Moneycontrol Pro Panorama | China's modest growth target a red flag for commodities 

China’s economic trajectory in general and the real estate sector in particular are crucial for the industrial metals sector. (Image source: Bloomberg)

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The opening part of China’s Two Sessions did not yield the big bang growth number investors in metals may have been hoping for. Last week, we had written about how China’s growth optimism was important to the outlook for industrial metals.

But China’s government work report set a modest target of around 5 percent for 2023 on Sunday, when the National People’s Congress started its annual parliamentary session. Reuters’ sources had expected GDP growth target to be set as high as 6 percent. It’s the lowest target in decades and comes after a low growth of around 3 percent achieved in 2022, mainly due to the restrictions on economic activity due to COVID-19.

The government’s view on the real estate sector also gives an impression its tough stance will continue. A Reuters report said the government warned that risks remain in the property market and it would promote stable expansion and prevent disorderly expansion by developers. While the property market has shown signs of recovery in recent weeks, buyers remain cautious, which weakens chances of a rebound, said the news report.

China’s economic trajectory in general and the real estate sector in particular are crucial for the industrial metals sector. The government may have decided to be conservative in its outlook since it was unable to meet the 2022 target due to the pandemic. If 2023 sees a repeat in some form, it could hurt credibility. Overshooting the target is a more acceptable error.

However, it may also be a nod to what’s transpiring in the global economy as most large economies are seeing concerted monetary tightening, as central banks turn less accommodative and are hiking interest rates to curb inflation. Since China is a leading supplier of goods to these economies, a consumption slowdown there could affect its own growth. Recent weeks are seeing the narrative in the US, for example, shifting to interest rates staying higher for longer. Europe too is facing a similar situation.

China’s modest growth outlook does raise the risk for commodities, particularly ferrous and non-ferrous metals by a few notches. It’s not surprising then that the Bloomberg sub-index for industrial metals was down by 0.6 percent at 11.30 am on Monday. It had already given up in February the gains it had notched up in January. While this may seem like a bleak prognosis, surprises can happen. If China’s government is only being conservative and if the coming months support a higher growth figure, then investors may ignore the conservative forecast.

Even if commodity prices hug the bottom, that’s good for bringing inflation under control and even helpful for India’s infrastructure investments as capital costs go lower. Finally, if the western economies and China are headed for lower growth rates, then India’s relatively stable growth prospects could make it a more attractive destination for equity investors. That’s subject to the caveat that the RBI’s fight against inflation does not deal too harsh of a blow to growth.

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Technical Picks: GAIL, Crude oil, TD Power Systems, Punjab National Bank, USD-INR and Tech Mahindra (These are published every trading day before markets open and can be read on the app).

Ravi AnanthanarayananMoneycontrol Pro