China’s stimulus will not stop metal demand falling

For commodity markets, China’s annual “Two Session” parliamentary meetings are arguably the most important events of the year. It is when policymakers announce their macro economic objectives and fiscal plans for the world’s biggest consumer of raw materials.

As such the National People’s Congress, as it is also known, can have a big impact on commodity prices — both negative and positive. At this year’s meeting Premier Li Keqiang announced a Rmb6.1tn ($853bn) stimulus package to stabilise the economy following the coronavirus disruptions. That is equivalent to 6.1 per cent of nominal gross domestic product.

The new stimulus measures will increase demand for raw materials in key sectors such as construction and transport. However, it will not be as steel-intensive as previous packages with copper likely to benefit the most from the new infrastructure spend. Traditional projects such as bridges, roads, and airports were not mentioned.

The commodity industry has fond memories of the mega stimulus unleashed by China after the 2008 financial crisis. That was delivered mainly in the form of direct government spending on infrastructure. It drove a sharp recovery in commodity demand, generating a multi-decade peak in commodity prices that boosted mining sector profitability.

But the episode taught China that fiscal bazookas come with costs. For example, a misallocation of resources (eg, bridges to nowhere) that lowers productivity and gives rise to pockets of overheating, especially in property. In contrast, China’s current fiscal stance has been measured and targeted.

Financial markets responded negatively to these announcements. Chinese stock prices fell 2 per cent, aluminium traded on the Shanghai futures exchange fell 1 per cent as did base metals prices listed on the London Metal Exchange.

The package includes a Rmb2.5tn cut in taxes and expenses, a Rmb3.75tn quota for local government special bond issuance — an increase of Rmb1.6tn over last year — and a Rmb1tn issuance of government bonds for Covid-19 control.

The deficit-to-GDP target was increased to 3.6 per cent, crossing the informal rule of keeping it below 3 per cent. Beijing also abandoned its growth target for 2020, signalling acceptance that growth in 2020 will be well below the 6 per cent or so achieved in recent years.

Taken together, these measures show that China is adjusting its policy on the margin to take account of the pandemic that has hit the global economy.

Mr Li identified three priority spending areas: new infrastructure, new urbanisation, and other big projects. This is in line with China’s medium-term strategy to advance its economy through investment in science and technology.

New infrastructure includes building next-generation information networks, 5G applications and charging facilities for new energy vehicles. New urbanisation captures the upgrade of public facilities, including renovation of 39,000 old urban residential communities and installation of elevators in residential buildings.

Big spending projects include improved water conservation and transport, with Rmb100bn earmarked for national railways.

CRU expects Chinese GDP to grow by 2 per cent to 3 per cent in 2020. This incorporates the new stimulus measures, the 6.8 per cent contraction of GDP in the first quarter of 2020, the favourable recovery of the economy through April and May, and the weak demand outside of China for the rest of the year. Consistent with this, CRU forecasts annual metals demand growth to contract in 2020.

The stimulus package will not return economic growth in China to the 6 per cent that had been forecast before Covid-19. Nor will it be sufficient to prevent main metals demand from falling in 2020. That said, the measures announced are marginally positive for metals demand, even if they are not as big as markets wanted.

Jumana Saleheen is the chief economist at consultancy CRU Group

The Commodities Note is an online commentary on the industry from the Financial Times

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