Chinese State Governments Try Their Own Stimulus

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Chinese stimulus measures have ridden to the rescue of the commodity markets before, most notably in 2009/10 following the financial collapse of 2008.

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Recent increases in metals prices have been put down to a number of factors, one of which has been increased demand from China following last year’s mini-stimulus measures initiated by its central government around this time in 2013, but two articles point to moves to boost spending this year and as coming not from the central government, as much as from LOCAL government.

The first, in Reuters, says the finance ministry is applying pressure on regional governments to expedite funding already allocated for infrastructure projects. The central government is  dictating that budget money for key infrastructure projects be paid in a timely manner or the local governments could face the prospect of the money being recalled. Beijing has ruled out the possibility of any big centrally planned fiscal stimulus to spur economic growth, as they tolerate a gradual slowdown while pushing ahead with structural reforms.

“GDP is still the key performance indicator for local officials,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong who previously worked at the European Central Bank, said in a Bloomberg article. The problem is some states are falling seriously behind. While the national GDP grew at 7.4% in the April-June quarter, Northern Hebei province’s GDP grew only 4.2% in the first-quarter, less than half that of a year earlier. As a result Hebei announced it will invest 1.2 trillion yuan ($193 billion) in areas including railways, energy and housing to boost growth, even as it works to close less efficient steel plants in a separate initiative to meet Beijing’s plans for the steel industry and to counter pollution.

Meanwhile Heilongjiang province in the northeast, with 2.9% growth that was China’s lowest in the first quarter, will spend more than 300 billion yuan over two years in areas including infrastructure and mining.

These are not isolated cases. The sums are large enough that if applied as announced will have a material impact on metals demand this year and next. With concerns rising about metal supply, continuing strong demand from China is just what metals bulls will be looking for to push prices of copper, zinc, aluminum and nickel higher.

Infrastructure spending is particularly supportive of metals demand, and hence prices, so to the extent these announcements are implemented expect prices to respond to the upside this year and next.




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