China 'to slow' commodities demand
(CNN) -- China's economy grew at a breathtaking 9.0 percent-plus last year, but a government-ordered cooling of its booming construction sector will have a big impact on global commodities demand, an analyst warns.
HSBC economist Qu Hongbin said Premier Wen Jiabao last month ordered state banks to curb lending to counteract over-investment in industrial parks, big urban construction projects and shopping malls.
Wen reinforced that theme in his address to the National People's Congress Friday, saying the government would crack down on "haphazard" and "redundant" investment.
Wen told the NPC he expected China's economy would still grow at more than 7 percent this year, but the focus would shift to raising incomes in rural areas.
In a commentary released just before the Congress, Hong Kong-based Qu said Wen's lending order in February meant that commodity demand would continue in China for the next couple of years, but at a slower pace than 2003.
"This slowdown, together with new capacity, is likely to have a material impact on global demand for commodities over the next two years," Qu said.
Global resources giants such as BHP Billiton, Rio Tinto, and Brazil's CRVD have seen a surge in sales and profits recently on the strength of their supply agreements with China.
Earlier this week, for example, BHP said it reached agreement with four of China's leading steel mills to supply iron ore worth $9 billion over 25 years.
But Qu noted that the Chinese Association of Steel Industries predicts demand in 2004-05 will grow at only 7 percent, compared to 21 percent last year, and that if investment growth continues at its current pace, domestic steel-making capacity will exceed demand by 80 million tonnes or 30 percent by 2005.
Qu said Wen warned last month that some of China's urban developments programs were ill-considered, and that some sectors -- such as steel, cement and aluminium -- were showing signs of over-investment.
As a result, credit is being tightened, leading to slower growth in fixed investment.
"We expect growth in fixed investment to slow from 27 percent last year to 15 percent in 2004 and around 10 percent in 2005," Qu noted.
Qu said while the slowdown was gradual, it was likely to have a "substantial impact" on demand for raw materials.
In his opening address to the NPC, Wen also highlighted a crackdown on corruption related to China's property and construction sector, saying some bureaucrats were 'wasteful, extravagant ... and sometimes even corrupt."
He said the fight to tackle corruption would be an "arduous task."
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Just as nearly everyone believed the crack-up boom on commodities would go on forever. Let's see when the slowdown occurs, but there is no doubt in my mind that it will, and it won't take a rate hike to do it either.
Mish |
