More Problems For China Labour Market As Workers Go On Strike

I was worried about the Impact Of The Foxccon Suicides On China Labour Market.

Yes, Foxconn had raised its workers pay by about 30%.

On today's Edge Financial article, there's another unsettling development.

China labour strife halts Toyota, Honda plants

• Written by Nathan Layne & Don Durfee
  Wednesday, 23 June 2010 14:50
  
  TOKYO/HONG KONG: Japanese auto giants Toyota and Honda said key factories in south China halted work on Wednesday, June 23 after a strike at a parts supplier, as worker discontent continued to jolt the industry and unnerve investors.
  
  A Toyota Motor Corp plant in Guangdong province that can make 360,000 vehicles a year has stood idle since Tuesday, after workers struck at a nearby parts supplier, Denso (Guangzhou Nansha) Co Ltd, owned by Japan's Denso Corp.
  
  Toyota said production would halt at the assembly plant for all of Wednesday and it had made no decision on when it could restart.
  
  Honda Motor Co said it halted assembly lines at one of two plants at Guangqi Honda, one of the company's joint ventures in China, after a disruption in parts supplies. The idled plant can make up to 240,000 Accord, Fit and other vehicles a year.
  
  The stoppages follow a series of strikes at parts suppliers in Guangdong and other parts of China, laying bare the vulnerability of stretched "just-in-time" supply chains to restive rural migrant workers impatient with wage levels they say lag far behind booming economic growth and company profits.
  
  "The automotive sector in China, especially for foreign companies, is highly profitable, but there hasn't been an appropriate scaling of company profits and workers' earnings," said Chang Kai, a labour law professor at Renmin University in Beijing who earlier advised workers striking at another Honda parts plant.
  
  "Strikes in an industry like this can have a copy-cat effect. Workers think, 'If you can settle your problems by striking, why can't I?'" he said. "This effect may continue unless basic problems are dealt with."
  
  The Denso plant supplies fuel injection equipment and other parts and has stopped shipping since Monday. Clusters of workers in blue uniforms sat in front a plant warehouse on Wednesday.
  
  "The salary is only 1,300 yuan (US$191) a month, including meal subsidies, while my rent costs me 200 yuan a month," a worker surnamed Zhang from Hunan Province told China's official Xinhua news agency.
  
  "I feel not respected by the human resources department. They often say, 'You can leave if you think other plants are better,' when we ask for something," another worker told Xinhua.
  
  The flare-up apparently unnerved some investors.
  
  Honda shares fell 2.3% on Wednesday and have dropped more than 10% since the first strike at its supplier started at around mid-May.
  
  Shares of Toyota lost nearly 9% in the same period, compared with a drop of 5% for the benchmark Nikkei average. The company's shares were down 1.8% on Wednesday morning, in line with the Nikkei.
  
  Denso strike to continue
  Chinese workers' incomes have been rising in recent years, and while any wage rises won from the strikes may unsettle some investors, they do not threaten to unseat the country from its role as a low-cost production base with a workforce held in check by the ruling Communist Party and state-controlled unions.
  
  But the spasm of industrial unrest is a symptom of deeper discontent among workers that could spread unless the government and companies learn to negotiate with a more assertive workforce, said Chang, the Beijing professor.
  
  In recent weeks, strikes have broken out at a supplier of locks to Honda, a Toyota Gosei plant which makes parts for Toyota among others. All have since been resolved. Chinese state-censored media have reported sparingly on the disputes.
  
  "It's an outcome of problems built up over a long time," said Chang. "Workers no longer accept their conditions, but lack the channels to use milder ways to raise their demands. So they're starting to see that strikes are a way."
  
  A striking Denso worker, reached by telephone, said no compromise was in sight and the workers believed the company was vulnerable to extended pressure.
  
  "We'll continue to strike today as the management failed to come up with a wage increase offer," said the worker, who declined to give his name for fear of retribution.
  
  Denso spokeswoman Yoko Suga said no agreement had yet been reached with workers, who have been negotiating for higher wages and better benefits.
  
  Employees are asking that wages rise from between 1,100 and 1,300 yuan ($161-$191) per month to between 1,800 and 1,900 yuan, according to the Denso employee. Other recent disputes have been settled for raises smaller than that.
  
  Automakers who have not faced labour disputes may also find themselves pressed to raise wages.
  
  "If they don't want to lose the China market, (car makers) will have to raise salaries, especially at parts suppliers," said Lin Huaibin, an analyst with IHS Global Insight. — Reuters

Andy Xie: Getting The Yuan Right

Everyone is now talking about Yuan's appreciation. Now back in April, Andy Xie wrote the following piece, Get the Yuan Right, Prove Pundits Wrong and Andy actually thinks the opposite. He reckons that the Yuan appreciation is a bubble!!

• Hype over an 'imminent' increase in yuan value ignores China's greater need for higher interest rates and fewer bubbles
  
  Unless China exits its economic stimulus quickly, the nation's inflation rate could rise to double digit levels sooner than many expect. The right sequence of events for a proper response to inflation would be to raise interest rates and then, if necessary, move the yuan exchange rate.
  
  But acting on the currency first, especially in small steps, would further inflate China's property bubble and inflation, potentially leading to a major economic crisis in two years. A small increase in the yuan's value would fail to resolve two pressing problems: inflationary pressure at home, and political pressure from the United States. Moreover, a small appreciation would attract hot money, stoking inflationary pressure.
  
  Imported goods' share of consumption is too small in China for a small currency appreciation to affect the consumer price index. At the same time, a minor appreciation would fail to placate U.S. interest groups, some of whom are demanding a rise in yuan value of one-third or more. Some argue it should double in value. Indeed, a slight appreciation would merely exacerbate existing problems by emboldening U.S. supporters of a stronger yuan to demand even greater appreciation.
  
  Meanwhile, financial markets are back on the yuan appreciation watch. Inflation pressure at home and political pressure from the United States have inflamed expectations. Every week or two, the media reports that some notable person has predicted an imminent yuan appreciation of 5 percent or so. So much ink has been spilled on this issue that the consensus on yuan appreciation has become the longest lasting and most widely accepted consensus in financial history. It's lasted for so long because financial markets have few stories to stir fry, and an appreciation of a pegged currency is a free lunch. Nothing gets financial markets more excited than a free lunch.
  
  The intensity and persistence of yuan appreciation expectations point to support for China's vast property bubble. These expectations have increased the concentration of hot money in China, which in turn has caused excess liquidity and speculation, fueling the property bubble.
  
  By all measures (stock value to GDP ratios, inventory value to GDP ratios, new property sales to GDP ratios, price to income ratios, rental yields, and vacancy rates) China's property market is one of the biggest bubbles ever. It's probably much bigger than the U.S. property bubble relative to GDP.
  
  Now, the same liquidity that fueled the property bubble is leading to rapid pickup for consumer price inflation. One just needs to look around to see the seriousness of the inflation picture, regardless of how it's measured. Denying that inflation is serious in China right now is akin to burying one's head in the sand. This sort of denial is how countries in Southeast Asia got into a crisis situation in the past: They kept real interest rates too low and fueled speculation that eventually destroyed their banking systems.
  
  If China's economic stimulus is withdrawn, the property bubble will cool. And it may even burst. This is why so many interest groups consistently argue against higher interest rates. Instead, they support using currency appreciation to cool inflation.
  
  Why is this policy option so popular among interest groups? Because it would fuel the hot money inflow, which in turn would support and expand the property bubble. Of course, inflating the property bubble will only worsen inflation. And the odds are that a small currency appreciation would only make the property bubble bigger and inflation worse.
  
  In a standard economy, currency appreciation cools inflation by decreasing import prices. China's imports are mainly raw materials, equipment and components. A small currency appreciation would have virtually no effect toward cooling inflation. So while a small appreciation might be justified politically, it should not be used to fight inflation.
  
  On the other hand, a major appreciation or revaluation could cool inflation by removing further currency appreciation expectations. It would trigger a hot money exit from China, creating a liquidity crunch that would almost certainly burst the property bubble. I doubt anyone would support such a policy move.
  
  For China to achieve a soft landing from the current property bubble – if this is at all possible – interest rates must steadily increase by 2 percentage points in 2010, another 3 points in 2011, and further in 2012. Such a trajectory for interest rates would not burst the bubble, but it would prevent real estate interest rates from further declining in an atmosphere of rising inflation. At some point, real estate interest rates will start inching up and slowly rein in speculation. Stopping real estate interest rates from declining further would prevent inflation expectations from accelerating, which in turn could halt inflation's accelerating pace.
  
  Getting It Wrong
  
  But let's return to fact that the most widely held belief today on Wall Street is that a rise in the yuan's value is a foregone conclusion. In the past, Wall Street forecasters have had trouble getting big calls right. Indeed, over the past two decades Wall Streeters have missed three of the biggest calls: the East Asian Miracle, the Internet Revolution, and Financial Innovation, i.e., derivatives. All three mega-trends had considerable substance. But U.S. financial markets misread implications of these trends.
  
  In 1995, the most widely accepted consensus on Wall Street was that Southeast Asian currencies such as the Malaysian ringit would surely appreciate. At the time the East Asian Miracle – referring to strong, prolonged economic growth for Southeast Asian economies and South Korea – was all the rage on Wall Street. It was rooted in the fact that these economies had been growing with strength for many years.
  
  But it was wrong to conclude that their currencies should appreciate. Many well-known hedge funds took big positions on these currencies in 1995, but two years later the Asian Financial Crisis brought them down. Currencies that had been under appreciation pressure two years earlier suddenly collapsed.
  
  Wall Street got the causality of currency strength and economic growth all wrong. The East Asian Miracle was based on cheap currencies that supported export growth. Inflation ended the model, as inflation makes a currency more expensive. An export economy can avoid inflation with a big appreciation of its currency as soon as inflation hints surface. But when inflation persists for a number of years, a currency has already appreciated sufficiently in real value, and the right policy response is to increase interest rates substantially to cool inflation. In 1995, currencies of the East Asian Miracle economies were already overvalued after many years of high inflation. The Wall Street consensus then created speculative demand for these currencies and, hence, appreciation pressure. In other words, the appreciation pressure was a bubble.
  
  In 2000, the Internet explosion seized Wall Street's imagination. It was a revolutionary technology that promised to raise economic productivity substantially – and it did. But investors who enthusiastically bought Internet stocks lost billions.
  
  Too many analysts hyped Internet companies on the premise that companies would reap all the revolution's benefits. Although these companies were indeed driving the revolution, competition passed most of the benefits to consumers in terms of lower prices. Profits were sketchy.
  
  More recently, financial innovation in the form of derivatives and synthetic financial products promised to decrease risks and, hence, lower funding costs for all. The belief in their effectiveness led to rising demand and, hence, leverage. Subsequently, rising leverage led to a credit bubble. For a few years, the credit bubble kept the economy strong, controlling bankruptcy rates. A visible, declining risk strengthened the belief that derivative products were indeed decreasing risk, which further inflated demand for them. Now we now it was a bubble.
  
  Right on the Yuan?
  
  If Wall Street got its biggest calls wrong over the past two decades, might it be wrong on the yuan, too? On the surface, it seems self-evident that the yuan is under appreciation pressure. Like any product, a currency's value depends on supply and demand. When the two are mismatched, foreign exchange reserves rise or fall. China's foreign exchange reserves have risen massively in the past five years, which means demand for the yuan has exceeded supply. This could be viewed as prima facie evidence that the currency is undervalued.
  
  Some argue that pressure for a rising yuan is not a bubble by noting that China's large trade surplus contributes to about half of the increase in foreign exchange reserves. Hot money may be responsible for only half the pressure. Hence, they say, it cannot be a bubble. But history is full of examples of currency appreciation pressure building a bubble.
  
  I am surprised that China is still running a trade surplus. The surplus is declining, but considering how depressed the world economy is and how hot China's is, a trade deficit would be more likely. The surplus, I think, can be attributed more to distortions in domestic pricing than the currency's cheapness.
  
  First, high property prices are a major deterrent to middle class consumption. In mature economies, rising property prices boost consumption through a positive wealth effect because most middle class households already own property. In China, the positive wealth effect is limited because the credit system is not there for the middle class to monetize capital gains. But first-time buyers, such as newlyweds, have to save more to purchase property. Indeed, since prices are so high, parents have to save to help them. Hence, China's property bubble suppresses consumption and, therefore, boosts the trade surplus.
  
  Second, prices for middle class goods and services are very high. Autos stand out: Prices in China for cars, even those built domestically, are the highest in the world. Auto demand has been rising rapidly with middle class expansion, but it would rise even faster without price distortions. Imports would be much higher, too, which would reduce the trade surplus. Actually, though, consumption in China is higher that should be expected, since China's middle class incomes are only 20 to 30 percent of OECD levels.
  
  Third, China's taxes on the middle class are too high. The top marginal income tax rate of 45 percent applies at quite low income levels by international standards. The 17 percent VAT is also among the highest in the world. Because China tends to invest its tax proceeds, high taxes suppress consumption.
  
  If China's property and consumption prices as well as tax rates decline to international levels, would China still have a trade surplus? Good question. If the answer is yes, the right policy would be to adjust prices rather than the exchange rate.
  
  Whenever a country successfully industrializes, its currency value should appreciate. This appreciation can come in the form of a higher exchange rate or inflation. What worries me is that inflation has already happened. China's real exchange rate may have appreciated greatly in the past three years. Even though China's reported inflation rate has been relatively low, prices that one encounters in daily life appear to have risen enormously. Foreigners who visit China are often surprised by prices, which are even higher than in many developed countries. Even China-made retail products are more expensive in China than in other countries.
  
  I am not sure that yuan appreciation pressure is entirely a bubble. But a big chunk is. Instead of looking at appreciation pressure per se, it would be better to get rid of the hot money and clean up domestic price distortions. These should be the first steps. If yuan demand still exceeds supply afterward, the exchange rate should move.
  
  Many analysts argue that raising interest rates would attract more hot money. This is wrong. Hot money comes to China for currency appreciation and asset bubble reasons, not to chase interest rates. When an interest rate is raised, expectations for property price appreciation wane and hot money is more likely to fall than rise.
  
  Increasing the yuan's value a bit would certainly trigger more frenzy. Any new property booms that follow may support the economy for a time. But the long term consequences would be severe. Indeed, a small appreciation could make a crisis inevitable.
  
  The temptation for a small move in the exchange rate is high. It seems to be a cost-free step. Many hope the United States would be placated by it. Even though exporters may be hurt a bit, the near-term domestic economy could benefit. It may seem a perfect short-term fix. But it's the wrong thing to do, because there is no real free lunch. What's free one day could cost a lot more in the future.
  

Impact Of The Foxccon Suicides On China Labour Market?

Ever wonder the impact of the Foxconn suicides on the China labour market?

Foxconn raised its workers pay by about 30%.

How would this impact the Chinese labour market? Would this signal the end of the cheap labour market?

Well Andy Xie has written one very interesting piece on this issue.

• By Andy Xie 06.07.2010 11:17
  Dismantling Factories in a Dreamweaver Nation
  
  A new generation is challenging China's labor-squeezing business model and an older generation that apparently doesn't get it
  
  A decade ago, I took a group of fund managers to an assembly line at an electronics manufacturing contractor in China. We saw rows and rows of young women hunkered down, concentrating on putting together tiny parts. They had few toilet breaks, and during rest periods they had to sit at their benches.
  
  "They're all 18," the line manager told me. "We need nimble fingers. In a few years, we will replace them with another batch of 18-year-olds."
  
  I wrote a story after that visit. I didn't judge the situation but stated that a compliant labor force willing to be pushed to the extreme was the fuel for China's economic miracle. The engine was the mutually beneficial relationship between western companies with technologies, brands and distribution channels, and China-based manufacturing outsourcing companies that specialized in taking advantage of China's vast, cheap labor force. These included Taiwanese companies, which have been by far the most successful in the original equipment manufacturer (OEM) business.
  
  The fund managers with me on the visit wanted to determine sustainability and profitability before deciding whether to buy the company's shares. They thought an endless supply of labor would ensure the model's profitability, and they were bullish about the company. What's happened in the years since has proven them right.
  
  But will they be right indefinitely? To answer that question, we can glance back to the days of silent film star Charlie Chaplin. In his movies, Chaplin parodied the inhumane nature of the modern factory system, especially monotonous human movement on assembly lines. What he portrayed vanished a long time ago in developed countries, driven out by rising labor costs. Factory owners invested in automation, such as robots that now dominate modern auto assembly plants.
  
  When multinational companies outsourced production to China, though, their business became less capital intensive. They took advantage of low labor costs and abundant supply. Some businesses, such as battery makers, started substituting machines with people. But no one could have predicted how far the outsourcing model, particularly in the electronics sector, would go while companies scaled up and maximized economies of scale by using cheap labor.
  
  Scaling Higher
  
  Economies of scale are typically associated with capital intensive industries. When a business requires a lump-sum fixed investment, it requires a certain scale to make the investment pay. Outsourcing businesses in China are labor intensive but have scaled up massively. Some businesses employ hundreds of thousands, often at a single location. So where do they get the economies of scale?
  
  I know of two factors that can be scaled up in such businesses: customer relations, and what I call labor squeeze.
  
  Good relations with big buyers such as Apple and HP are not easily obtained. Years of interaction are needed to build necessary trust. Suppliers that prove better than others are retained, while the rest are dumped. As time goes by, the number of suppliers shrinks and the survivors expand.
  
  Thus, economies of scale are improved through good management of customer relations. Apple, for example, demands total secrecy in the production of its products. This goal cannot be met if it uses many suppliers, so when it signs with a trustworthy supplier a virtuous cycle is created.
  
  An even more important factor is labor management. What I observed during my visit 10 years ago was actually the key to economies of scale. To put it bluntly, the key competence of a successful OEM in China is to squeeze labor to the maximum extent possible. That skill is developed within an organization. When a company employs hundreds of thousands from all over China, it needs a massive machine that involves recruiting, housing, training, and worker management on the factory floor.
  
  For example, the factory I visited derives its economies of scale from 1) knowing where to find all the 18-year-old girls, 2) convincing them to stay in factory dormitories, 3) training them to put the parts together, and 4) ensuring that no one takes too many toilet breaks. This is all part of a huge system that can derive considerable economies of scale by processing hundreds of thousands of workers.
  
  Labor management as a core competitive advantage in East Asia began in Japan. After the Meiji Reforms, Japan wanted to industrialize quickly but faced the challenge of turning agricultural labor into industrial labor. It looked to the military for a role model. The military faced a similar challenge: It had to turn farm boys into soldiers. The answer was maximum pressure and total regimentation. Factory uniforms, morning exercises, company loyalty indoctrination, etc., thus became unique characteristics of Japanese factories.
  
  This model becomes less relevant as the transition from rural to urban labor force winds down and labor costs rise. Nowadays, Japanese factories have few workers and lots of robots on factory floors.
  
  The Japanese military factory management system spread to other parts of East Asia, especially Taiwan. It was a Japanese colony for a half-century and receptive to Japanese management skills. When the yen's value rose in the 1970s, Taiwan got its first opportunity to take away Japanese market share by adopting the Japanese factory management system.
  
  And when the Taiwanese took their businesses to the mainland, they found a place for applying their skill with 50 times as many people. Because they combine the Japanese system and knowledge of China's labor force, they are better than Japanese in managing factories in China.
  
  The magnitude of scaling up by Taiwanese businesses is beyond what the Japanese could have imagined. Indeed, no other businesses have done what Taiwanese businessmen have with hundreds of thousands of workers in labor intensive operations.
  
  This Taiwanese success drove an economic restructuring in the United States. It allowed multinational companies to focus on research and development, branding and distribution. Today, a U.S. brand company can dream up a product and order it from a Taiwanese company with factories in China as easily as ordering a pizza from Pizza Hut. Without Taiwanese factories in China, it is hard to believe that Wal-Mart and Apple, the era's quintessential creatures, could have become as successful as they are.
  
  This sustainability of this profitable relationship between U.S. brand and distribution companies and Taiwanese factories is based on a Chinese labor force that continues to be plentiful and willing to accept working conditions.
  
  How Much Longer?
  
  In early 1990s, when I was working in Latin America, I became bullish on China's future. I saw Chinese workers would go much farther than elsewhere to earn a little money for two reasons: a cultural acceptance of "eating bitterness" in life; and familial obligations.
  
  The girls at the factory I visited were earning US$ 100 a month, which was not a bad wage. That money could be used to pay for a younger brother's tuition, a mother's medical bill and, if circumstance permitted, building a house for the whole family. Each worker was willing to sacrifice herself for the family; she was not living for herself. Essentially, she accepted hardship.
  
  These factors have changed. Today's young adults are less willing to eat bitterness. They are the first generation to grow up during prosperity, without worrying about food and shelter. Many were pampered by parents sensitive to the one-child policy. They are more like counterparts in other countries, which is good for China's international relations.
  
  Moreover, rural families are not desperate as they were a decade ago. Siblings are few, and the government pays much more for rural education. Health insurance is decreasing the numbers of families facing financial crises due to sickness. Most rural families have built houses. And familial obligations for today's rural youth are not as urgent as in the past.
  
  Meanwhile, inflation has severely eroded income value. Today's rural youth aspire to live in big cities, yet property prices in cities have grown twice as fast as wages. Dreams of owning a house in a comfortable city are becoming more distant.
  
  Recent events at Foxconn and Honda factories are symbols of this new China. The labor force isn't as plentiful or compliant as before, and the ways that governments and businesses are handling the situations expose their ignorance of a new reality. They still think these are isolated incidents and, through pressure and bribery (such as a little wage increase for all and then firing rebel leaders) can bring the situation back to normal.
  
  They think this way because of a generation gap, and the unusual relationship between local governments and businesses in China. The economy has raced three times faster than western economies did a century ago, and the generation gap seems three times larger as well. Today's young adults and their parents may as well be from different centuries. But government and business leaders are all from the parental generation, handling labor crises from this old perspective.
  
  The governing class judges everything on short-term, marginal economic improvement rather than according to dreams and long-term goals. Today's young people are more concerned about what will happen to them in the future. They want to settle down in big cities and have interesting, well-paying jobs – just like their counterparts in other countries. This vast generation gap in perception is the force behind social tension over China's property bubble as well as factory working conditions.
  
  The current factory system is unable to realize the dreams of today's young people. China's factories are often in isolated locations and self-contained. Youths who leave villages for these jobs find themselves more isolated than at home, with little hope of integration into urban communities. Indeed, they are neither in city or village. It's the most isolated life possible.
  
  The compensation system makes their lives extremely difficult as well. Base pay is low, and only with massive overtime can they expect close to 2,000 yuan a month. They have no time for self improvement or integrating into modern urban life. In a few years, they will lose their youth and jobs, but they still will not have the ability or financial resources to live in cities.
  
  Business leaders and government officials, of course, are asking why these workers aren't willing to accept these conditions, like the workers of a decade ago. They grew up in poverty and rule the country with a view that marginal economic improvement is the purpose of life. They don't appreciate, however, that times have changed: The previous generation focused on economic benefits for relatives in villages, not their own futures.
  
  The unusual relationship between factory owners and local governments makes it difficult to resolve or prevent labor problems. Most coastal factories have workers from interior provinces. The governments have few ties to workers, but they are very connected to factory owners through tax revenues and other benefits. Local governments, therefore, side with the businesses when dealing with workers.
  
  To improve the situation, the central government should limit these major, isolated factory sites. In the future, they should be located close to cities. As in other countries, workers should be encouraged to rent housing rather than live in factory dormitories. They should have a chance to integrate into urban life.
  
  For example, future factories should locate close to provincial capitals such as Changsha, Chengdu, Hefei and Nanchang, which until now have been supplying workers for coastal regions. As a general rule, these cities should discourage factory dormitories but instead build public transportation systems to link factories and residential areas.
  
  For many, these sorts of solutions to China's labor challenges may be apparent. But government and business leaders may not understand them at all. They are blinded by the urge to continue operating within the confines of the old model while protecting businesses from potential buyers in the West. So, when dealing with crises such as those at Foxconn and Honda, they try temporary fixes.
  
  I'm afraid similar yet greater problems will eventually surface. Ultimately, market force will bring down the current system. Workers don't have to show up for factory jobs. They can join the urban service sector instead, where wages may be a bit lower but lifestyles are much better, and have a chance to integrate into urban life.
  
  Rising labor costs will ultimately force factories closer to labor sources, and working conditions will turn more humane. The biggest losers will be coastal governments that side with the factories to protect their revenues. If they refuse to change, they will lose the factories and all those nimble fingers.

Source: http://english.caing.com/2010-06-07/100150460.html

Plunging Baltic Dry Index Reflects The Slowing China Commodity Demand

The Baltic Dry had been plunging since hitting a high of 4209 on 26th May.

Yes, I am aware the possibility that one of causes of the steep decline could be caused by the surge in the supply of vessels but what I am concerned about is the slowdown of China's purchase of commodities.

The following news clip posted on Reuters offers many suggestions.. China commodities demand slows despite export pickup

• By Polly Yam and Ruby Lian
  
  Business Economy
  
  HONG KONG/SHANGHAI (Reuters) - China's imports of industrial commodities slowed in May despite a leap of almost 50 percent in the country's overall export figures, which global markets took as an encouraging signal about the state of the global economy.
  
  China's total exports rose 48.5 percent in May from a year earlier and imports were up 48.3 percent, China's customs office said on Thursday, giving China a trade surplus of $19.5 billion, up from just $1.7 billion in April.
  
  Imports of crude oil, refined fuel, copper, iron ore and rubber all slumped compared with April, giving little evidence of Chinese export strength feeding through into commodity demand.
  
  Crude oil exports slid 16 percent, copper shipments fell 9 percent, and rubber exports fell 36 percent compared with the previous month. Aluminium imports were flat on the month, but 72 percent down from May last year.
  
  However, China's commodity exports did benefit from the jump in exports overall, with net exports of steel products rising by more than a quarter to almost 5 million tonnes, a reversal of China's unusual position as a net importer a year ago.
  
  Within China, many commodity traders are nervous of demand falling off because of a slowing property market and cooling growth in car sales, as well as oversupply of materials imported in vast quantities when prices fell after the financial crisis.
  
  China's buying power was boosted throughout 2009 by the relative weakness of most other economies, enabling it to snap up sought-after supplies with little competition. That honeymoon has now ended.
  
  "Chinese copper firms reduced their copper buys in May after international copper prices fell, despite running rates at copper smelters remaining at high levels. This means they were using their inventories," said Fang Junfeng, an analyst at Shanghai Cifco.
  
  "June copper imports are expected to remain at the same level as May. But imports could fall by about 10 percent in July when the peak demand season ends."
  
  
  SLUGGISH DEMAND, TOUGH EXPORTS
  
  China's huge steel sector, which produced almost half the world's steel output last year, is now facing rising costs and production cuts in the third quarter of the year.
  
  Citi analysts said in a research note that despite a long period of destocking, current trader inventory levels were still 35 percent higher than the 2009 average.
  
  "We believe steel prices have no way to go but to fall off in the third quarter. Weak seasonality, sluggish demand from downstream and tough exports are all driving prices downwards," they said.
  
  Exports of coke, used by steelmakers, almost doubled to more than 20 times the volume shipped a year ago, despite a 40 percent export tax, implying a lack of domestic demand. Imports of iron ore also fell by 6.2 percent from April.
  
  "Most of the deals were signed in March or early April when prices were still high and buying was active, but orders have dramatically fallen in May after prices plummeted," said an iron ore trader based in Ningbo.
  
  Imports of soybeans also rose on the month, to 4.37 million tonnes, but some buyers are cancelling cargoes after overbooking imports, leaving ports swamped with supplies.
  
  "We have not booked anything for August. There are too many supplies at home and crushing margins were negative, which could last for two months," said an official at a soy crushing firm in Dalian.