Deflationary pressures prompt urgent call for fiscal support in China’s economy

The ongoing housing crisis in China has dramatically reshaped the dynamics of the steel industry, diminishing the construction sector's role in steel consumption while highlighting the rising importance of machinery manufacturing, according to an article published by Bloomberg . 

Commodity prices fell after China refrained from announcing new fiscal stimulus measures to support its economy. During a highly anticipated briefing on Saturday, the finance ministry did commit to providing more assistance for the struggling property sector—crucial for raw materials demand in China—and for heavily indebted local governments, while suggesting potential increases in government borrowing.

However, these measures lacked specific spending proposals, which investors had anticipated could total up to 2 trillion yuan ($283 billion). As of 8:01 a.m. local time, iron ore futures in Singapore dropped 0.7 per cent to $105.50 per ton. This year, iron ore prices have fluctuated significantly, peaking above $140 per ton in January before falling below $90 last month.

Similarly, the copper market has seen a volatile year, reaching a record high of over $11,000 per ton in May before retreating. In early trading, the three-month contract on the London Metal Exchange was down 0.7 per cent at $9,719 per ton. Brent crude oil futures also declined by 1.8 per cent. As the world’s largest importer of these commodities, China's economic health is critical. Metals had surged recently after Beijing implemented a series of monetary interventions to boost growth. However, commodities investors have been urging additional fiscal measures, which would have a more immediate effect on material consumption and help offset demand lost due to China’s extended real estate downturn.

The government’s emphasis on revitalizing the property sector is likely to be positively received by markets, not only due to the expected demand for raw materials but also because housing represents a significant store of wealth for many Chinese citizens.

The housing crisis has significantly reduced the construction sector's importance to Chinese steel mills, with construction accounting for just 24 per cent of steel consumption in 2023, down from 42 per cent in 2011, according to mining giant BHP Group Ltd. In contrast, the machinery sector's share has increased from 20 per cent to 30 per cent during the same period, while steel exports have surged over the past two years. 

Copper, with its broader applications and key role in the energy transition, still sees nearly 20 per cent of its market tied to construction, as reported by Citic Securities Co. Prices for other metals, like aluminum and zinc, as well as fuels such as diesel, are also affected by construction activity and the demand for durable goods that typically accompany new home purchases. The government’s focus on boosting consumption is expected to shape its fiscal response to economic challenges. 

Years of urbanization have saturated opportunities for metals-intensive state investments in infrastructure, making this sector a less reliable growth driver. However, the finance ministry's recent briefing offered few insights into how the government intends to increase spending among citizens. 

China's economic difficulties were further highlighted by price data released on Sunday, which revealed persistent deflationary pressures. Consumer prices rose less than anticipated in September, while factory-gate prices fell for the 24th consecutive month, emphasising the urgent need for additional policy support. 

Further details—and a price tag—on enhanced fiscal measures may emerge when Chinese legislators convene later this year. In the meantime, commodity bulls are likely to be cautious until the extent of government support is clarified.

By Naila Huseynova