High-frequency China: Activity down, interest rates up

Steel production and coal burn in the last 11 days of January were sequentially weaker, with this sizeable sample of coal burn falling more sharply YoY.  Chinese New Year shouldn't have played a decisive roll given it didn't affect the numbers too much in 2013.  Also of note is that interbank rates have remained decidedly higher post the Chinese New Year holiday.

Steel production slipped from the levels seen in mid-Jan, although are still higher than this time last year.  Over the month as a whole, the CISA data were up 3.3%YoY.  All eyes will now be on how quickly production ramps over the next couple of months.

Coal inventory at power plants was a little lower in absolute terms, but up to 22 days in terms of days of use. This implies coal burn fell 4%YoY at the end of Jan and slipped by 1% over the month as a whole.

Its a little more difficult to know how this translates into overall power generation given there was a marked divergence between these numbers and the NBS data in December.  That said, this gels with weaker coal prices.

Hydro generation will start to play a bigger role in the coming months and more recently it has been strong.  But that shouldn't detract from the fact that coal burn accounts for a larger portion of generation this time of year and suggests the overall picture for power is sluggish.

SHIBOR rates appear to be less spiky post the New Year, but they don't appear to be meaningfully lower.

To be sure, it would appear that rates are deliberately higher, with the overnight lending rate, which the PBC has most control over, has been relatively high in the month to date.

So while spreads have been mostly lower, rates further out the curve have still been quite high, with the 1 week rate at ~5%.

Slower activity and tighter credit suggests its a time to be cautious on commodities