Sell and buy on signals: Is China’s slower growth priced in for dry bulk shippers?

China and dry bulk shipping demand

As the world’s largest importer of iron ore and coal, which are sensitive to economic growth, China’s economic output is a key driver of dry bulk shipping demand. Economic output is measured in gross domestic product (GDP), which is the sum of consumption, investment, government spending, and net export (exports minus imports). Although it’s a lagging indicator since it’s reported every quarter, policymakers could nonetheless use GDP to adjust policies.

China GDP and Steel Output 2013-07-15Enlarge Graph

Second quarter GDP meets estimate

On July 15, China’s National Bureau of Statistics Agency reported annual growth of 7.5% in gross domestic product for the second quarter of 2013. Asian markets rose on the day the news was announced on relief that economic growth didn’t fall below the rate that the government has set as a target for this year. Whether this is mere coincidence or is being rigged is something to think about (or is it really necessary to?). But going into the week, several economists were estimating growth of between 7.0% and 7.5%. Finance Minister Lou Jiwei said in the prior week that China could tolerate growth of 7.0%, spooking concerns that the government may do nothing until economic activity falls to 7.0%. There was some confusion after the official Xinhua news agency reported Jiwei claiming that the government’s target growth for this year was 7.0%. However, it was later corrected to be 7.5%.

Sentiment turning around

Now that China’s GDP growth has fallen to 7.5%, the government’s stance would likely change if economic growth slows further. As premier Li Keqiang was recently quoted, “Neither should we change policy orientation due to temporary economic fluctuations, which may affect the hard-won restructuring opportunity, nor should we lack vigilance and preparations when the economy might slide below the reasonable range.” After all, China hasn’t missed a single year’s growth target since the Asian financial crisis in 1998.

FXI ETFEnlarge Graph

As the market has fallen since the beginning of the year, cued from the government about lower growth ahead, the iShares FTSE/Xinhua 25 index ETF (FXI) is now near the lows it saw last year. This means the market could have priced much—if not all—of the downside in. However, investors must be cautious, because support from the government may not come until further signs of deterioration in the economy and negative news stir some fear, causing the market to sell off. Perhaps, though, China doesn’t need any stimulus at the moment, as other indicators such as car sales and construction activities have shown resilience (see our Macro Trends Page for other indicators).

If economic growth holds at 7.5% this year, it will support dry bulk shipment growth. This would be positive for dry bulk shippers such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Eagle Bulk Shipping Inc. (EGLE), Knightsbridge Tankers Ltd. (VLCCF), and Navios Maritime Partners LP (NMM).