Moneycontrol Pro Panorama | Can China’s stimulus revive commodity prices?

The question investors need to ask is whether the latest stimulus alone is sufficient to revive China’s economy and investments in the country.

Dear Reader,

China’s central bank has announced a slew of measures to revive its economy and the troubled property sector. The People’s Bank of China reduced the short-term interest rate, the reserve requirement banks have to maintain and outlined measures to support the property market. The quantum of the rate cut and additional support measures came as a surprise. Equity markets rose in China and Asia. In India, metals and commodity stocks reacted positively.

As the world’s biggest producer of finished goods, China wields outsized influence on raw material prices. Weak demand in its domestic economy has been a bugbear for global commodity markets. Therefore, brighter prospects for a demand recovery comes as a relief for commodity producers, particularly for steel manufacturers in India.

China accounts for over half of the world's crude steel output, points out our Research Team. Rapid infrastructure build-up and a housing boom have fuelled demand for metals historically. However, as economic growth in China slowed, the country's metal producers stepped up exports, which has weighed on prices in global markets, including India. If domestic Chinese demand improves, local producers can sell more in the domestic market, lowering export availability and helping improve steel prices globally.

Similarly, demand for other industrial commodities can rise on a recovery in China. But the question investors need to ask is whether the latest stimulus alone is sufficient to revive China’s economy and investments in the country.

The main problem is that China’s economic slowdown is more deep-rooted. The “common prosperity” campaign and increasing control over the economy is stifling private investment and entrepreneurship in the country. Global business enterprises are reducing exposure to China amid trade tensions. This is weighing on investor morale and consumer sentiments.

“The risk of problematic systemic deflation — when falling prices and wages reinforce each other and drag down economic activity — has risen. In the short term, say the next six months, the main external risk is slower global growth. In the medium term, it is accelerated supply-chain adjustment and large barriers to trade and investment by major trade partners,” warn economists at S&P Global Ratings.

To counter economic headwinds, China will have to follow up the latest actions with more monetary and fiscal policy support measures. An outreach to the private sector and renewed focus on transparency will help. Such measures will take time to yield results.

Also, the recovery in China’s troubled property market is contingent on price stabilisation and normalisation of inventories, explains Lynn Song, chief economist, Greater China, ING Bank. Until these two metrics and investments in China improve, a sustained improvement in commodity prices can remain elusive.

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