China Q2 GDP growth cools as factory output weakens, trade row flares

China’s exports grew at a solid pace in June, though analysts suggest front-loading of shipments ahead of tariffs taking effect may have boosted the figures. (Reuters)
Updated 16 July 2018
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China Q2 GDP growth cools as factory output weakens, trade row flares

  • The economy grew 6.7 percent in the second quarter from a year earlier, in line with expectations and slightly lower from the first quarter
  • Chinese policymakers have started to step up policy support for the economy and have softened their stance on deleveraging

BEIJING: China’s economy expanded at a slower pace in the second quarter as Beijing’s crackdown on debt risks crimped activity, while June factory output growth weakened to a two-year low in a worrying sign as a heated trade war with the United States threatens to knock exports.
The more timely activity indicators for last month backs market views that growth is cooling, with some analysts calling for the government to take stronger measures to support the economy.
“They need to slow financial deleveraging slightly and to turn their focus more on growth-supportive measures, for example increasing liquidity through (bank reserve requirement) cuts,” said Iris Pang, Greater China Economist at ING in Hong Kong.
“If the situation gets worse a lot faster than what we expect I do think Chinese authorities need to beef up supportive measures, both fiscal and monetary.”
The economy grew 6.7 percent in the second quarter from a year earlier, in line with expectations and slightly lower from the first quarter, the National Bureau of Statistics said on Monday.
First half fixed asset investment growth was a record low, while industrial output for June matched the slowest growth rate in over two years at 6.0 percent and missed forecasts centered on 6.5 percent expansion.
Analysts polled by Reuters had expected the economy to expand 6.7 percent in the April-June quarter.
On a quarterly basis, growth picked up 1.8 percent from 1.4 percent in the first quarter, beating expectations of 1.6 percent growth.
The second-quarter data weighed on markets around Asia, adding to investor concerns about the impact of the Sino-US trade war on economic growth in China and the rest of the world. The Shanghai Composite index and the blue-chip CSI300, the world’s worst-performing major indexes this year, each fell 0.7 percent. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4 percent.
The world’s second largest economy has already felt the pinch from a multi-year crackdown on riskier lending that has driven up corporate borrowing costs, prompting the central bank to pump out more cash by cutting reserve requirements for lenders.
Data on Friday showed China’s exports grew at a solid pace in June, though analysts suggest front-loading of shipments ahead of tariffs taking effect may have boosted the figures. More worryingly, the trade surplus with the United States hit a record high last month and looks set to keep a bitter tariff dispute with Washington on the boil for a while longer.
The administration of US President Donald Trump has raised the stakes in its trade row with China, saying it would slap 10 percent tariffs on an extra $200 billion worth of Chinese imports, including numerous consumer items.
Other data showed retail sales rose 9.0 percent in June from a year earlier, in line with market forecasts.
Faced with a slowdown in domestic demand and the potential fallout from the trade war, Chinese policymakers have started to step up policy support for the economy and have softened their stance on deleveraging.
China’s economy is likely to experience a mild slowdown in the second half of the year as financial market risks become “obvious” and demand is expected to decline, official think tank State Information Center (SIC) recently said.
The nation’s financial regulator has told banks to “significantly cut” lending rates for small firms in the third quarter in comparison with the first quarter, two people with direct knowledge of the matter told Reuters last week.
The People’s Bank of China, which has cut banks’ reserve requirements three times this year, has recently replaced its use of the term “deleveraging” with “structural deleveraging,” a change that suggests less harsh curbs on debt.
Nomura economists said in a recent note they expected the PBoC to deliver at least one more RRR cut before year-end, likely by 100 basis points and increase direct funding to the real economy via other liquidity injection tools, such as the supplementary lending facility.


Asia’s refining profits slump as Mideast exports surge

Updated 23 February 2019
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Asia’s refining profits slump as Mideast exports surge

  • Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India
  • However, overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs

SINGAPORE: Asia’s biggest oil consumers are flooding the region with fuel as refining output is exceeding consumption amid a slowdown in demand growth, pressuring industry profits.
Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India.
Yet overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs.
Compounding the supply overhang, fuel exports from the Middle East, which BP data shows added more than 1 million barrels per day (bpd) of refining capacity from 2013 to 2017, have doubled since 2014 to around 55 million tons, according to Refinitiv.
Car sales in China, the world’s second-biggest oil user, fell for the first time on record last year, and early 2019 sales also remain weak, suggesting a slowdown in gasoline demand.
For diesel, China National Petroleum Corp. in January said that it expected demand to fall by 1.1 percent in 2019. That would be China’s first annual demand decline for a major fuel since its industrial ascent started in 1990.
The surge in fuel exports combined with a 25 percent jump in crude oil prices so far this year has collapsed Singapore refinery margins, the Asian benchmark, from more than $11 per barrel in mid-2017 to just over $2.
Combine the slumping margins with labor costs and taxes and many Asian refineries now struggle to make money.
The squeezed margins have pummelled the stocks of most major Asian petroleum companies, such as Japan’s refiners JXTG Holdings Inc. or Idemitsu Kosan, South Korea’s top oil processor SK Innovation, Asia’s top oil refiner China Petroleum & Chemical Corp. and Indian Oil Corp., with some companies dropping by about 40 percent over the past year. Jeff Brown, president of energy consultancy FGE, said the surge in exports and resulting oversupply were a “big problem” for the industry.
“The pressure on refinery margins is a case of death by a thousand cuts ... Refinery upgrades throughout the region are bumping up against softening demand growth,” he said.
The profit slump follows a surge in fuel exports from China, India, Japan, South Korea and Taiwan. Refinitiv shipping data shows fuel exports from those countries have risen threefold since 2014, to a record of around 15 million tons in January.
The biggest jump in exports has come from China, where refiners are selling off record amounts of excess fuel into Asia.
“There is a risk for Asian market turmoil if (China’s fuel) export capacity remains at the current level or grows further,” said Noriaki Sakai, chief executive officer at Idemitsu Kosan during a news conference last week.
But Japanese and South Korean fuel exports have also risen as demand at home falls amid mature industry and a shrinking population. Japan’s 2019 oil demand will drop by 0.1 percent from 2018, while South Korea’s will remain flat, according to forecasts from Energy Aspects.
In Japan, oil imports have been falling steadily for years, yet its refiners produce more fuel than its industry can absorb. The situation is similar in South Korea, the world’s fifth-biggest refiner by capacity, according to data from BP.
Cho Sang-bum, an official at the Korea Petroleum Association, which represents South Korean refiners, said the surging exports had “triggered a gasoline glut.”
That glut caused negative gasoline margins in January.