Don’t look to Beijing to raise global growth via stimulus as it has in the past

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In previous downturns, Beijing has taken a range of stimulus measures to keep the economy growing robustly; as a result, it has contributed positively to global GDP and commodity prices.

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But this time around Beijing seems to have a greater tolerance for slowing growth.

While stimulus measures are expected as early as December, the Financial Times reported, they are not expected to be on the scale of those seen in 2008-2009 and 2015-2016.

Freya Beamish, an analyst at Pantheon Macroeconomics, is quoted by the Financial Times as saying China’s stimulus in the 2018-2019 period will be equivalent to about 7% of GDP over the two-year period. Measures taken in 2015 and 2016 were worth 10% of GDP, while the 2008-09 stimulus amounted to 19% of GDP, according to an OECD estimate.

Beijing appears constrained by a number of factors, policy-driven and economic, in what it can do and how far it can go.

Office space is at an all-time high in some Chinese cities, forcing the delay and cancellation to high-profile skyscraper projects and more general office developments, the Financial Times reported.

Following a surge in new residential housing starts earlier this year, growth has since moderated and is expected to slow further in 2020. Beijing seems reluctant to undermine the currency by further monetary easing and is particularly sensitive to avoiding property price rises by stoking demand.

The Financial Times reports that Chinese states and municipalities are already heavily indebted and banks are reluctant to increase bad debts. While infrastructure lending is the most likely form of stimulus, it will probably not be on the same scale as previous measures.

A former Chinese bank official is quoted as saying that due to previous infrastructure investments, “Cities and provinces are having trouble financing new projects as they must spend a significant portion of their cash-paying off debt.” Possibly as a result of this, investment spending grew by only 3.4% in the first three quarters of this year.

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This moderation in appetite for further stimulus coming on top of the cooling housing market undermines the case made in a recent article we reviewed suggesting steel prices could be set for a recovery, extrapolating on the apparent recovery of the Chinese steel sector.

If the Financial Times is correct in its analysis above, any current strength in Chinese — and, by extension, southeast Asian — steel prices could be relatively short-lived.

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