China—Reforms will have mixed effects on Australian commodities
Premier Li Keqiang set China’s 2017 growth target at ‘about 6.5%’ at the National People’s Congress this month. This is lower than the 6.5% to 7% target in 2016. The more conservative outlook acknowledges slower momentum in the economy and allows the government room to lower unsustainable credit growth and emphasise structural reforms—including capacity reduction in the steel and coal industries. Authorities aim to cut steel capacity by 50Mt and coal output by 150Mt this year. Lower domestic coal production will prop up the price of Australian thermal coal. But lower steel output is likely to weigh on iron ore and coking coal prices.
Premier Li also restated the need to reduce red tape and reform the financial sector and state-owned enterprises. Modest improvements in these areas have so far been short of expectations—but implementation is likely to gain momentum after China's 19th Communist Party Congress later this year. This will help contain growing systemic risks in Australia’s largest export market.