While China seems comfortable with a slower rate of GDP growth, the government will continue to support the economy with targeted infrastructure investment. Meanwhile, it is also focusing more on the environment, which has a potential impact on coal and steel, as well as natural gas and oil. Sebastian Lewis takes a look at how China's plans, as announced at the recent National People's Congress, could affect energy and commodity markets.
Post-National People's Congress review: What to look out for in China's energy and commodity markets
By Sebastian Lewis
Hello and welcome to the Snapshot, our series that examines the forces shaping and driving global commodity markets today.
The National People's Congress – China’s parliament – has recently finished in Beijing.
This meeting is closely watched by analysts for clues as to the Chinese government’s plans for the year and how these impact markets.
First, the government is targeting economic growth of 6.5% for the year – this is not much lower than last year’s actual GDP growth of 6.7%. What does this mean? Well, while it’s clear that Beijing is comfortable with a slower rate of economic growth, it does not want it to be that much slower. They will still be supporting the economy with targeted investment in areas like railways, highways, water conservation – all of which will support metals and energy demand.
Last year the government was very successful in removing excess capacity in the steel and coal as part of its supply side reform policy – and this is expected to continue this year with government targeting a further capacity cuts with 50 million tons of steel and 150 million tons of coal.
This had a significant impact on prices in 2016 and it’s very likely the trend will continue and that they will remain at elevated levels throughout 2017.
However the outlook for the real estate sector, which was so strong last year, does not look as promising. Government efforts to control house prices including restricting mortgage lending likely to have a knock on effect on demand for everything from steel to cement, aluminum and diesel.
Over in the oil and gas sector we expect the government to speed up reforms. While the exact plans remain unclear, look out for a loosening of restrictions on foreign investment in upstream oil and gas exploration, and maybe finally, reform of the midstream sector with a new pipeline company being spun out from the big three state oil companies.
Finally expect a much bigger focus on the environment and especially efforts to restrict demand for coal. Government plans to get rid of small scale coal furnaces in cities and move more than 3 million households off coal to electricity and natural gas. China is also suspending or postponing construction of coal-fired power stations, and all these will be negative for coal demand, which as you can see has been declining since 2014.
That’s all from me. Until next time on the Snapshot, we’ll keep an eye on the markets.