China Push to Step Up Spending Will Have Little Impact on Steel Industry

Written by Sandy Williams

The China Ministry of Finance is urging the government to step up spending to support growth in the Chinese economy. The announcement on May 28 follows a call for action by Premier Li Keqiang to increase development projects, which he considers a panacea for China’s economic woes.

The notice by the Ministry has three key points: 1) all fiscal departments must allocate budget spending to local levels by the end of second quarter. If no progress is made by the end of third quarter, the funds are to be returned for reallocation; (2) fiscal departments must initiate payment quickly to avoid funds from being idled in fiscal accounts; and (3) an improved assessment mechanism by the Minister of Finance will better relate fiscal spending to fiscal budget.

A report out of Bank of America Merrill Lynch (BofAML) seen by Steel Market Update suggests that China’s escalating anti-corruption campaign has dampened enthusiasm for pushing economic growth as local government officials are reluctant to make changes that may come to the attention of investigators, or, in some cases, are not motivated now that graft payments have become risky to accept. The announcement by the Minister of Finance is intended to compel officials into action.

“In our view, Beijing could reverse the contractionary fiscal policy to some extent by spending the extra government savings on social welfare projects such as social housing, health care, urban infrastructure and infrastructure projects in Western areas,” said BofAML in its recent commentary.

SMU’s Asia commentator had the following insight on the Chinese economy and whether the new budget requirements will affect iron ore or steel pricing:

“The only thing I really get from this is basically that China is not spending or appropriating the Budgetary funds in fear of Anti Corruption or getting thrown in jail or worse. From what we hear, the Budget funds have not been released by the Government for the applied projects as this is being more thoroughly scrutinized, correct as per the article [Bank of America article], but the question remains that when the funds are not released, how can they be spent??? The Government Bodies, I like that terminology (Bodies), have been asked to provide more itemized or detailed expenditure data for the funds applied and that is where the delay is.

This, in my opinion, is a paradox because Grafting in China is a KNOWN fact by all, and now they are asking the Government Bodies to curtail on this while simultaneously expecting to receive kickbacks.

Why doesn’t someone just call a spade a spade (no racial intent) and get on with it vs. making all these explanations which people only read and take as the real truth when it has nothing to do with the facts at all??

To answer your question John, the details in this article will have no impact on Steel Prices. Let’s look at the main items in the article:

1). Social Welfare Projects as Social Housing

(I would like to see hard data that China has social Housing… show me that and I will be amazed.) If Social Housing being the case at hand, then why not give those homes in the 12-13 Ghost cities to those in need?? Why build more??

2). Health Care

Build more Hospitals?? My goodness, there are more clinics and hospitals in China than you can shake a stick at John. The question is Doctors because they all go overseas vs. staying in China. Taiwanese Doctors are going to China to work at Hospitals opened by Taiwanese Conglomerates and now there is a shortage of Doctors in Taiwan!! As for overall Health Care, I mean what can you expect in China?? The wealthy get the best and the poor get the worst, and that will never change for obvious reasons.

3). Urban Infrastructure

There is not that much more they can build that hasn’t already been built John… Plus, these Urban expansion projects are not solely funded by the Government, they petition Private Investment for minimal returns, and no one is interested.

4). Infrastructure Projects in Western Areas

This has been on Beijing’s agenda for the past 15 years and every Premier has made the same trip to the West and has made the same comments, but no action. If you have ever been to Western China, they have Modernized cities John, self sustained. I can see more Airports, Trains etc.., but what else?? Build more Ghost cities for 10 million people that already have housing?? It is not as though the wealthy wish to have condos in Western China when they have homes in HK, Australia, New Zealand etc… Can you imagine experiencing a sunset at 12 midnight in Xinjiang John?? When it is 6PM in BJ, it is 6PM 3000 miles away in Xinjiang Province (One Time Zone).

Nothing is going to happen in China unless the rewards are shared with the Government “Bodies”, and I mean real Bodies John.”

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