Markets Look to China for Some Good News

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Stock and currency markets have been a little perkier the last week or so as expectations rise of some form of Chinese stimulus to boost demand — and, hence, global growth.

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That optimism, though, may be somewhat misplaced.

China has limited scope of debt-fueled stimulus of the type employed in the past, so a pick-up in demand resulting from fiscal measures may be more muted than some optimists hope.

Still, hopes were raised when Premier Li Keqiang closed a briefing to the National People’s Congress with a number of announcements. Beijing intends to use tools such as lowering bank reserve requirements, according to Bloomberg.

However, a promise to reduce VAT on manufactured goods from the current 16% to 13% from April 1 gave a definite fillip to traders and cast depression among hard-pressed aluminum semis manufacturers in the region. More competitively priced Chinese aluminum semi-finished product is the last thing regional aluminum producers want on their doorstep.

The measure is expected to further boost exports, which have already been running at near-record levels in 2018-19. According to Aluminium Insider, exports have risen from 517,000 tons per month last August to 552,000 tons in January to set a new record. Primary producers, who had been meeting to negotiate capacity closures in the face of slowing demand, are reportedly now likely to reverse that decision in the hope demand will pick up.

According to Aluminium Insider, the move is expected to pump in the region of CNY 600 billion (U.S. $90 billion) into the manufacturing sector, boosting the country’s gross domestic product by 0.6%. The move comes as the latest in a series of changes to the country’s tax regime conducted by Beijing, carried out to bolster the economy after manipulations of monetary policy and further debt-based spending have become increasingly difficult avenues for effecting change.

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Optimism is supported by the widespread belief that an agreement on China’s trade war with the U.S. is just a matter of weeks away — but the much-touted trade summit between President Donald Trump and Premier Li Keqiang has been postponed yet again, and may now not take place until well into April or even May.

A successful trade deal is by no means a certainty, as much as the markets will look for any deal to be better than no deal.

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