China’s total social financing (TSF) — a proxy for the economy’s liquidity — fell further in May after peaking in October, indicating steel demand from infrastructure and property construction activities is likely to decline in the coming months, which is expected to add pressure on Chinese steel prices and profit margins, market sources said.

The May drop has been mainly attributed to slowing issuance of local government bonds and tightened financing to property developers and home buyers.

However, China’s TSF rose 11% on the year in May, according to the People’s Bank of China. May numbers decelerated 7 percentage points from April, after peaking in October 2020 at 13.7%.

Market sources expect the TSF growth rate to continue its descent in the coming months, as China aims to rein in local government debt and deleverage the property sector.

On June 4, the ministry revised down the 2021 annual quota of new local government special bonds — a major support to some infrastructure projects, bringing it down from the previously planned Yuan 3.65 trillion ($571 billion) to Yuan 3.47 trillion. The revised quota was also down 7.5% from 2020 levels.

Some market sources said the actual issuance in 2021 might be even lower than the revised quota, as these types of bonds are only allowed to fund profitable infrastructure projects, and remain strictly prohibited for any property-related projects this year.

The new special bonds issued over January-May accounted for just 16.51% of the annual quota, according to the finance ministry.

Moreover, China has stopped approving urban rail transport projects to cities that have no such transport system, in a bid to tackle the hidden debt of local governments, Hunan authorities said June 10, when the province announced it was terminating its application of an urban rail transport project in one of its cities.

Meanwhile, tightened financing for China’s property sector led to a drop in new residential long-term loans in May, falling 10% on the month and 5% on the year. This indicates property sales and investment were likely to slow down in the coming months, which is expected to dent property construction and demand for construction steel, sources said.

Combined infrastructure and property steel demand accounts for about 50% of China’s total steel consumption.

Some market sources said signs of a slowdown in construction steel demand had already emerged, so the market should be cautious about high steel prices and margins, which are largely supported by anticipated steel output cuts and further tightening of steel exports.

On June 11, the Chinese domestic rebar price was assessed at Yuan 5,280/mt ($826/mt), with the sales profit margin at $66/mt, S&P Global Platts data showed.
Source: Platts