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Steel prices have diverged from China's falling stock market, indicating the world's second-largest economy is more resilient than many fear.
Stock investors have worried about slowing economic growth as Beijing tries to reduce its reliance on debt, especially in the face of rising trade tensions with the United States. Steel prices, on the other hand, are what actually reflect the current state of the economy, while stocks represent market sentiment on the growth outlook, said Larry Hu, head of greater China economics at Macquarie.
China's Nanhua rebar steel futures index is up 22 percent this year, versus the Shanghai composite's 16 percent decline.
Despite China's slow transition from being a manufacturing-driven economy toward one based on consumption, the steel industry is closely watched because it remains an important part of the overall economy.
Hu said the stock market decline is probably a bit overdone, and noted previous divergences in steel and Chinese stock prices occurred at a turning point in monetary policy toward easing that would help stocks. In any event, Hu said, there is little concern for stagflation — a run-up in prices with slowing growth, reminiscent of Japan.
Chart: Diverging steel and stock prices
Source: Wind, Macquarie Macro Strategy
In a reflection of the steel market, Chinese industry giant Baosteel announced late Monday Beijing time that profits in the first half of the year rose 62.2 percent year-over-year to 10.01 billion yuan ($1.47 billion). The company, officially called Baoshan Iron and Steel, said in a report that it anticipated that the steel industry will benefit from stability in the Chinese economy in the second half of the year. The company did warn of risks from rising trade protectionism.
Despite the signals of economic strength from the steel industry, some recent data point to slower growth in the overall economy.
Earlier this week, data showed industrial profits slowed for a third straight month to 16.2 percent year-on-year growth in July, according to Reuters. Other reports for last month showed fixed asset investment grew at its slowest pace since the 1990s, while retail sales slowed and missed expectations, according to Reuters. To prevent a dramatic slowdown in growth, Beijing has announced stimulus and easing measures in the last few months, and more support is expected.
But data on China's economy that is released with a greater time lag tends to be more accurate than closely followed monthly reports and points to stable growth, according to Nicholas Lardy, a senior fellow at the DC-based Peterson Institute for International Economics.
In a two-part blog series this month titled "Who Thinks China's Growth Is Slowing?" Lardy noted that retail sales do not account for increased spending on education or travel. Instead, he pointed out the best data on Chinese consumption, available quarterly, shows an increase of more than 7 percent in the first half of the year. Lardy also said he expects a forthcoming annual report to show that China's production capacity, as measured by growth in capital formation, grew faster than fixed asset investment.
The Shanghai composite jumped more than 1.5 percent in local trading Monday after the People's Bank of China announced a new measure to stabilize the weakening yuan. The index closed mildly lower Tuesday and remains 3.4 percent lower over the last 20 days. Nanhua rebar, meanwhile, is up 5.2 percent over that time despite falling 3 percent on Tuesday.