China Stimulus Measures: No More Than a Short-Term Boost to Commodity Prices

Commodities reacted positively to news that China intends a new round of stimulus measures. In reaction to a deteriorating growth picture, the HSBC PMI has been below the ‘no change’ reading of 50 for 10 straight months, and there have been calls for further measures from Beijing to support economic growth.

In what appears to be a carefully orchestrated response from state governments, one after another have come out with announcements.

According to the Telegraph, Guangdong has unveiled 177 “core projects” worth 1 trillion yuan. The cities of Chongqing and Tianjin have both said they would spend 1.5 trillion yuan, while Guizhou, one of China’s poorest provinces, has said it will spend 3 trillion yuan on eco-tourism and creating a series of national parks.

The central government, meanwhile, is quoted as saying it would spend 2.4 trillion yuan on reducing carbon emissions and energy conservation programs over the next three years, and has already set aside 26 billion yuan in subsidies to encourage consumers to switch to low-energy appliances, presumably hoping this will stimulate manufacturing — albeit at taxpayers’ expense.

Analysts, though, are questioning to what extent these are really new initiatives, and to what extent these are already-announced plans just being bought forward.

With growth still at or slightly above 7 percent, you may ask what all the fuss is about. Surely most economies would be delighted with a low-inflation 7 percent growth rate! Yes, they would, but in China’s case it’s the trajectory that has everyone worried — the trend has been inexorably downwards since last year and the forward indicators, such as they are, are not promising.

This article reports the HSBC Flash China manufacturing purchasing managers index (PMI) fell to 47.8 in August, from 49.5 in July. This is well below the 50 level that divides growth from contraction, and the lowest reading since last November.

Nor are the banks alone. Just a year after talking up plans to invest some $80 billion in commodity projects to meets Asia’s perceived needs, BHP Billiton announced last week it would dramatically scale back a planned expansion of its Olympic Dam copper and uranium mine and defer development of a Queensland coal deposit in the face of weak prices and doubts over demand.

But not all reports paint such a dire picture.

Continued in Part Two.