Chinese factories face headwinds in post-lockdown recovery

Chinese factories could struggle to keep up momentum as pent-up demand wanes and exports struggle. (AFP)
Short Url
Updated 09 July 2020

Chinese factories face headwinds in post-lockdown recovery

  • China’s passenger car retail sales fell 8 percent in June from a year earlier

BEIJING: Orders for infrastructure materials and equipment have helped industrial output recover faster in China than most places emerging from COVID-19 lockdowns, but further expansion will be hard to attain without stronger broad-based demand and exports.

Prices of copper and steel have surged and share prices for Chinese blue chips struck five-year highs, as state-funded infrastructure projects drove up production of cement, steel and non-ferrous metals.

Railway investment, for example, soared 11.4 percent in April-June from a year earlier versus a 21 percent drop in the first quarter.

Industries gained from pent-up demand for autos and electronics. The property sector, a pillar of growth, also showed signs of rebounding, with real estate investment expanding and sales quickening.

China’s factory-gate prices, still in deflation territory this year, may have turned positive on a monthly basis in June, said Yating Xu, senior economist at IHS Markit, in a sign of recovering demand for manufactured goods.

The optimism also led investment bank ING to forecast no more policy interest rate cuts from the central bank for the rest of the year. “We started to return to thin profit in May and became a bit better in June,” said an official at a state-owned steel mill in central China, declining to be named due to company policy.

“Our demand mainly comes from infrastructure so far this year, especially for steel rebar and medium plates,” he said. Steel rebars are mostly used in construction, and medium steel plates in ships and excavators.

Underpinned by robust infrastructure demand from China, the Baltic dry index, which tracks rates for ships ferrying dry bulk commodities and reflects rates for capesize, surged 257 percent in June from a low struck in May due to the freeze in global trade as a result of the lockdowns.

The rosy outlook stands in stark contrast to the dismal industrial landscapes of other economies still fighting COVID-19. Factory output plunged further in May from a year earlier in Japan, South Korea and the US. Euro zone manufacturing output fell by a record 28 percent in April.

The industrial recovery is expected to help China’s economy post a positive growth rate in the second quarter after contracting for the first time in decades due to COVID-19.

But analysts warn that factories could struggle to keep up momentum even as early as this quarter as pent-up demand wanes, exports struggle and heavy floods take their toll on industries and businesses in the Yangtze Delta.

The surge in demand for automobiles has been released and the auto market entered a traditional lull in June, said the China Passenger Car Association (CPCA) last week. China’s passenger car retail sales fell 8 percent in June from a year earlier.

In May auto sales rose for the first time after a two-year slump, fanning expectations of a strong V-shaped recovery in a pillar industry, supporting the broader economy. Auto deliveries to dealers also rose for the second straight month in May.

Exports, a sector that provides about 200 million urban jobs, are forecast to come under pressure in the third quarter, analysts say, as sales of COVID-19-related medical supplies slow and global demand stays soft.


Bailout will keep Air France-KLM afloat for less than year: CEO

Updated 21 September 2020

Bailout will keep Air France-KLM afloat for less than year: CEO

  • ‘If we base it upon the past few weeks, it is clear that the recovery in traffic will be slower than expected’
  • Governments are coming under pressure to tie airline bailouts to environmental commitments

PARIS: Bailouts provided to Air France-KLM by the French and Dutch governments will keep the airline flying less than a year, its CEO Benjamin Smith said Monday and evoked the possibility of injecting new capital.
In an interview with the French daily l’Opinion, Smith also warned that calls for airlines to contribute more to fight climate change could be catastrophic for their survival which is already under threat due to the coronavirus pandemic.
When countries imposed lockdowns earlier this year to stem the spread of the coronavirus airlines faced steep drops in revenue that have claimed several carriers.
A number of countries stepped in with support, including France which provided $8.2 billion to Air France and the Netherlands which received a $2.9 billion package.
“This support will permit us to hold on less than 12 months,” said Smith.
The reason is that air traffic is picking up very slowly as many northern hemisphere countries are now fearing a second wave of infections.
“If we base it upon the past few weeks, it is clear that the recovery in traffic will be slower than expected,” according to Smith, who said when the bailout was put together the airline was expecting a return to 2019 levels only in 2024.
Smith said discussions were already underway with shareholders on shoring up the airline group, and steps would be taken before the next regular annual meeting in the second quarter of next year.
“One, three or five billion euros? It is too early to put a figure on a possible recapitalization,” he said.
The airline group had $12.12 billion in cash or available under credit lines.
Major shareholders include the French government with a 14.3 percent stake, the Dutch government at 14 percent, as well as Delta and China Eastern airlines which each hold an 8 percent stake.
Governments are coming under pressure to tie airline bailouts to environmental commitments.
One proposal that has come from a citizen’s convention convoked by President Emmanuel Macron would cost airlines an estimated $3.6 billion.
Smith said the imposition of environmental charges on the industry would be “irresponsible and catastrophic” for Air France-KLM.