CHINESE MARKETS HIT BY SIGNS OF SLUGGISH COMMODITY DEMAND / THE WALL STREET JOURNAL

Chinese Markets Hit by Signs of Sluggish Commodity Demand

By Shen Hong

03/12/2014 02:02 PM ET



SHANGHAI— Signs of weakening Chinese demand for commodities are filling in a picture of a slowing economy and sparking a selloff in the country's currency, its stock market and in prices of the coal, copper and iron ore that China buys.

The selloff rattled markets across the region Wednesday. Japan's Nikkei Stock Average fell 2.6%—its biggest decline in more than a month—and the offshore yuan, which is freely traded outside mainland China, dropped to its lowest level in eight months.

"Growth is slowing, risks are rising, and I think that has probably led to a recalibration of portfolios," said Matthew Sherwood, head of investment markets research at Perpetual Investments in Sydney, which manages 29 billion Australian dollars (US$25.9 billion). "China has gone from the savior of the world to one of the weakest links in the chain."

Iron-ore traders say buyers are staying on the sidelines and stockpiles are rising in China's ports as a drop in exports and tightening credit make steel mills reluctant to add inventory. Copper prices are down on fears that inventory would flood the market if companies dumped the metal to unwind risky trades.

At the Grand Canal Northern Port, a run-down coal-loading station in Shandong province, there was no activity Wednesday afternoon. "Things aren't so good now. Coal prices just aren't stable," said Meng Fanqiang, a manager at the port.

The port, which serves barges plying a canal completed during the Sui Dynasty around A.D. 600 to transport grain from southern China to the north, at its peak shipped four barges of coal a day, each weighing 2,000 to 3,000 tons. Today, the port ships two barges daily and gets paid less for each shipload.

The price for premium hard coking coal from Australia fell 2.4% on Wednesday and is down 13% this year.

China's stock market, one of the world's worst performers this year with a 5.6% decline, sank to its lowest level in nearly eight months on Wednesday. The benchmark Shanghai Composite Index closed down 0.2% at 1997.69, after touching 1974.38, its lowest level since July 30, 2013.

"Pessimism is permeating every corner of the stock market at the moment," said Tangyue Yanglin, a senior investment adviser at Everbright Securities.

The yuan weakened further against the U.S. dollar on Wednesday, falling 0.1% in Shanghai and leaving it down 1.5% this year. The decline is a reversal from years of steady appreciation, including a 2.9% gain in 2013.

Copper extended its slide to a fourth day, falling more than 3% in Shanghai and bringing its decline for the year to around 15%. The metal is piling up in warehouses in China as demand from manufacturers slows. In addition, much of the stored copper is used as collateral for loans. As prices fall, borrowers could come under pressure to post more collateral, forcing them to sell copper to raise money.

Economic concerns about China intensified over the weekend after it said exports fell 18.1% in February. Economists had expected a 5% increase, following a 10.6% expansion in January. The country also posted a rare trade deficit for last month of $22.98 billion.

Investors are awaiting data on Chinese industrial production and fixed-asset investment set to be released Thursday. Economists expect industrial production to have climbed 9.5% in January and February compared with the same two months a year earlier.

Economic data are usually murky at the start of the year in China because of the long Lunar New Year holiday, which some years falls in January and others in February. Concerns have been heightened this year by a slowdown in growth in 2013 that came as Beijing pushed to make changes to the economy.

The big debate among analysts has been whether the Chinese government will step in if growth slows.

"The balance between growth and reform will soon be tested," said Minggao Shen, head of China research at Citigroup. The government seems to be leaning toward defending growth through "milder Chinese medicine rather than radical surgery," Mr. Shen said.

The latest wave of selling in markets was driven by fears that another Chinese company was running into financial trouble. Shares of Baoding Tianwei Baobian Electric Co., a power-equipment maker that has made bad bets on the solar industry in recent years, fell 5.1%, the daily downside limit, and the company's bonds were suspended from trading for a second day.

The share selloff came after the company, which is based in northern China's Hebei province, said overnight that the Shanghai Stock Exchange had disqualified its corporate bonds from being used as collateral for short-term lending among exchange investors.

Zhang Caibo, an official from Baoding Tianwei, said the bonds would be suspended from trading until the company releases its 2014 annual report. She declined to comment further.

Baoding Tianwei's misfortunes raised fresh concerns about the stresses in China's financial system, after midsize solar-energy company Shanghai Chaori Solar Energy Science & Technology Co. on Friday became the first Chinese company to default on its domestic corporate bonds.

Iron-ore prices are down 6% this week, as investors worry about rising supply and weakening demand. "The substantial decline in exports and significant increases in both Chinese port stocks of iron ore and finished steel inventories have sparked fears that spot cargoes could face prolonged downward pressure," said Kash Kamal, a London-based analyst at broker Sucden Financial. "As a result, end users have held off from immediate purchases in the hopes of further declines."

Tim Condon, an economist at ING, said the lack of transparency in China's financial policies often generates uncertainties and anxiety for investors.

"Sentiment has definitely turned sour toward China and it does raise the question why it's so easy to accentuate the negative in this country," he said.

While Beijing's recent move to guide the yuan lower is widely considered a tactic to deter excessive "hot money" inflows—speculative foreign capital— its tolerance of an extra supply of the local currency flooding the nation's financial system is also being interpreted as a stimulus effort.

"When it comes to the low interbank rates, we don't know what policy makers are thinking about. Is this policy easing because the economy is slowing?" Mr. Condon said.

The seven-day repurchase agreement rate, a benchmark for short-term loans among banks, fell to its lowest level in nearly 22 months Wednesday. It closed at 2.23%, down from 2.26% Tuesday and at its lowest point since May 31, 2012, when it hit 2.17%.

Chinese financial institutions issued 644.5 billion yuan ($104.9 billion) in new yuan loans in February, sharply down from 1.32 trillion yuan in January. Total social financing, a broader measurement of credit in the economy, reached 938.7 billion yuan in February, well below 2.58 trillion yuan in the previous month.


—Liyan Qi, Dinny McMahon, Rhiannon Hoyle, Wynne Wang and Daniel Inman contributed to this article.