China is pumping billions into infrastructure — but commodity markets were not impressed

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Yellow pylons work at a construction site in China. China’s new home prices in May fell for the second month this year, depressed by still fragile demand as widespread Covid-19 curbs dented already weak buyer confidence, suggesting more policy stimulus is needed to return the market to growth.

Sheldon Cooper/SOPA Images | Lightrocket | Getty Images

China’s latest pledge to spend big on infrastructure did little to move prices of iron ore and steel — analysts said pumping more money into the economy doesn’t mean people are going to be able to spend it.

China’s State Council announced more stimulus policies on Wednesday including an additional 300 billion yuan ($44 billion) in quotas for infrastructure spending and investments by banks — on top of the 300 billion yuan already announced at the end of June. 

State-owned power generation companies would also be allowed to sell 200 billion yuan of bonds and local governments would be allocated 500 billion yuan of special bonds from previously unused quotas.

It comes as Covid lockdowns and a real estate crisis continued to weigh down on the Chinese economy, and as some investment banks cut China’s GDP growth estimates for this year to about 3%.

Prices of the iron ore and steel, some of the biggest beneficiaries of infrastructure stimuli, were mostly muted after the announcement, platforms like the SGX Iron Ore futures trading exchange showed.

While the additional infrastructure stimulus was welcome news, high-frequency data continues to show us just how poor construction steel demand is in China.

Atilla Widnell

Navigate Commodities

Commodities markets did not rally as a result of the stimulus as there’s no point in pledging funds when they cannot be spent in an economy stunted by lockdowns and restrictions, said Atilla Widnell, managing director at iron ore intelligence consultancy Navigate Commodities.

“While the additional infrastructure stimulus was welcome news, high-frequency data continues to show us just how poor construction steel demand is in China,” Widnell said.

“More importantly, frequent COVID outbreaks, mass testing, and lockdowns are acting as a handbrake for the Chinese economy and will continue to do so until there’s a fundamental shift in its dynamic clearing strategy.”

“Effectively, it is just even more money in the system with no one able to go out and spend it,” he added.

‘Show me the money’

Stimulus packages are simply not enough to revive the economy including the beleaguered property market, said Al Munro at broker Marex.

“It’s a question of whether the money is actually spent. Show me the money,” Munro said in a note.

“Either way the muted response from the Shanghai property index says much about how the markets felt towards the news. The onshore markets still face Covid lockdowns with Zhuozhou, in the northern province of Hebei, imposing a lockdown on Tuesday.”

Zenon Ho, also from Marex, said base metals like steel and iron ore would be more reactive if there was a more instant flow of money into the economy. 

And with fiscal stimulus like infrastructure spending, there “tends to be a six- to nine-month lag between the release of stimulus and impact on real demand”, said Widnell from Navigate.

“The reality is the measures so far have failed to boost growth. Excitement in the commodity market tends to be short-lived,” ANZ Research chief China economist Raymond Yeung told CNBC.

“This is the not the first time the State Council pledges to stabilize the economy via infrastructure spending.”

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