09/02/2015 - 17:00

China seeks out foreign fields for excess capacity

09/02/2015 - 17:00

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China is looking to export railways and power plants to improve its external position, with the added benefit of stoking steel demand.

The Chinese government has announced a plan to expand direct investment in overseas infrastructure to beef up its exports and use excess capacity in its industries.

The announcement follows what was another subdued monthly performance for the country’s manufacturing sector.

The country’s powerful State Council voted to fast track the strategy, which it hopes will increase export demand for its industrial equipment sector, using increased foreign direct investment in physical capital to be financed through private and public joint ventures.

Key products including building of railways and nuclear power plants, while the steel and building materials sectors, which are operating below capacity, will also feature prominently.

China contributes around half of global crude steel production by volume, according to the Reserve Bank of Australia, and consequently is the world’s largest importer of seaborne iron ore. Much of this comes from Western Australia, with the Pilbara providing about 40 per cent of the global ocean-going iron ore trade.

HSBC chief economist (China) Qu Hongbin said the move would support demand in the country’s industrial sector.

“Beijing sees this as an effective way to increase the utilisation of domestic industrial capacity and support machinery exports where China increasingly sees as its competitive advantage,” Mr Qu said.

“The meeting pledges policy support for key industries to gain market access and financial support by allowing more overseas fund raising.

“Strong overseas investment will also help China optimise the structure of its balance of payments.

“In the past, large current account surpluses and strong (foreign direct investment) has led to significant accumulation of (foreign exchange) reserves, which are parked in low-yielding financing assets, mostly US treasuries.”

He said the shift from investment in financial to physical assets would help with the Chinese currency’s effective appreciation against its trading partners.

China has a competitive advantage in the development of high-speed railways, Mr Qu said, and was in discussions with a series of developing countries to build that infrastructure.

Steel is a typically a key input in the construction of railway tracks.

Steel production

Meanwhile, Chinese crude steel production lifted to 68 million tonnes in December, from 63.3mt the previous month, according to the World Steel Association.

That total was only slightly above the December 2013 figure, however, of 67mt.

The world’s second-largest steel-producing nation, Japan, was down 1.9 per cent in December.

The Japan Iron and Steel Federation said crude steel production was 9mt, down from 9.2mt in November.

Production for the year to date was up 0.1 per cent.

The Chinese State Council’s announcement comes after HSBC’s latest purchasing managers index for Chinese manufacturing showed that sector had deteriorated marginally in January.

Staffing levels were also cut for the 15th successive month on the back of weak demand.

It was the second successive month the report showed pessimism about the sector, albeit with a slightly better rating.

Mr Qu said export orders had also undergone downward revisions.

“We think demand in the manufacturing sector remains weak and more aggressive monetary and fiscal easing measures will be needed to prevent another sharp slowdown in growth,” he said.

Average input costs also fell, this time for the sixth month in a row, driven by lower raw materials costs.

HSBC said the rate of deflation among manufacturing inputs was at its strongest since mid-2009.

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