In June this year, China announced that they will be introducing a new series of stimulus measures aimed at revitalizing its economy. As the world's largest consumer and producer of commodities, China's policies and actions have significant implications for global markets.
This article examines the latest stimulus measures implemented by China and explores their potential impact on the commodities trading market.
China’s Economy
China's economic recovery following the removal of its zero-COVID has failed to meet its expectation.
According to a news article by Foreign Policy, recent data has indicated a surge in youth unemployment and a decrease in credit demand. Notably, e-commerce companies refrained from disclosing complete sales figures on a major shopping day, which indicates a low consumer spending.
The challenges faced by small businesses have intensified. The government is now in a state of crisis, seeking input from business leaders and economists to address a predicament largely caused by its own actions.
Even prior to the pandemic, the Chinese economy displayed signs of deceleration. However, the primary factor contributing to the current economic downturn is the erosion of public confidence.
Over the past few years, individuals have become increasingly hesitant to spend or engage in even slightly risky investments. COVID-19 lockdowns not only resulted in income losses but also imposed additional burdens on households. This comes in the form of delivery costs and price hikes due to shortages of essential goods.
Consequently, household savings surged by 80 percent in 2022 compared to the previous year, with a significant portion of that money remaining unspent.
In contrast to Western nations, Chinese small and medium-sized enterprises received minimal financial assistance despite facing more stringent restrictions.
Furthermore, the Chinese government's attempts to downplay the impact of the lockdowns and the subsequent surge in infections after lifting the zero-COVID policy have not been successful. These events have left an indelible mark on public memory.
While people may no longer fear the prospect of future lockdowns, they are now acutely aware of the government's authority to drastically alter their lives, even amid a resurgence of COVID-19 cases in China.
This, in turn, has compelled the Chinese government to implement new stimulus measures aimed at boosting the Chinese economy's stuttering post-pandemic recovery.
China Economic Stimulus Measures
According to Reuters, the Chinese cabinet met up in June to deliberate on strategies aimed at stimulating economic growth. The government has committed to implementing timely policy measures in response to indications of a waning post-COVID recovery.
On June 13, China's central bank, the People's Bank of China (PBOC), reduced the interest rate for its one-year medium-term lending facility (MLF) loans by 10 basis points to 2.65% from the previous rate of 2.75%.
This move aligns with expectations and reflects Beijing's efforts to bolster the fragile economic recovery by intensifying stimulus measures. The PBOC announced the lowering of rates for 237-billion-yuan ($33.1 billion) worth of MLF loans provided to some financial institutions.
Reuters predicted that the China Loan Prime Rate (LPR) will be further reduced. Additionally, the China government stimulus measures should have more support for the struggling economy.
New Stimulus Measures’ Impact on Commodities Prices
The latest stimulus measures introduced by China to boost its post-pandemic recovery have had a mixed impact on commodity trading.
Positive Impact
Reuters reported that Crude oil and copper experienced gains following China's central bank's decision to cut its benchmark loan prime rates (LPR) for the first time in 10 months in June.
Brent crude price increased over $1 per barrel to reach $77.12 on 23rd June 2023, which is the highest closing price in nearly a month. This gain was attributed to a decline in the U.S. dollar and indications of stronger demand, with Asian refiners purchasing cargoes for delivery in about two months. Asian crude oil imports, including China's, are expected to remain robust in June.
Copper prices also rose due to indications of a tighter physical market in China. It increased by 0.6% on June 23, reaching a two-month high of 68,930 yuan ($9,582) per metric ton.
Refined copper inventories held at bonded warehouses in China dropped to their lowest level since January, reflecting a decline compared to the same period last year. However, the impact of the tight copper market on future imports remains uncertain, as high global prices have deterred traders from placing orders.
The article also stated that Vice Premier He Lifang has expressed positive sentiments that China's economy is showing signs of improvement. He mentioned that the manufacturing industry is growing steadily, and the services industry is recovering relatively quickly.
Negative Impact
However, the iron ore market did not respond positively, as investors felt that the 10-basis point reduction in the five-year LPR would have limited impact on the property sector, which is facing concerns over financial difficulties among some developers.
Iron ore futures traded in Singapore ended lower at $112.63 per metric ton on June 23, down 1.4% from the two-month high reached on June 19.
Although there have been recent positive developments in the market, such as increased demand for steel due to stimulus measures in property construction, infrastructure, and manufacturing, the overall sentiment in the market has been dampened.
This is primarily due to weak data related to the property and manufacturing sectors, which has raised concerns about their performance. Additionally, market sentiment has been negatively impacted by the perception that the size of the interest rate cut implemented by the government was not sufficient or met expectations.
Nonetheless, iron ore imports have remained relatively steady in recent months.
China Commodity Market Outlook
Even though the new stimulus measures implemented by the Chinese government have mixed impact on commodity prices, the hope is that they will roll out more measures to boost the struggling China economy.
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