Economy

China just released stimulus but is a big iron ore rally on the cards?

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Since the Global Financial Crisis, China has revisited a similar playbook.

When its economy faces headwinds, fiscal stimulus is never too far away.

In 2009, it released around US$586 billion (Yuan 4 trillion) in stimulus, most of which found its way into huge infrastructure projects including railways, roads and property development.

The main ingredient required to feed those projects, was of course, Australian iron ore.

When Covid-19 ravaged global economies, China again stepped in releasing stimulus measures to prop up its economy.

And guess what? The demand for iron ore took off again.

But this time the stimulus playbook could play out a little differently.

What’s different this time?

Ever since 2009, stimulus measures have built some unwanted economic bubbles in China.

An oversupply of housing, debt, and infrastructure projects that return less and less economic benefit, have been the side effects of cash splashes.

This has played out badly in the property sector, with Evergrande the most notable developer which collapsed under a pile of debt.  

On Friday, The People's Bank of China (PBOC) cut interest rates and pumped money into the economy to boost growth and combat deflation. 

China's central bank lowered the reserve requirement ratio (RRR) for banks by 0.5% on Friday. It’s the second time they've done this this year.

It is part of Beijing's broader stimulus plan to hit its annual growth target of around 5% and prop up its ailing share market.

China also plans to issue 2 trillion yuan (US$284 billion) in special sovereign bonds this year as part of its stimulus package, according to sources familiar with the matter.

But it's a far cry from the Y 4 trillion stimulus injected primarily into infrastructure projects in 2009.

The directive to complete housing projects rather than commence new housing developments signals a significant shift.

It's clear China’s most recent targeted stimulus and policies aim to stabilise the property market, not overheat it.

The same applies for China’s local governments.

It is estimated they carry $13 trillion in debt and the last thing policy makers will want is for them to splurge on infrastructure projects that have low economic value and increase their debt burden.

With many countries now imposing trade sanctions against China, pumping investment into manufacturing and relying on steel exports can no longer be counted on to drive growth.

So where does that leave us?

Ultimately, Beijing plans to shift focus to domestic consumer spending, a goal they've had for years but haven't achieved to date.

And the most recent policies reflect that.

If mega infrastructure projects do not materialise and growing trade sanctions against China prevent the export of steel, it's likely the demand for Australian iron ore will not reach the dizzying highs of the recent decade.

Certainly, we can expect a sugar hit now but how long it will last remains to be seen.

More fiscal measures could eventuate before China's National Day holiday on October 1. 

Time will tell. One thing is for sure, we’re not going back to the iron ore halcyon days of 2009 - 2012.

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