China concluded its annual Central Economic Work Conference (CEWC) on Friday and the succinct official read-out has sent ferrous markets into a frenzy. The reason is that China appears to be reassuring markets that economic reform will not occur too quickly, Kallanish notes.

China’s steel industry is strongest when the Chinese economy is not too strong. The CEWC, chaired by Xi Jinping, has decided that there remain underlying concerns about the strength of the economic recovery, according to official state media reports. As a result, there will be “...no U-turn” on current policy, meaning continued stimulus to support economic growth.

This contrasts with China’s overall economic aims, which are to boost consumption rather than investment, increase the average return on investment, reduce financial risks and other moves which could have a negative impact on steel demand. There are key sectors where these goals remain paramount, such as antitrust actions against tech conglomerates and restrictions on real estate developer borrowing.

The new read out steers away from some of the key fears of the steel industry, however. There had been talk before the meeting of reducing local government special purpose bond quotas, which are key in developing infrastructure projects. There were fears that credit would be tightened to reduce investment to projects with strong returns. Heavy industry was concerned that it would lose out as focus shifted to “…demand-side reform.” The CEWC appears to make all of that less likely, at least in 2021.

The key sticking point seems to have been employment and consumer spending. Retail sales are still down year-on-year as people remain concerned about income levels. In addition to the impact on direct employment, key employment sectors such as deliveries have seen take-home salaries cut by competition and weak spending. If support is withdrawn from industries, especially if bankruptcies increase, weaker employment could make it impossible to grow domestic demand. 

As a result, China appears set to continue state spending on infrastructure, keep credit moderately loose and support employment. The Kallanish KORE 62% Fe index jumped $11.04/t on Monday to $175.33/dry metric tonne cfr Qingdao (see separate article).