SSY thinks China’s latest economic stimulus package does not include radical good news for shipping, but will limit downside risk in commodity demand.
The shipbroking group’s global head of research, Dr Roar Adland, has worked with shipping expert Professor Haiying Jia from the Norwegian School of Economics to analyse the package, which was announced earlier this month.
China’s finance ministry has said it will increase government debt and ensure that CNY 2.3trn ($325bn) in unused funds are allocated by the end of the year.
Adland cautioned freight market watchers against jumping to conclusions.
“If you spent October following the FFA [forward freight agreement] curves across segments and the October news cycle out of China regarding new monetary and fiscal stimulus measures, you would be forgiven for thinking freight rates have suddenly decoupled from the prospects of its biggest player,” he wrote in a report on Monday.
“This is of course not the case.”
The stimulus package does not necessarily generate much in terms of fresh steel and shipping demand, he added.
Instead, the measures focus on destocking and “socialising” losses.
“This is key for social stability in China and could benefit the country’s long-term economic development by improving the social profile of the housing market,” the report said.
This means no big explosion of commodity demand, but rather modest, incremental gains in steel demand.
“Based on our interpretation of the recent Chinese policies, increasing state borrowing will flow through the large state-owned commercial banks to Chinese SOEs [state-owned enterprises],” the report said.
These SOEs will use these funds to buy back unused land from commercial developers for redevelopment as public social housing.
The cash will also be used to purchase and complete unfinished housing developments so that private buyers are no longer stuck with a stranded assets.
And China’s oldest housing stock — typically prime-location, low-rise homes built in the 1990s — will be redeveloped, according to Adland and Jia’s interpretation of the policies.
Mass redevelopment projects would increase scrap availability. This is a new focus area for China, which launched a central recycling SOE named China Resources Recycling Group in mid-October, the report noted.
But the policies also put a “hard stop” to new private property construction in certain areas.
Cities with a housing inventory equal to more than 36 months of supply — often second and third-tier cities, SSY said — are not allowed to sell more land to developers.
“All told, while the case for incremental steel demand at this point is weak, the recent policy pivot signals that the Chinese government is ready to resolve the problems in the property sector,” Adland wrote.
“This should accelerate a stabilisation of the property market and removes some of the downside risk to commodity demand.”
Analysts have generally been circumspect in reacting to the stimulus and the implications for shipping demand.
The CNY 2.3trn package aims to boost GDP during the fourth quarter.
GDP growth in China usually correlates with increased demand for capesize and newcastlemax bulk carriers, as well as panamaxes.
This made Clarksons Securities analysts quite excited last week, forecasting that $5,000 per day could be added to capesize rates during the fourth quarter.
“Higher Chinese import volumes are likely to result in increased port congestion, which could boost vessel demand even more,” analysts Frode Morkedal, Even Kolsgaard and Bendik Folden Nyttingnes wrote.
They noted that a 1% rise in Chinese GDP growth typically leads to a 0.5% increase in global dry bulk trade volumes.
