year in which the uncertainties of the Covid-19 pandemic pushed China to drop its target for the first time since 1994.

China’s economy recovered relatively quickly from an initial outbreak centered in the Chinese city of Wuhan, and finished the year with an economic expansion of 2.3%, becoming the only major economy to report growth in 2020.

With growth momentum approaching pre-virus levels, Beijing policy makers have signaled that they plan to gradually withdraw stimulus measures and focus instead on reining in debt and heading off an emerging bubble in the real-estate market.

Mr. Li said in his annual government report on Friday that the government would seek to cut the fiscal deficit ratio target to 3.2% of China’s projected GDP this year, compared with a target of above 3.6% in 2020.

Beijing also plans to reduce the amount of debt that local governments are permitted to raise this year. China plans to let localities issue 3.65 trillion yuan in local government special-purpose bonds in 2021, lower than the 3.75 trillion yuan earmarked last year. The bonds are primarily used to fund infrastructure projects.

Mr. Li said China aims to keep consumer price inflation at around 3% in 2021, compared with last year’s 3.5% target and its actual increase of 2.5%.

The government also said it plans to create 11 million new jobs this year, higher than the new-jobs target of nine million for 2020. It also aimed to cap the urban surveyed jobless rate at 5.5% in 2021, compared with a ceiling of 6% in 2020.

Updated: 3-9-2021

China’s Car Sales More Than Quadrupled In February

Sales slumped in 2020 when the country was in the grip of the Covid-19 pandemic.

China’s car sales surged in February from a year earlier when the country was at the height of the coronavirus pandemic and consumers were locked down in their homes.

Retail sales of passenger cars last month more than quadrupled to 1.18 million vehicles compared with the year before, the China Passenger Car Association said Tuesday. The jump reflects the low sales during the same period last year. Sales plummeted 79% in February 2020 as many cities were locked down and factories and dealerships were shut.

In February, 97,000 electric cars were sold, CPCA said. That is a more-than-sevenfold increase from a year earlier, but represents a 38% decline on month. Tesla Inc. sold 18,318 Shanghai-made Model 3s and Model Ys last month, the group’s data showed.

Since last year, China has been offering various subsidies and incentives to help boost car sales and mitigate the fallout from the Covid-19 pandemic. In recent months, Chinese regulators have announced more measures, including further relaxing vehicle-purchase restrictions and building more charging facilities for electric cars.

Updated: 3-15-2021

China’s Soaring Economic Activity Masks Uneven Recovery

China’s economic activity surged in the first two months of the year compared with a year ago, though the figures showed an uneven recovery with strong industrial output fueled by exports but lagging consumer spending.

The official data released Monday show unprecedented growth rates of more than 30% for key indicators, largely due to distortions when compared to last year’s shutdowns. Industrial production growth of 35.1% beat economist’s expectations of 32.2%, reflecting a shorter Lunar New Year holiday this year as the government encouraged workers to remain in factories rather than return to their hometowns.

Combined with strong export data for January and February, the statistics show that China has largely continued the pattern established last year of a recovery based on growth of industrial production for export and investment in sectors such as real estate, delaying Beijing’s efforts to re-balance the economy toward domestic consumer demand.

Retail sales reported by China’s statistics bureau climbed 33.8% in the period, beating a forecast of 32% in a Bloomberg poll of economists. On a two-year average basis, which corrects for the huge drop seen last year as China introduced pandemic restrictions, retail sales growth was 3.2%, a sharp contrast with 8.1% growth in industrial output over the same period.

Retail sales in February rose only 0.56% from the previous month, the data showed. This indicates that “the Lunar New Year may have had a weaker boost to national consumption than expected,” according to Bruce Pang, an economist at China Renaissance Securities.

China’s stock market fell Monday after the data, with the CSI 300 Index down 3.0% at 2:20 p.m. in Shanghai after losing 2.2% last week. The onshore yuan weakened slightly against the dollar. The central bank kept market liquidity neutral earlier Monday, prompting money market rates to rise on persistent concerns about liquidity.

The central bank’s action “just offset maturity, indicating the People’s Bank of China’s tightening intention,” said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. “Since the start of this year, PBOC has net drained over 600 billion yuan in funds from the market in order to curb asset bubbles.”

Travel Restrictions

The government imposed travel restrictions before the new year holidays, which fell in February this year, to curb sporadic virus cases in some parts of the country. That helped to boost industrial output, with factories able to remain open or resume production earlier than usual to meet soaring export demand. But it also suppressed spending on travel, restaurants and leisure activities.

Fixed-asset investment rose 35%, well below a projection of 40.9%. Since real estate has been the biggest driver of investment growth over the past year, that likely reflects Beijing tightening financing for property developers. Economists expect investment by manufacturers will strengthen in 2021 following a recovery in their profits. However, the lower-than-expected investment figures showed manufacturers are still cautious, Pang added.

“Domestically, the unbalanced recovery is still notable and the foundation for the economic recovery is not solid yet,” Liu Aihua, a spokeswoman for China’s statistics bureau said in a statement. The urban unemployment rate of 5.5% in February remained above pre-pandemic levels, with the rate among younger people particularly high.

“The retail sales and industrial consumption figures were widely above estimates and shows there is resilience in the economy,” said William Ping, managing director at Peaceful Investment Co. Ltd in Shenzhen. “Currently the closest thing to a worry of mine is whether the nation will put enough emphasis on domestic consumption in the long run,” he added.

What Bloomberg Economics Says…

* This makes for a lopsided but robust start to the year. It puts the economy on a path to easily clear the growth target of above 6% for 2021, a low bar given the base effect. Fiscal support looks set to be rolled back only gradually — which should keep a prop under the economy. This backdrop could reduce the probability of economy-wide easing on the monetary front.

China is still the only major economy to have powered out of the pandemic after early control over the virus and then surging global demand for medical goods and work-from-home devices. The economy grew 2.3% in 2020 and is forecast by economists to expand 8.4% this year.

The government is targeting more modest growth of “above 6%” in 2021, allowing officials to focus on longer-term challenges such as technological upgrading and curbing risk in the financial system. Beijing has signaled it wants to scale back its pandemic stimulus, with analysts predicting a gradual reduction in monetary and fiscal support.

Updated: 3-31-2021

China’s Consumers Boost Its Economic Recovery

After a year in which manufacturing drove the rebound, services and construction activity jumped in March.

China’s economic recovery picked up a surprising amount of steam in March, boosted by strong domestic consumption and unquenchable foreign demand for Chinese-made goods.

The country’s official manufacturing purchasing managers index, a gauge of factory activity, hit a three-month high of 51.9 in March, topping February’s reading of 50.6 with the 50 mark separating expansion from contraction, according to data released Wednesday by the National Bureau of Statistics. Economists polled by The Wall Street Journal had forecast a reading of 51.2.

More encouraging for China’s leaders—who have been eager to rebalance the economy toward consumer spending after a year in which manufacturing drove the recovery—a parallel gauge of services and the construction industry jumped even more in March, suggesting a broadening of consumer activity.

The official nonmanufacturing PMI surged to 56.3 from February’s 51.4 reading, the statistics bureau said Wednesday. That is the highest reading in four months.

Since the coronavirus shut down China’s economy in early 2020, the world’s second-largest economy has powered back on the strength of its factories, which have churned out pandemic-related medical equipment and computer gear for export.

That strength has largely carried over into 2021, even as much of the world has adjusted to pandemic life. In March, the PMI subindex for exports, which had slipped into contraction territory in the previous month, returned to expansion with a reading of 51.2—a move that economists attributed to stimulus measures in the U.S. and other large economies.

Factory production climbed, too, in March after China’s Lunar New Year holiday came to an end. Though many workers remained at their posts during the weeklong holiday this year at the encouragement of authorities, the postholiday boost was perceptible, with the subindex measuring a production increase to 53.9 from 51.9 in February. Total new orders, meanwhile, increased to 53.6 from 51.5 in the previous month.

In the nonmanufacturing realm, the official subindex measuring business activity in the service sector strengthened to 55.2 in March, from a relatively subdued reading of 50.8 in February, as China brought a resurgence of infections under control.

Analysts expected the strong PMI numbers on Wednesday to help China’s economy finish the first quarter on a high note. In the first quarter of 2020, China’s economy shrank by 6.8% compared with a year earlier, as the country reeled from the initial shock of the coronavirus.

Last year’s historic contraction sets China up to record a sizable year-over-year jump when it reports first-quarter gross domestic product on April 16. Some economists are expecting China to report year-over-year growth of 15% or more in the first quarter and 8% or more for the full year.

Despite the encouraging numbers released Wednesday, some economists questioned the sustainability of the recovery, particularly in the export sector.

“The current strength of exports is likely to unwind over the coming quarters as vaccinations allow a return to more normal global consumption patterns,” Julian Evans-Pritchard, an economist with Capital Economics, told clients in a note Wednesday.

Nomura economists, too, expect both the manufacturing and nonmanufacturing PMIs to moderate in April. As a result, they said Wednesday’s better-than-expected numbers were unlikely to affect Beijing’s monetary policy, which has tilted toward not withdrawing last year’s stimulus measures. The economists said they expected “no sharp shift” in the coming months.

Updated: 4-9-2021

China Car Sales Soar To Pre-Pandemic Levels

Tesla has its best month in the country, as demand for electric vehicles stand out in the market.

Auto sales in China recovered to pre-pandemic levels in the first three months of 2021, though the world’s largest car market was subdued, with the exception of red-hot demand for electric vehicles.

Passenger-vehicle sales increased 69% year over year to 5.09 million in the January-to-March period, the China Passenger Car Association said Friday. That put sales back where they were two years ago, still down significantly compared with 2018’s record March quarter, when 5.67 million cars were sold in China.

The country, a critical market for global auto makers because of its unrivaled scale, is unlikely to regain the heights of the previous decade’s boom until around 2024, some analysts say. The weak performance of local stock markets since February has sapped Chinese consumers’ appetite for buying new vehicles in recent weeks, the association said.

Once a key source of growth, China has become a tough place for U.S. auto makers in particular. General Motors Co. sold 780,200 vehicles in the January-to-March period, its worst first quarter in China since 2012, not counting virus-hit 2020.

A long-term decline in Chevrolet sales has weakened GM’s position in its only major global market outside the U.S. Chevrolet is one of several once-popular foreign brands to have been squeezed by China’s more competitive market conditions. Its sales of 64,800 in the March quarter were a fraction of the roughly 170,000 Chevrolets sold in China in the same period in 2015.

Ford Motor Co. has stabilized its China business after years of dwindling sales. Its 153,822 sales for the quarter were an improvement on the 136,279 vehicles it sold in the country in the same period two years ago. The company sold more than twice as many cars in the same period in 2016, its best year in China.

In contrast, premium auto makers have continued to thrive as greater numbers of affluent Chinese consumers trade up from mass-market brands, a trend that has chiefly benefited German auto makers. BMW AG and Mercedes-Benz-maker Daimler AG both broke sales records in the quarter, selling 229,748 and 222,520 cars in China, respectively.

Electric-vehicle sales also surged in the quarter, with 437,000 units sold—a nearly 8% market share. Those increasing sales have brought EVs into the mainstream in megacities such as Beijing and Shanghai, where most of the country’s EVs are sold.

Tesla Inc. had by far its best month in China, selling 35,478 locally built Model 3 and Model Y cars, according to the passenger-car association, suggesting that recent controversies over quality issues and the potential for Tesla cars to spy on Chinese government facilities have done little to dent the company’s local appeal. Of the vehicles sold last month, 25,327 were Model 3s and 10,151 were Model Ys, the association said.

The 69,280 vehicles Tesla sold in China during the first quarter accounted for more than one-third of the EV maker’s global Model 3 and Model Y sales during the period. Tesla started delivering the made-in-China Model Y in January.

While China has scores of EV producers, a small group dominates the country’s fast-growing market. The top three players—SAIC-GM-Wuling Automobile Co., one of GM’s local joint ventures; Tesla; and BYD Co.—collectively had a 55% market share in March, according to the China Passenger Car Association.

U.S.-listed Chinese EV startups Li Auto Inc., Nio Inc. and XPeng Inc. all reported record quarterly sales, though their combined tally of roughly 46,000 cars for the first quarter means they still significantly lagged behind the market leaders in terms of volume.

Updated: 4-19-2021

Foreign Buying of Chinese Government Bonds Stalls

Global investors pare China holdings as yields rise elsewhere.

A huge run-up in foreign holdings of Chinese government bonds has stalled, with international investors hitting pause on their purchases as China’s interest-rate advantage over the U.S. has shrunk.

International ownership of Chinese government debt declined slightly in March to the equivalent of $313 billion, according to the China Central Depository & Clearing Co. Holdings fell about 1% to 2.04 trillion yuan, from 2.06 trillion yuan a month earlier.

That was the first drop in foreign investors’ positions since February 2019. It came in a month when the yuan weakened more than 1% against the dollar, after strengthening more than 9% from June through February.

Meanwhile, prices for U.S. Treasury notes and other global government debt have been falling, pushing yields higher. That has shrunk the extra yield that China’s sovereign debt offers over international rivals.

This spread has narrowed to about 1.6 percentage points, after topping 2.2 percentage points throughout the second half of last year, data from FactSet and brokerage Tullett Prebon shows.

Jason Pang, a Hong Kong-based portfolio manager at J.P. Morgan Asset Management, said he had recently taken some profits on Chinese government bonds, or CGBs, and redeployed funds into local-currency government bonds in Southeast Asian countries such as Malaysia and Indonesia.

“We now expect a rotation out of CGBs into other assets to capture more value,” said Mr. Pang. Still, he added that Chinese bonds had been more stable than bonds elsewhere so far this year, offering investors shelter from market volatility as prices fell and yields rose in other markets.

The dollar is likely to keep strengthening in the coming months, and U.S. Treasury yields are likely to rise further, with benchmark 10-year yields hitting 2% by mid-2021, said Aidan Yao, senior emerging Asia economist at AXA Investment Managers. As of Monday, the yield on the 10-year Treasury note was slightly less than 1.6%.

Mr. Yao said that meant China could see reduced inflows, or even further mild outflows, of foreign money from its sovereign-bond market in the near future. He said discussions with clients such as global pension funds and insurers suggested many investors were still learning about China’s onshore bond market, and said hedging was an issue.

Longer term, however, Mr. Yao expects global fund managers to increase their holdings, since they are very underweight compared with bond indexes they track, such as the Bloomberg Barclays Global Aggregate Index and benchmarks calculated by JPMorgan Chase & Co.

A third index provider, FTSE Russell, said recently it plans to add China to its World Government Bond Index over three years, a longer time frame than many investors and analysts expected. FTSE Russell is a unit of London Stock Exchange Group PLC.

Mr. Yao said further inflows into Chinese sovereign debt could reach $160 billion over the next three years. Similarly, Mr. Pang at J.P. Morgan Asset Management said he expects foreign holdings could total 15% of the Chinese government-bond market within three to five years. The current figure is about 10%.

So far, overseas investors have largely stuck to buying debt issued by China’s central government and by a handful of state-owned lending institutions known as policy banks. They have been slower to buy yuan-denominated corporate debt.

In total, their holdings of all sorts of onshore debt totaled 3.56 trillion yuan at end-March, the equivalent of $546 billion, according to figures compiled by Bond Connect Co.

Updated: 5-7-2021

Chinese Consumers Are Opening Their Wallets Again

The country’s exports and imports also rose in April from a year earlier.

China’s post-coronavirus recovery has been strong but uneven. A burst of data released Friday, however, suggests the world’s second-largest economy is rebalancing as consumer spending—the weak link so far in the recovery—picks up steam.

A private gauge of activity in China’s service sector soared in April to its highest level this year, while tourist travel and some consumer spending exceeded their pre-virus levels during a five-day holiday that ended Wednesday.

At the same time, China’s export sector, the key driver of the country’s economic recovery in the past year, surprised economists by posting yet another month of resilient growth, driven this time by increased shipments to India and other countries battered by recent resurgences of the virus.

China’s outbound shipments jumped 32.3% in April compared with a year earlier, data from the General Administration of Customs showed Friday—higher than March’s 30.6% year-over-year increase and far outpacing the 21% gain predicted by economists polled by The Wall Street Journal.

Stripping out the impact of the pandemic, last month’s exports were 36.3% higher than they were two years ago in April 2019, the customs bureau said.

Exports to India jumped sharply in April, rising 144% compared with the year before, up significantly from March’s 19%, as China shipped more Covid-19-related medical supplies to its hard-hit neighbor. Shipments to Southeast Asian countries also accelerated, surging 40% year-over-year in April, compared with March’s 16% rise.

The worsening pandemic across parts of the developing world have shut down their production capabilities while increasing demand for Chinese-made personal protective equipment, said Lu Ting, a Hong Kong-based economist for Nomura.

The export surprise helped widen China’s trade surplus to $42.85 billion at the end of April, up from March’s $13.8 billion and wider than economists’ estimate of $28.2 billion. That was despite an increase in Chinese imports, which also beat market expectations to rise 43.1% in April from a year earlier, boosted by soaring commodity prices.

Since it began reopening its economy this time last year, China’s recovery has been powered by its factories, which have cranked out large volumes of medical equipment and electronic products to the rest of the world. Resilient demand for Chinese goods helped the country’s recovery defy expectations of a slowdown and secured China’s status as the only major economy to post growth in 2020.

Less impressive, at least so far, has been the services sector, which has failed to keep pace with the manufacturing sector’s recovery. The contrasting performances heightened imbalances last year in China’s economy, which economists and policy makers have said needs to tilt more in favor of domestic consumption.

Those hopes, however, have repeatedly been dashed by periodic flare-ups in Covid-19 infections in various pockets of the country, keeping consumers on their toes.

Now, with the last coronavirus resurgence having been brought under control for several months, Chinese citizens—still confined within their own borders—are beginning to open up their wallets again.

In April, the Caixin China services purchasing managers index, a private gauge of services activity, rose to 56.3, up from 54.3 in March and hitting the highest level since December, Caixin Media Co. and research firm IHS Markit said Friday.

A reading above 50 indicates expansion, while a reading below 50 indicates contraction.

Strong overseas demand for some Chinese services—such as consulting and other knowledge-intensive work—played a big role in boosting activity in the sector, prompting companies to add to their staffing levels for a second straight month, Caixin said.

But traditional consumer spending is also picking up.

During the five-day Labor Day holiday that began on May 1, official data showed Chinese travelers made a total of 230 million trips, topping the 195 million trips recorded during the same holiday in 2019 and marking the first time that traveler numbers have surpassed their pre-virus levels for any public holiday normally associated with heavy traffic.

China’s box office also broke new records for revenue and visitor numbers during the five-day holiday.

Movie ticket sales rose to 1.67 billion yuan, the equivalent of $258 million—a 9.4% increase from the same holiday period in 2019. Movie theaters were shut down during last year’s Labor Day holiday.

“The robust holiday activities suggest consumption, especially consumer services, is emerging as a new growth driver,” Citigroup economists told clients in a note Wednesday.

Despite the rebound in the number of trips, tourists collectively spent 23% less money this year than during the same holiday in 2019, official data showed. Citigroup economists attributed the cautious consumption to a discounting of travel products and a shift toward shorter-distance tourism.

For the first quarter of the year, all of China’s 31 provinces reported double-digit percentage growth in gross domestic product when compared with the year earlier, state media reported Friday. Hubei province, the original epicenter of the coronavirus, saw its first-quarter GDP skyrocket by 58.3% from the previous year’s exceptionally low base.

Updated: 5-9-2021

Chinese Manufacturers Sidestep Trade Barriers By Buying Factories Overseas

Beijing subsidizes state-owned companies that acquire Western rivals or build plants in other countries; ‘appetite for economic conquest’.

For decades, France’s Valdunes SAS charged premium prices for the wheels it made for high-speed trains and other rail systems around the world. That strategy changed after a Chinese state-owned industrial conglomerate bought the company in 2014.

The new owner, Maanshan Iron & Steel Co., or MA Steel, slashed prices in a bid to dominate the market.

“We were told that we shouldn’t miss a single order. That was explicit,” recalled Jérôme Duchange, Valdunes’s former top executive in France. “They have an appetite for economic conquest.”

The French firm was now in the service of the steel company’s larger strategic goals—to give it the know-how to make wheels for high-speed trains in Chinese factories, and to gain access to Europe’s highly regulated rail sector and other markets world-wide. For that, Valdunes received low-cost credit from Chinese government banks and 150 million euros, equivalent to $181 million, from MA Steel to stay afloat.

Over the past decade, China has provided billions of dollars of subsidies to state-owned companies to acquire Western manufacturing rivals and to build factories beyond its own borders. Now, these overseas factories are roiling global markets with low-price goods in sectors ranging from automotive tires and rail equipment to fiberglass and steel.

“Chinese companies are expanding. They are investing everywhere,” said Luisa Santos, deputy director of BusinessEurope, the region’s main business association. “This means that the flaws we see in the Chinese market are now being exported to other markets.”

The European Union this week proposed legislation to rein in companies in Europe that are subsidized by foreign governments, one of a series of measures that aim to counter the global expansion of Chinese firms.

Zhang Ming, the Chinese ambassador to the 27-nation bloc, has said Europe’s stance has worried Chinese investors in the region and undermined the EU’s historical openness to foreign investment. “We often see the EU as our professor for building our market economy,” Mr. Zhang said. “So we don’t want to see our professor and our partner have any hesitation when it comes to these principles.”

The U.S. and nations in Europe and elsewhere also subsidize their own industries, often through tax breaks, export financing and research-and-development funding. What makes China different is the outsize role state-controlled companies play in its economy, and its willingness to support their expansion abroad.

Daniel Gros, an economist at the Centre for European Policy Studies, a think tank in Brussels, said those differences shouldn’t lead the EU to penalize China for investing abroad. “Sorry, we cannot export our own model,” he said. “And we have lots of other subsidies. The footprint of our governments in our economies is very, very large.”

The U.S. and Europe have long relied on the World Trade Organization and tariffs to penalize China for subsidizing exports with grants, tax breaks and credit from state-owned banks, measures that helped the country grow rapidly. But the WTO rules weren’t written to constrain subsidies that a government gives to its manufacturers overseas.

The result: Chinese-owned factories outside of China usually face lower tariffs than those imposed on factories inside the country—or escape them altogether.

Western officials and executives say financial support from the Chinese government allows Chinese-owned manufacturers overseas to operate on razor-thin margins or at a loss, while they grab market share or serve the strategic objectives of the government. The problem, they say, is particularly difficult to address when the manufacturer in question is operating inside a Western market.

“China may never care about a profit because it’s a nonmarket economy,” said Michael Wessel, a member of the U.S.-China Economic and Security Review Commission, which advises Congress on China policy. “We have to assess whether as a market economy we view that as acceptable.”

The commission is recommending Congress give the Federal Trade Commission the authority to block acquisitions by foreign companies that receive government subsidies, particularly if those funds are used to execute the transaction. It also says U.S. authorities should have the power to screen plans by Chinese-owned companies to build factories in the U.S. for potential threats to national and economic security.

The EU’s proposed legislation would allow the European Commission, the bloc’s executive arm, to stop acquisitions by companies subsidized by a foreign government or impose restrictions on them to stop distortions of the European market.

EU rules restrict how much aid member states can give the private sector. The bloc’s officials say the subsidies legislation aims to level the playing field: Chinese companies in Europe wouldn’t be allowed to benefit from Chinese government subsidies when European companies are forbidden similar support from their own governments.

China says the West’s criticism of its practices amounts to an attempt to stifle its economic development. “Major Western countries formulate most of the rules of world trade,” Hua Chunying, spokeswoman of China’s foreign ministry, said last month. “It is their customary practice to maintain their hegemony.”

To maintain access to the European market, the Chinese government is offering to remove restrictions on investment by European companies in China’s domestic economy, part of a preliminary investment deal struck with the EU in December. The EU says it is moving forward with the foreign-subsidies legislation regardless of the investment agreement.

The U.S. in January imposed antidumping tariffs on tires from Thailand, South Korea and Vietnam after Chinese companies set up production in those countries to escape Western tariffs on tires imported from China.

The Chinese investments helped transform Thailand into the world’s biggest exporter of tires. Chinese companies also are building tire factories in Algeria, Serbia and elsewhere to export to the West without antidumping tariffs.

The EU last year levied tariffs against Chinese glass fiber manufacturers that built factories in a Chinese-run industrial zone in Egypt. EU investigators found that the Chinese companies in Egypt had received hundreds of millions of dollars in loans and funds transfers that were either provided directly by China’s state-controlled banks or funneled through the Egyptian subsidiaries’ parent companies in China. The Chinese companies are challenging the tariffs at the European Court of Justice.

In February, the EU opened a probe into Chinese government subsidies for building one of the world’s largest stainless-steel smelters in a special zone in Indonesia.

China Railway Rolling Stock Corp., or CRRC, a state-controlled rail giant, has built two factories in the U.S. The investments helped CRRC win over local politicians and satisfy rules that require a minimum percentage of goods purchased by public-transit agencies to be made in the U.S. CRRC underpriced the nearest competitors by as much as 20%, securing contracts with Boston, Chicago, Los Angeles and Philadelphia, according to U.S. government documents.

In 2019, Congress passed a law that forbids using federal transportation funds to purchase passenger railcars and buses made by Chinese-owned firms. But CRRC won a grace period that allows the company to receive funds for new contracts for two years, thanks to allies in Congress such as Democratic Rep. Richard Neal, chairman of the House Ways and Means Committee, whose Massachusetts district is home to one of CRRC’s U.S. factories. Rep. Neal said he wants to extend the grace period indefinitely.

Marina Popovic, general counsel of the CRRC subsidiary that is building the cars for Chicago, said the company is determined to stay in the U.S. passenger rail market.

When MA Steel bought Valdunes for just €13 million, the French company was in financial trouble. MA Steel saw the acquisition as a way to expand its overseas sales channels—Valdunes’s brand is well-known in the industry—and to acquire know-how to make precision wheels for high-speed trains.

The company, renamed MG-Valdunes, got support from state-owned banks such as the Bank of China and China Construction Bank, according to corporate documents, receiving credit at interest rates of 1% to 2%.

After observing Valdunes for a year, MA Steel told the company’s French executives to ensure that its order book was filled, regardless of the price and the cost of production, former executives said.

That strategy caused losses to balloon, they said. Mr. Duchange, the former CEO, said MA Steel officials told him Valdunes could raise prices again after taking market share. Mr. Duchange recalled that one MA Steel executive explained the strategy with a Chinese saying: “There is no such thing as barren land, only farmers who don’t work enough.”

Valdunes and MA Steel didn’t respond to requests for comment.

Valdunes began to export low-price wheels to Australia for mining operations. The surge of imports from both Valdunes and MA Steel’s plants in China led Australia to impose antidumping tariffs against the two companies.

The same year, as losses mounted, MA Steel’s board approved another €70 million in capital for the French company.

“Valdunes is a bridge for the company to further penetrate into Europe and other overseas markets,” MA Steel said at the time.

MA Steel has used Valdunes to navigate the procurement rules of big European wheel purchasers such as Deutsche Bahn, Germany’s state rail company. Chinese rail-wheel exports to the EU have nearly quadrupled since Valdunes was purchased by MA Steel.

MA Steel sent Valdunes engineers to help its factories in China make wheels for high-speed trains. Those wheels require far more precise engineering than the ones MA Steel already makes for freight trains. China’s vast high-speed train network still uses wheels made in partnerships with European manufacturers.

Deutsche Bahn is now testing high-speed-train wheels made by MA Steel in China. MA Steel has increasingly used Valdunes to finish and package wheels for customers in Europe and elsewhere that were made in China.

“The fear was that, little by little, we wouldn’t produce in France anymore,” said Mr. Duchange, who left Valdunes in 2019. “But for certain products, we couldn’t resist.”

Toward the end of 2019, MA Steel was absorbed into China Baowu, the country’s largest steel company, which is owned by the central government. Under the new ownership, MA Steel said its rail business is continuing the strategy of global expansion using Valdunes.

“The Biden administration shows great interest in the development of rail transportation,” said MA Steel chairman Ding Yi when discussing the company’s results in March, “which provides us with a great opportunity.”

Updated: 6-21-2021

Metal Prices Fall As China Says It Will Release State Stockpiles In Effort To Control A Soaring Commodities Rally

Most metal prices in London and Shanghai fell early Wednesday before paring back losses as China ramped up its campaign to rein in commodity prices that have hit a 13-year highs.

China’s National Food And Strategic Reserves Administration said it will release state stockpiles of metals including copper, aluminum, and zinc, the agency said in a statement cited by Bloomberg. The country hasn’t released state reserves in years, and the move is expected to boost short-term supply and weigh on prices.

The stockpile release is the latest move out of Beijing to try and clamp down on soaring commodity prices, including a 67% increase in copper over the past year.

Last month, a government agency in China said the country will show “zero tolerance” for monopoly behavior and hoarding and will increase law enforcement inspections. The agency said “excessive speculation” had disrupted the production in commodities and contributed to price increases.

According to Bloomberg data, copper and zinc dipped in London after the Wednesday announcement from China. However, China’s buying power over metals doesn’t necessarily mean it will be able to tame global prices.

China said it would begin to sell major industrial metals from state stockpiles, an effort to squelch factory-gate price increases that have hit a 13-year high and are stoking fears of global inflation.

As the world’s biggest buyer of a range of industrial commodities, China is using its market heft to try to quell the sharp rise in global metal prices over the past 12 months, including a 67% surge in copper, a bellwether for macroeconomic health. Economic stimulus measures and a broad resumption of global economic activity from pandemic lows have spurred a spree of buying in China and elsewhere.

China’s latest move targets copper, aluminum and zinc, among other metals, and outlines a program of public auctions to domestic metal processors and manufacturers, the National Food and Strategic Reserves Administration said Wednesday. Still, Beijing’s move comes as some metal prices, including copper, had already begun to decline in recent weeks, amid market sentiment that global supply levels didn’t warrant such rallies.

Beijing’s vast buying power over metals doesn’t necessarily guarantee its ability to tame global prices. London spot prices for aluminum traded largely flat on Wednesday from a month earlier, but have risen 5% from early June as investors shrugged off the likely impact of Chinese sales.

Much of the effectiveness of Beijing’s metal auctions will depend on the amount of metals it releases—or that it is able to release—into the market. The government doesn’t disclose its holdings.

The state stockpiler said in a statement that it planned to release the metals in batches “in the near future” to ensure stable supply and prices of commodities. It didn’t specify the time frame, but past such sales programs have unfolded over months.

“Investors have been cautiously monitoring the amount of stocks that are genuinely hitting the market,” commodity analysts Warren Patterson and Wenyu Yao at ING Bank said in a report. “A more important factor is the message that Chinese authorities are sending to the market, with their efforts to curb the excessive run in commodities prices.”

Top Chinese officials have increasingly sought to rein in commodity price increases. The State Council, China’s cabinet, last month said it would take steps to ensure adequate supply and stable prices for commodities.

“We need to keep prices basically stable, and pay particular attention to commodity price trends,” China’s Vice Premier Liu He said after China’s producer-price index rose 6.8% year-over-year in April.

That measure accelerated to 9% in May, topping economists’ consensus forecasts and reaching the fastest pace since September 2008. The increase comes as both producer and consumer inflation in the U.S. are rising sharply to their highest levels in more than a decade.

Individual commodities are a small part of the final price tag of consumer goods, and aren’t likely on their own to move the price significantly—but the broad rallies are stoking concern that China’s PPI could be a factor in exporting consumer price pressures abroad. Chinese exporters this year have raised prices on products such as furniture and boots. Rising prices of Chinese exports, posting the biggest increases in almost a decade in the U.S., also have been due to yuan strength against the dollar.

Analysts say the market is on the lookout for more such policy moves from Beijing.

“We can’t rule out the possibility that further price-control policies will be introduced,” Chinese commodity brokerage Huatai Futures said in a report on Wednesday. The state stockpiler didn’t respond to a call for comment.

China’s massive buying has roiled markets elsewhere across commodities globally. A run on natural gas last winter, caused by huge Chinese purchases, put parts of Japan on the verge of blackouts.

Partly weighed by China’s impending sales, London copper prices fell 4% from a week earlier to reach $9,560 a metric ton on Wednesday. The world’s second-largest economy consumes half of the world’s refined copper.

The red metal, largely viewed as a bellwether due to its versatility in industrial applications, has already fallen 9% since posting its record-high in early May. The metal’s heady rally may have overreached its demand-and-supply fundamentals, even before Beijing’s announcement on Wednesday, some analysts say.

“In the last supercycle, the copper industry was unable to keep up with China’s insatiable demand,” said Wood Mackenzie analyst Julian Kettle in a May report, referring to a broad commodity rally about a decade earlier. As copper prices overshot its fundamentals, however, producers began to substitute it with aluminum, causing copper to lose 2% a year in demand volumes earlier this decade and prices to subside, he said.

“It seems little has been learned from past experience,” Mr. Kettle said.

Analysts say it is unclear if the metal sales will sufficiently dent China’s producer price inflation surges. China’s statistics bureau has attributed the increase also to commodities not included in these latest metal auctions, such as crude oil and iron ore—over which China’s buying power has little ability to sway global prices.

“Industrial inflation pressure will likely remain and pose additional risks to economic growth,” Citigroup economists said in a note earlier this month, adding that there is no quick fix to this round of commodity-led inflation.

Updated: 8-9-2021

China’s Producer Prices Jump Despite Efforts To Cool Commodities Costs

Rise in factory-gate prices matches highest level in more than 12 years.

China’s factory-gate prices rose at an unexpectedly fast clip in July, matching the highest level in more than 12 years as crude oil and coal prices soared—though economists say the price pickup is unlikely to last.

China’s producer-price index rose 9.0% from a year earlier, the National Bureau of Statistics said Monday—faster than June’s 8.8% year-over-year increase and the 8.8% gain forecast by economists polled by The Wall Street Journal.

July’s increase matched May’s 9.0% year-over-year jump, which marked the biggest surge in producer prices since September 2008.

On a month-over-month basis, China’s producer prices rose 0.5% in July, faster than June’s 0.3% advance.

The price increases came despite measures taken by Beijing in recent months to cool soaring commodity prices, including restricting steel exports and cracking down on speculative behavior.

Fortunately for Chinese policy makers, the high producer prices haven’t fed through to consumers.

China’s consumer-price index rose 1.0% from a year earlier in July, down from June’s 1.1% gain, kept in check by food prices that fell 3.7% in July from a year earlier, compared with June’s 1.7% drop.

Nonfood prices rose by 2.1% in July, up from June’s 1.7% advance, lifted by soaring oil prices and higher hotel and travel expenses during the summer months, China’s statistics bureau said.

More recently, however, domestic outbreaks of the Delta variant of Covid-19 have prompted authorities to lock down cities, dampening domestic demand. Together with a recent easing in global oil prices, economists expect factory-gate price pressures to moderate again.

The July data likely didn’t factor in the impact of local Chinese authorities’ pandemic measures toward the end of the month, which have included cancellations of large events, travel restrictions and more stringent quarantine rules, said Xing Zhaopeng, an economist with ANZ.

As a result, Mr. Xing said, both producer and consumer prices will likely cool in August and September and enable Beijing to turn its focus to slowing economic growth amid the spread of the Delta variant.

Using a more dovish tone from Chinese officials, Ning Jizhe, the head of China’s statistics bureau, said Friday that domestic demand was struggling with weaker momentum.

On Sunday, China’s National Health Commission tallied up 125 new cases of symptomatic infections, 94 of which were locally transmitted, the highest daily total during the current outbreak.

In response, at least two global investment banks, Goldman Sachs and Morgan Stanley, have lowered their forecasts for China’s economic growth. Other economists say they are likely to make their own downward revisions to reflect Delta’s impact on the world’s second-largest economy next Monday, when China’s statistics bureau releases a batch of economic indicators for July.

China’s gross domestic product grew 18.3% and 7.9% in the first and second quarters of the year, respectively, compared with the same periods a year earlier—putting the economy in a good position to meet policy makers’ full-year growth target of 6% or higher.

Even so, with a pronounced slowdown likely in the second half of the year, more policy support may be needed.

Mr. Xing, the ANZ economist, pointed to an unspent sum equivalent to about $3 trillion, or 20 trillion yuan, in this year’s fiscal budget, which he argued would play a central role in underwriting infrastructure projects that could help shore up growth through the end of the year

On monetary policy, Mr. Xing expects China’s central bank to release more liquidity by reducing banks’ required reserves and to lower financing costs for struggling businesses by cutting certain lending rates.

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