UBS: China's Contribution to the Global Demand Recovery
Commodities led China's import recovery from late last year into 2017, accounting for over half of its headline y/y import growth print. While improved underlying investment demand took over from Chinese supply-side cuts to drive its Q1 commodity import surge, China's YTD commodity import momentum has likely peaked.
30.05.2017 | 10:03 Uhr
1. China has played a central role in the recent global commodities rebound
Commodities led China's import recovery last year and continued to do so into 2017, making its contribution to the recent revival of global commodity markets abundantly clear . Volume imports of key mineral and fuel commodities such as oil, coal, gas and iron ore and copper all accelerated, both on last year's strictly enforced production cuts and gradual improvement of domestic demand in H2. While this clearly benefited commodity exporting economies like Australia, Chile, and Indonesia and others like South Africa (gems and precious metals) and Argentina (animal meats/food products) fared worse due to the non- construction, non-investment nature of their top export categories.
Supply-side cuts likely played a bigger part in driving up China's commodity imports last year, given how tepid underlying investment demand was based on the weakness of imported investment and intermediate goods such as machinery tools, chemicals until Q4 2016. However, as production-cut measures started to be reversed at the end of 2016, a faster pick-up in infrastructure and resilient property investment demand helped to rally additional momentum for commodity imports in Q1.
The rally in global commodity prices from last November to this April drove China's import prices up by 18%, further fanning its USD value imports which YTD are now running stronger (21%y/y) than volume imports (13%). YTD imported commodities like oil, iron ore, copper ore, grain/soy bean, coal, gas, steel products, etc. have surged nearly 53%y/y.
China's YTD commodity import growth momentum will unlikely be sustained. Looking ahead, though key commodity import prices remain high at absolute levels, their y/y growth is already in decline, posing headwinds for upcoming USD commodity import growth. Alongside the fact that onshore PPI has already peaked; China's property investment needs will likely start to soften towards year-end; and Q3/Q4 infrastructure investment likely face headwinds from stricter enforcement of local government financing rules, it will be extremely hard for China's YTD nominal USD commodity import growth rates to be sustained.
2. China has helped non-commodity exporters too...
China's contribution to global non-commodity reflation has been less impressive but nonetheless important, with YTD non-commodity imports up by just under 13%y/y (2016 ave: 0.8%), growing twice as fast as in Q4 2016. That said, although China has helped key non-commodity exporters like Korea, Japan and the EU, it has not been the only nor always the most dominant source of export support for them.
China has been an important component of Japan's recent export recovery. After more than a year in contraction, Japanese exports bounced back into growth this year with a YTD increase of 8.2%y/y; about 1/3 of of which related to China- bound shipments. ASEAN and South Korea-bound shipments followed, each with a contribution of just under 20%.
For Korea, China has been the second most important source of YTD export demand. Of Korea's YTD 17.2%y/y export growth, 4.2ppt or 25% traced back to ASEAN demand, and 3.8ppt or 22% of which to China-bound exports.
For the less re-export/processing trade-reliant EU, the US has been a more important export market. 18% of its YTD export growth (13%y/y) related to US shipments and 16% to China shipments, both lagging far behind the contribution of intra-EU exports (embedded within the nearly 60% contribution of "Others" .
3. ... thanks to a mix of both final domestic and re-export demand
Understanding how much of China's demand for a country's exports comes from its domestic versus re-export demand is key to understanding how vulnerable that country may be to a slowing China. Though processing trade no longer dominates China's trade structure as it used to (~40% today versus 60% in the 1980s), China remains integral to the global supply chain.
Its non-commodity final demand started improving in H2 2016, gathering further momentum in 2017. YTD volume import growth of "final-user" goods such as fertilizers, grains, cereals edible oils and soybean are all back in strong expansion after zero growth or double-digit contractions in 2016. Import growth of investment/intermediate goods like machinery tools & equipment, and chemicals have all improved visibly YTD versus Q4 2016 too.
Slightly behind leading indicators like the ISM and PMIs, real imports of re- export related items have all improved since the turn of this year too, suggesting improved global demand outside China (e.g. textiles, diodes, semiconductors, liquid crystal display, hi tech products, and even autos). Import growth of electronic integrated circuits which have stayed strong these past 2 years are still holding up at a 9-10%y/y clip, and in YTD value resumed positive growth for the first time in over a year (as did that of high tech product imports).
Where Japan, Korea and the EU are concerned, China's final domestic demand has been most important – accounting for roughly 3⁄4 of their respective YTD China-bound export growth. China's re-export/processing demand also made a positive, albeit smaller, contribution.
For Japan, China's domestic and re-export demand for Japanese exports have both improved since October 2016, though the former (especially for machinery & vehicles, metals and other manufactures) has consistently outpaced the latter. Of Japan's almost 16%y/y growth in YTD exports to China, we estimate that ~11ppt was from non-commodity Chinese domestic demand.
Both Chinese domestic demand and re-export demand for Korean exports have also improved since late 2016, with the former (electronics, machinery & vehicles, chemicals) strengthening relatively more since February. We estimate that of Korea's YTD China-bound exports growth (15.7%y/y), 10-11ppt was related to non-commodity Chinese domestic demand.
Unsurprisingly for the EU, re-exports has played a much smaller role in its China-export recovery – although that said, its detailed country trade data is currently only available until February, so this may have improved since. Of the EU's just over 18%y/y China-bound export growth for the first 2 months of 2017, we estimate that 12-13ppt was related to non-commodity Chinese domestic demand (March not yet available).
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