A China signaled this Monday (9) that it will move forward with its economic stimulus package starting next year, as Beijing prepares for a trade war when Donald Trump take over the position.
The Politburo, the body that brings together the cream of the Chinese Communist Party (CCP) and is responsible for the State’s most strategic decisions, stated that it will nominate the president Xi Jinping a “moderately flexible” monetary policy in 2025, according to the official news agency Xinhuasignaling more rate cuts in the future and changing a “prudent” strategy maintained for almost 14 years.
The group also promised a “more proactive” fiscal policy at its monthly meeting, raising expectations that Beijing will widen the fiscal deficit. This would open the door to more borrowing from the central government to prop up the faltering economy.
The Politburo’s December meeting “sent the most aggressive stimulus tone in a decade,” Morgan Stanley economists including Robin Xing wrote in a research note, adding that “although the tone is very positive, implementation remains uncertain”.
The Politburo also promised to boost consumption, stabilize the real estate and stock markets and, for the first time, promised “extraordinary” countercyclical policy adjustments — the Communist Party talks of more unusual tools to boost the economy.
By indicating greater focus on consumption and stabilization of the real estate market, the measures could have a positive effect on Brazilian commodities — iron ore, soybeans and meat — since China is the largest consumer of Brazil’s main export items.
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“The formulation of this Politburo meeting statement is unprecedented,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. “The tone of the policy shows strong confidence against Trump’s threats,” he noted, referring to the US president-elect’s pledge to impose a 60% tariff on Chinese exports that would decimate bilateral trade.
Policy change
The last time China adopted a “moderately loose” monetary policy was in the 2008 Global Financial Crisis, as part of a bazooka stimulus package to prop up the economy. This is something Beijing has promised to avoid repeating.
But the Politburo statement nonetheless sent a message to markets that Xi is feeling a new urgency to support growth. It’s a reminder that “top leaders’ views on economic conditions have changed substantially compared to last quarter,” said Martin Rasmussen, senior strategist at macro research firm Exante Data.
After second-quarter growth fell short, authorities began implementing stimulus in late September. Economists widely expect another cut in banks’ reserve requirements by the end of the year, while an interest rate adjustment is more likely to occur in the first quarter of 2025.
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Policymakers will also need to find remedies for China’s longest run of deflation this century. That problem was on display earlier on Monday in data showing producer prices falling in November for the 26th month in a row. Consumer prices also rose at the slowest pace in five months, hovering around zero.
Falling prices have hampered the economy’s 4.8% growth so far this year, eroding corporate profits and forcing companies to cut investment as well as wages. While the People’s Bank of China has cut interest rates and offered more money to banks several times, authorities have found it difficult to encourage greater spending.
The Politburo promised to “increase consumption by force” and boost domestic demand “in all aspects,” without directly mentioning deflation. This could indicate more rounds of the cash-for-scrap program that is operated like a consumer voucher, encouraging people to buy new electronics at a discount in exchange for their old products.
Effect in Brazil
In the wake of China’s announcements, iron ore futures contracts recovered this Monday, ending a two-session downward trajectory. At noon, there were four Brazilian mining and steel companies among the biggest risers in the Ibovespa: CSN advanced 5.56%; CSN Mineração5,34%; Usiminas3,68%; e Vale3,19%.
The January iron ore contract most traded on China’s Dalian Commodity Exchange (DCE) ended the day’s trading up 1.57%, at 808.5 yuan ($111.12) a ton.
Benchmark iron ore for January on the Singapore Exchange rose 1.05%, to US$104.4 a ton.
Iron ore prices were supported above $100 per tonne on expectations of further stimulus announcements from the Beijing Central Economic Work Conference scheduled for December 11-12, Westpac analysts said.
“Recent Chinese stimulus measures have revived demand for steel and therefore iron ore, as property sales are showing some signs of improvement,” ANZ analysts said.
Stockpiles of the steel-making ingredient fell last week to the lowest level since August, they said.
With Reuters and Bloomberg.
