As rest of economy weakens, Chinese exports surge
The vast steel mill here on the south bank of the Pearl River was supposed to have closed more than three years ago, its labyrinth of rusty chutes and sheds bulldozed and its huge cranes with gigantic steel claws dismantled for scrap.
But the Guangzhou Steel mill continued churning out millions of tons of steel for construction projects across Southeast Asia all the way through last September, when the antiquated complex, built on Mao’s orders in the late 1950s, finally began shutting down. Even now, a fraction of the previously 6,000-strong work force continues to shape specialty products for export and the domestic market, while furnaces at a much newer mill to the south churn out higher-grade steel.
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The recent history of the old mill underlines two troubles in the Chinese economy: its dependence on construction in recent years and the return, at least temporarily, of a need for exports to help offset weakness in the domestic market.
Chinese stocks continued their slide Tuesday on concerns that the country’s debt-fueled real estate boom is finally slowing — and with it, the sprawling construction industry that accounts for nearly a fifth of economic output.
The falling currency, which could weigh on corporate profit, is only adding to the economic anxiety.
In the last two days, the CSI 300 index of big companies on the Shanghai and Shenzhen stock markets has lost more than 4.5 percent, with even steeper declines among real estate developers.
The weakness follows the government announcement on Monday that real estate prices are not rising as quickly and the state media reports that banks are limiting or delaying some categories of real estate loans.
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As worries have accumulated about the real estate sector, exports have leapt this winter despite a continued rise in blue-collar wages. As economies in the West start to recover, executives like Jim He, export manager of the Foshan Monalisa Industry Company, a ceramic tile manufacturer on the western outskirts of Guangzhou, once again see the future in overseas markets.
"Around 80 percent of our sales are to the domestic market, and we have seen a decline in our business recently, given the slowdown in construction projects," he said. "We are now expanding our export business to countries in Southeast Asia and in South America."
Rising Chinese exports may be helping to offset emerging signs of weakness across the broader Chinese economy.
An early reading of the HSBC/Markit survey for February of manufacturers' purchasing managers in China, released last week, showed improvement in new export orders and declines in every other category, including overall business sentiment, employment and industrial production. That was consistent with the weakness of most economic statistics for China in January except exports, which rose 10.6 percent from a year earlier.
But strengthening Chinese exports may lead to further trade tensions, particularly ahead of midterm congressional elections in the United States in November.
"As their economy slows, they are going to flood the U.S. with more and more of their excess capacity," said Leo Gerard, the president of the United Steelworkers union. "That will be felt all across the country, and politicians in steelmaking districts this election year will have to answer for why their government isn't doing more."
China's central bank has begun quietly helping the country's exports. It has unsettled traders by intervening heavily in currency markets for the last week, pushing the renminbi down steadily.
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On Tuesday, the fall continued, bringing the currency's loss against the dollar for the year so far to 1 percent. By comparison, the renminbi rose 3 percent against the dollar last year. The recent decline also interrupts what had seemed to be a steady rise in the Chinese currency, which had been eroding the competitiveness of Chinese exports.
The gain in exports last month from a year earlier was particularly surprising because exports a year ago had been overstated. Many Chinese companies inflated the value of their shipments to bypass currency controls and bring capital covertly into the country.
But Chinese government officials and Western economists say they believe that excessive invoicing has since faded.
"We cannot rule out the possibility that a few companies conducted illicit transactions, but on the whole, the export growth number is reasonable and logical if you look at breakdown figures for different commodities and destination markets," Shen Danyang, the Chinese Commerce Ministry spokesman, said at a recent news conference.
China's exports to the United States have been rising this winter in many categories, including steel, apparel, kitchen cabinets and toys. Shipments to the European Union have risen for goods like shoes and smartphones.
China's overall exported tonnage of structural steel for buildings, including products made at the Guangzhou Steel mill, leapt 18.9 percent in December from the same month a year earlier, the most recent month for which data is available. The biggest recipient of that steel was the Bahamas, where Chinese companies are building large hotels and other projects. Chinese exports of structural steel also increased sharply to Japan, the United States and Indonesia.
While exports are important to many companies, growth in overseas sales cannot fully offset slower growth in investment spending, which has expanded to almost half the economy as the state-owned banking system and a loosely regulated shadow banking system have churned out loans over the last five years at a blistering pace. Many industrial companies in China complain that excess capacity from previous over investment is now stunting their profitability.
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"Orders are down due to more competitors coming into the field — we can only get orders if we give very attractive pricing, but this in effect puts even more pressure on our margins," said Tom Zhao, a salesman at the Renqiu North Communication Equipment Company, a satellite dish manufacturer in Renqiu, near Beijing.
China's leaders hope that consumer spending can start to replace investment projects. But consumer spending depends at least partly on perceptions that apartments, the main asset of middle-class and wealthy families, are continuing to increase in price or at least hold their value. Any doubt on that assumption quickly sends shivers through the economy.
A national survey of prices in 70 cities released on Monday showed that prices fell in January compared with December in six cities for new homes and in 13 for existing homes. In the rest, prices continued to rise but tended to do so a little more slowly than in previous months. In Beijing, for example, new-home prices rose 0.4 percent last month from the previous month, after climbing 0.6 percent in December from November. Prices for newly built residential real estate are still up 14.7 percent from a year ago.
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But prices are already so high that first-time buyers are largely excluded from the market. Even a one-bedroom apartment on the outskirts of a large city can cost two decades' worth of salary for a young engineer. White-collar salaries have been stagnant or falling because of a glut of college graduates.
Optimists in China say that construction will continue and can absorb the output of a steel sector that has grown tenfold in the last 12 years, to the point that China now consumes half the world's iron ore.
Harley Seyedin, the president of the American Chamber of Commerce in South China, said he was driving on the outskirts of Guangzhou last month and found himself traveling parallel to an eight-lane highway and a light-rail system under construction.
"Where the stations will eventually be, I saw these mini cities popping up," he said, adding that although he was an hour's drive from the city center, "with that light-rail system, you can be in downtown Guangzhou in 15 minutes."
Yet steel prices have also been sliding slowly but steadily in China since last August, a sign that supply is outpacing demand. The tonnage of Chinese steel exports to the United States was flat through most of last year, but it leapt 31 percent in December compared with a year earlier as American steel prices stayed relatively high and the United States economy began gathering steam.
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A strengthening American economy makes it harder for companies to bring anti-dumping or anti-subsidy complaints. Winning such cases requires companies to show harm, and this is difficult when businesses are profitable.
Mr. Gerard, the union president, predicted it would take a while for the latest increase in Chinese exports to bring a legal response in the West. "By then," he said, "a lot of the damage will have been done."