It is not an idle question. For the last two decades, China’s infrastructure spending has been the engine of demand growth for steel, copper, and aluminum prices. So when the South China Morning Post reported that local governments sold 1.94 trillion yuan (US$289 billion) worth of bonds in June to fund infrastructure spending and boost economic growth, markets took note.
The Chinese Government Remains Focused on Infrastructure
This news came on the heels of last month’s announcement from the top of China’s State Council. At that time, they said state banks would increase their credit lines to provide 800 billion yuan of funding for infrastructure projects. Issuance so far this year has come to more than Rmb5tn, the SCMP reports. The majority, some Rmb3.4tn of this amount, came from special-purpose bonds specifically to fund infrastructure. Still, the figure represents 93% of the central government’s annual quota for such bonds. That seems to suggest that the second half of the year will see a sharp drop off.
However, a Financial Times Unhedged post quotes Bloomberg’s report that China’s Ministry of Finance is considering allowing local governments to sell Rmb1.5tn ($220bn) of special bonds in the second half of this year. This suggests that funding quotas will be exceeded this year as a whole.
Copper and Aluminum Prices Could See a Boost
Setting aside the record infrastructure bond sales already completed, the projected above-quota infrastructure bond sales, the development banks’ infrastructure fund, and Unhedged estimates that those banks’ increased lending quotas come to Rmb2.6tn. That’s more than 2% of gross domestic product and enough to push the market bullish for metals.
On top of that, early indications suggest funds are not primarily intended for China’s beleaguered housing sector. Instead, they may go towards public works. In that case, rail electrification and power could be particularly beneficial for copper and aluminum prices.
Share prices among Indian aluminum and steel producers all rose last week on the news. In fact, they’re up over 5% in most cases as investors see the increased funding as positive for India’s metal exporters. But whether news stimulates metals prices or buoys share prices elsewhere remains to be seen. According to most experts, this will largely depend on whether the lift provided by the increased infrastructure spending is depressed by woes elsewhere.
China’s Economy Still Has Challenges to Face
China has been suffering rolling COVID lockdowns, and anecdotal evidence provided to MetalMiner suggests unemployment is becoming a serious issue. Against this unstable domestic backdrop, and with developed markets facing rising interest rates and the threat of recession, there are counterbalancing negatives at home and abroad.
Most metals markets were assessed as being in surplus during the first half of this year. In fact, aluminum moved from a deficit last year to a surplus this year despite historically low exchange inventory levels.
China has been an exporter of many metals despite tariff barriers dissuading energy-intensive aluminum and zinc exports. So if demand were to pick up in China, it wouldn’t take much for those exports to stop. Were that to happen, an inventory-starved market outside of China would feel a sharp pinch, despite recessionary limits to demand.
It is too early to call, but China’s recent moves suggest we should not count out their boosting growth by pumping money into the construction sector. If it happens, it may serve to support metals prices in the second half of the year and next.
By AG Metal Miner
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