The paradox that is the Chinese economy has again been underlined in the May production data, especially for steel, and the price of iron ore and property.
Industrial production rose, urban investment was solid, but not outstanding and retail sales were stronger.
But house prices and investment in the property sector continue to sink, raising fears about the health of the financial system.
Overall the economy improved marginally from April, and the driver for that was easy to spot – a near 25% rise in spending by national and provincial governments in May, compared with May 2013.
But, underlining the paradox in the Chinese economy at the moment, steel output in May saw the highest ever monthly production of crude steel – more than 70 million tonnes, the second month this year production has hit this very high level.
But that’s not reflected in the iron ore market where global prices fell to a new 21 month low on Friday night, our time, which will hurt sentiment on the ASX today, especially for the shares of producers such as BHP Billiton, Rio Tinto and Fortescue.
Iron ore prices fell to $US90.90 a tonne, the lowest since September 2012 only hours after May’s production report revealed China’s crude steel production hit a record 70.43 million tonnes, just above the previous high of 70.24 million tonnes recorded in March of this year.
The continuing high level of crude steel production helps explain the high level of exports of iron ore from Australia, but is not helping keep prices high because there’s so much new supply coming onto world markets.
Iron ore prices though lost 3.8% last week and are now down almost 32% in 2014. And yet production of crude steel is running at record highs.
China’s crude steel production was up 2.6% from May 2013 and 2.3% from the 68.8 million tonnes produced in April, which belies the weaker level of overall production.
That in turn confirms the belief that Chinese steel mills are buying more high quality iron ore from Australia (and Brazil) than domestic ore because its cheaper and the mills get more steel from each tonne of imported ore, for a lower consumption of energy (in the form of coking coal and coke and electricity and gas) and fewer emissions.
Chinese analysts say the amount of ore being bought as part of financing deals by banks and other investors seems to have fallen sharply because of the crack down on Letters of Credit by the central bank and a big police probe into such deals.
But the record level of crude steel output last month contrasts with the weakness of the overall production report for May.
It was up an annual 8.8% in May, just 0.1% above April’s weak effort.
But it remains substantially below the 9.7% rate achieved in all of 2013.
China’s power consumption rose 5.3% in May compared with May 2013, faster than the 4.3% annual rate in April. But that was still well under the 7% plus rise seen in 2013.
But the big news from China’s monthly economic data last week was in the investment area, especially property.
Fixed-asset investment, an important driver of economic activity, grew 17.2% in the first five months of 2014 from the same period last year, weaker than the 17.3% rate in the first four months.
Real estate investment rose 14.7% in the first five months of 2014 from a year earlier, much slower than the 16.4% rate seen in the four months to April.
Newly started property construction fell 18.6% in the first five months from a year earlier, the fourth consecutive month of declines.
Property sales dropped 7.8% in January-May from a year earlier in terms of floor space and fell 8.5% in terms of value, China’s National Bureau of Statistics said on Friday.
Despite that bad news (property and the financing of it remains the major weak point in the Chinese economy and financial system), Chinese shares had their best week in nearly two months last week.
Shanghai shares closed at their highest level in more than 7 weeks on Friday as Chinese banks were buoyed by stronger-than-expected lending data which showed a surprise rise in bank lending in May.
The Shanghai Composite Index ended up 0.9% at 2,070.71 points on Friday, its highest close since April 22.
The CSI300 of the leading Shanghai and Shenzhen A-share listings jumped 1.1% to close at a one-month high.
Over the week, the CSI300 and the Shanghai benchmarks were up around 2%.
But the Chinese market closed before a big shakeout in Chinese property related companies in New York on Friday night.
Soufun Holdings Ltd, China’s biggest real-estate information website, sank 17% on the New York Stock Exchange, its biggest daily fall since 2011.
Shares in E-House China Holdings Ltd, a Shanghai-based property brokerage, dropped 5%, while shares in Leju Holdings Ltd, an online brokerage, sank 6.4%. Soufun shares fell after it revealed it had started cutting listing fees for real estate agents by up to 40%.
Soufun has been under increasing pressure from agents to cut listing fees because of the slide in property prices and pace of sale activity.
In some big Chinese cities, property sales have disappeared completely in the past month. Home sales fell more than 10% in the five months to May, faster than the 7.8% fall in all real state transactions.
