Yellow pole works at a construction site in China. China’s new home prices fell in May for the second month of the year, pressured by still fragile demand as widespread Covid-19 curbs undermined already weak buyer confidence, suggesting more policy stimulus is needed to get the market back to growth.
Sheldon Cooper/SOPA Image | light rocket | Getty Images
China’s latest pledge to spend heavily on infrastructure has done little to move iron ore and steel prices – analysts say pumping more money into the economy doesn’t mean people will be able to spend it.
China’s State Council announced more stimulus policies Wednesday included an additional 300 billion yuan ($44 billion) in quotas for infrastructure spending and investment by banks – on top of the 300 billion yuan announced at the end of June.
State-owned power generation companies will also be allowed to sell 200 billion yuan of bonds and local governments will be allocated 500 billion yuan of special bonds from the previously unused quota.
It comes as the Covid lockdown and real estate crisis continues to weigh on the Chinese economy, and as a result several investment banks cut their forecasts for China’s GDP growth for this year to around 3%.
Prices of iron ore and steel, some of the biggest beneficiaries of the infrastructure stimulus, were largely muted after the announcement, platforms such as futures trading exchange SGX Iron Ore showed.
Commodity markets are not rallying as a result of the stimulus because there’s no point in pledging funds when they can’t be spent in an economy hampered by lockdowns and restrictions, said Atilla Widnell, managing director at iron ore intelligence consultancy Navigate Commodities.
“While additional infrastructure stimulus is welcome news, the high-frequency data continues to show us just how bad demand for construction steel is in China,” Widnell said.
“More importantly, the frequent COVID outbreaks, mass testing, and lockdowns act as a handbrake for the Chinese economy and will continue until there is a fundamental shift in its dynamic cleanup strategy.”
“Effectively, it’s just more money in the system with no one being able to go out and spend it,” he added.
The stimulus package is not enough to revive the economy including the beleaguered property market, said Al Munro of brokerage Marex.
“Question whether the money was really spent. Show me the money,” Munro said in a note.
“In any case, the muted response from the Shanghai property index says a lot about how the market is feeling about the news. Onshore markets are still facing a Covid lockdown with Zhuozhou, in the northern province of Hebei, imposing a lockdown on Tuesday.”
Zenon Ho, also from Marex, said base metals such as steel and iron ore would be more reactive if there was a faster flow of money into the economy.
And with fiscal stimulus such as infrastructure spending, “there is likely to be a six to nine month lag between the release of the stimulus and the impact on real demand”, said Navigate’s Widnell.
“The reality is the measures so far have failed to boost growth. The excitement in commodity markets is likely to be short-lived,” ANZ Research China chief economist Raymond Yeung told CNBC.
“This is not the first time the State Council has pledged to stabilize the economy through infrastructure spending.”