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China is pumping billions into infrastructure but commodity markets weren’t impressed

Yellow pylons just work at a construction site in China. China’s new home prices in-may fell for the next month this season, depressed by still fragile demand as widespread Covid-19 curbs dented already weak buyer confidence, suggesting more policy stimulus is required to return the marketplace to growth.

Sheldon Cooper/SOPA Images | Lightrocket | Getty Images

China’s latest pledge to invest big on infrastructure did little to go prices of iron ore and steel analysts said pumping additional money in to the economy doesn’t mean folks are going to have the ability to spend it.

China’s State Council announced more stimulus policies on Wednesday including yet another 300 billion yuan ($44 billion) in quotas for infrastructure spending and investments by banks along with the 300 billion yuan already announced by the end of June.

State-owned power generation companies would also be permitted to sell 200 billion yuan of bonds and local governments will be allocated 500 billion yuan of special bonds from previously unused quotas.

It comes as Covid lockdowns and a genuine estate crisis continued to weigh down on the Chinese economy, so when some investment banks cut China’s GDP growth estimates because of this year to about 3%.

Prices of the iron ore and steel, a few of the biggest beneficiaries of infrastructure stimuli, were mostly muted following the announcement, platforms just like the SGX Iron Ore futures trading exchange showed.

As the additional infrastructure stimulus was welcome news, high-frequency data continues showing us precisely how poor construction steel demand is in China.

Atilla Widnell

Navigate Commodities

Commodities markets didn’t rally due to the stimulus as there is no point in pledging funds if they can’t be spent within an economy stunted by lockdowns and restrictions, said Atilla Widnell, managing director at iron ore intelligence consultancy Navigate Commodities.

“As the additional infrastructure stimulus was welcome news, high-frequency data continues showing us precisely how poor construction steel demand is in China,” Widnell said.

“Moreover, frequent COVID outbreaks, mass testing, and lockdowns are acting as a handbrake for the Chinese economy and can continue to achieve this until there is a fundamental shift in its dynamic clearing strategy.”

“Effectively, it really is just a lot more money in the machine without one in a position to venture out and spend it,” he added.

‘Show me the money’

Stimulus packages are simply just not enough to regenerate the economy like the beleaguered property market, said Al Munro at broker Marex.

“It is a question of if the money is in fact spent. Show me the amount of money,” Munro said in an email.

“In any event the muted response from the Shanghai property index says much about how exactly the markets felt towards the news headlines. The onshore markets still face Covid lockdowns with Zhuozhou, in the northern province of Hebei, imposing a lockdown on Tuesday.”

Zenon Ho, also from Marex, said base metals like steel and iron ore will be more reactive if there is a far more instant flow of money in to the economy.

Sufficient reason for fiscal stimulus like infrastructure spending, there “is commonly a six- to nine-month lag between your release of stimulus and effect on real demand”, said Widnell from Navigate.

“Thereality may be the measures up to now have didn’t boost growth. Excitement in the commodity market is commonly short-lived,” ANZ Research chief China economist Raymond Yeung told CNBC.

“This is actually the not the 1st time hawaii Council pledges to stabilize the economy via infrastructure spending.”

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