Affinity Policy Comment 13 January 2025

Going Out With A Bang

On 10 January, a mere 10 days before Trump was due to enter the White House, Joe Biden unleashed his most comprehensive package of sanctions on Russia. Oil companies, insurers and traders have all been hit, but perhaps most importantly (at least as far as shipping is concerned) is the large list of oil tankers on which sanctions have been slapped.

By our count, just under 350 tankers are now under OFAC sanctions for trading Russian, Iranian and Venezuelan oil. In DWT terms, this equates to just shy of 7 per cent of the entire tanker fleet – both crude and product.

On the crude side, 7.3 per cent of the entire active fleet is now sanctioned; Aframaxes are most affected, with 13.4 per cent of the fleet now sanctioned. It is less emphatic on the product side; just 3.4 per cent of the fleet is sanctioned. LR2s are the most heavily sanctioned fleet – 5.6 per cent of the fleet is now under sanctions.

Sanctions have been in place on vessels for many years, but they are now of greater importance as Washington begins to more keenly enforce them. China’s Shandong Port Group has reportedly banned US-sanctioned vessels from calling at its ports and, if others follow suit for fear of US reprisal, there could be significant ramifications for the tanker markets as supply is artificially but sharply squeezed. An estimated 35 per cent of the dark fleet is now under sanctions.

In other news, China's housing market showed signs of improvement in December, with home sales in the 30 largest cities reaching their highest levels since 2021. Sales in the top four cities rose by 35 per cent y-o-y, and existing home sales are also increasing. This reflects pent-up demand from buyers who had been waiting for a more favourable time to purchase. However, buyers continue to demand price discounts of 5-10 per cent, underscoring that it remains a buyer's market.

January PMI data highlighted strong growth in the construction sector, adding to the optimism in housing. While it remains uncertain whether this is a temporary boost or the start of a sustained recovery, sustained efforts from policymakers will remain essential, especially given how key a turnaround in housing is to unlocking more consumer demand. Policymakers have shown stronger resolve than in recent years, but it remains to be seen if they will take the necessary steps.

In addition to the housing rebound, there has been a renewed focus by policymakers on driving consumer demand. This priority topped the agenda at the recent Central Economic Work Conference, sparking widespread debate among policymakers and market participants alike.

During a recent visit to Shandong province, Premier Li Qiang emphasised the need for swift and decisive action to stimulate consumption from the start of 2025. And last week, details of an expanded trade-in scheme were also unveiled, now covering electronics like smartphones, tablets, and smartwatches, with subsidies of 15 per cent for products priced under CNY 6,000 (approximately USD 820). Furthermore, last month, civil servants’ salaries were raised by 5 per cent. While this measure affected ‘only’ 40 Mn people, it can be expected to further increase spending power as it comes on top of the trade-in scheme, and measures such as payments for those in need and reduced mortgage rates on existing loans.

Still, the most critical factor in driving sustained consumer spending appears to remain a recovery in the housing market. Improved employment conditions are also essential for restoring consumer confidence and ensuring a long-term increase in spending.

The Chinese government is also moving on the fiscal policy side, however, and on 24 December it revealed plans to issue CNY 3 Tr in special treasury bonds in 2025, a threefold increase from 2024. This indicates a more expansionary fiscal policy, with the central government shouldering greater responsibility as local governments face debt distress and lack the capacity for significant stimulus. The funds will support trade-in subsidy programs, technology investments, and other initiatives.

Additionally, according to Danske Bank, the 2025 growth target should remain around 5 per cent, with the budget deficit projected to hit a record 4 per cent. During an annual meeting on 3 January, the People's Bank of China announced plans to cut interest rates and the Reserve Requirement Ratio “at an appropriate time”. However, action has been delayed due to weakening pressure on the CNY and a sharp decline in bond yields, reflecting market anticipation of prolonged low rates.

Chinese leaders also appear increasingly focused on curbing industrial “involution”, which arises from excessive competition and overinvestment in sectors, such as solar panels and EVs. Overcapacity in these industries has led to sharp price declines and eroded companies’ profit margins. The South China Morning Post recently reported that at a late-December closed-door meeting, solar manufacturers agreed to a self-discipline program aimed at reducing fierce competition. However, scepticism remains about the program’s effectiveness, as it’s ultimately a war of attrition where weaker players must exit for meaningful consolidation.

For this strategy to succeed, local governments will need to withdraw support for struggling companies and allow market forces to lead to necessary bankruptcies. While government backing of certain sectors dubbed of strategic importance has enabled significant development and upgrades, it has also driven overinvestment and reduced profitability, underscoring the complex dynamics of China’s industrial policy.

For now, December data showed contrasting trends in manufacturing and services. While the construction PMI improved, the manufacturing PMI (Caixin) declined from 51.5 to 50.5, primarily due to a sharp drop in new export orders (from 51.5 to 48.6). This may reflect a normalisation after November’s potential tariff-driven front-loading, with anecdotal reports of full US warehouses contributing to softer demand. Also, going forward, data can be expected to remain volatile, at least until the new US administration has settled and there is more clarity on trade policy.

In contrast, the services PMI strengthened, rising from 51.5 to 52.2. However, challenges persist in manufacturing, as the PMI for output prices (Caixin) fell from 51.5 to 48.8, highlighting deflationary pressures that continue to weigh on corporate profits.


Affinity Research LLP