...the fate of commodities is inextricably tied to China....

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    ...the fate of commodities is inextricably tied to China.
    China’s big growth target won’t solve its six big problems

    China’s GDP growth target for 2024 is probably unrealistic, but it’s the lack of concrete stimulus plans that should worry investors and economists. There’s nothing here to solve Xi’s big problems.
    Mar 5, 2024 – 4.59pm


    It was former Treasury secretary Ken Henry who memorably declared during the global financial crisis that the best way to stimulate an ailing economy was to go hard, go early and go directly to the household.

    Once again, China has missed its chance to do exactly that.

    The GDP growth target of 5 per cent for 2024 that was announced on Tuesday by Premier Li Qiang sounds robust enough, but most foreign economists think it’s probably unrealistic, and expect the nation’s spluttering post-COVID recession to limit growth to about 4.5 per cent.
    Perhaps more notably, Li’s announcement of the annual “work report” or economic plan arrived with none of the big-bang fiscal stimulus that economists and investors hoped for.

    Yes, there was a plan to issue 1 trillion yuan ($214 billion) worth of ultra-long special central government bonds, which will help support fiscal stimulus measures over the next 12 months.


    And yes, Li did not try to pretend that all is well in the Chinese economy. “The foundation for the continuous recovery and improvement of our country’s economy is still not solid, with insufficient demand, overcapacity in some industries, weak societal expectations and many lingering risks,” President Xi Jinping’s number two told the nearly 3000 delegates crowded into the Great Hall of the People in Beijing.

    But with its property sector in the toilet, many observers believe China needs to deliver some direct support to households to lift consumption. Chris Wallis, the chief executive and chief investment officer of the $25 billion fund manager Vaughan Nelson, sums up the problem neatly.

    “Trying to stimulate the consumer without driving income to the consumer is like me trying to make an NBA basketball team – it just ain’t going to happen.”

    Wallis believes Xi may eventually need to reconsider this stance – “At the end of the day, it’s all about staying in power. If that really is the only choice left, they’re going to do what every government’s doing, which is create liquidity and drive it to where it’s going to generate economic growth” – but with little in the way of new solutions on Tuesday, the focus will again quickly revert to China’s big problems.
    The three Ds

    The shadow of what’s become known as the three D’s – debt, deflation and demographics – has been well canvassed.

    Debt levels in China’s local government and property sectors remain unsustainable and China is clearly unwilling to try to re-inflate the property bubble as it has in past crises. The government did promise on Tuesday to treat property companies the same regardless of their ownership (which should aid struggling private sector developers) and, for the first time since 2019, the work report omitted the slogan “housing is for living in, not speculation”. But the slow bleed in property will continue.

    A sustained period of deflation has raised the danger that China is, or will soon be, in a liquidity trap, where cutting interest rates or improving access to credit fails to generate economic growth.

    And the demographics issue is arguably the most intractable problem of them all; history says lifting low birth rates is difficult in any country, and particularly difficult when the economy is running on empty.

    But Chanticleer’s discussion with senior Australian business leaders with exposure to China over the last months has revealed three other concerns that are putting the brakes on China’s economy.

    The first is what one veteran China watcher describes as a loss of confidence that has been created by the mixed message coming out of China’s leadership, which has talked a good game on growth, but tightened the screws on the private sector in recent years, including through a series of regulatory crackdowns in the tech sector. It is telling, they say, that many top Chinese entrepreneurs are now no longer based in China.

    The second problem stems from the centralisation of power in Xi’s hands, particularly in the past three years. Decision-making has slowed, robbing the Chinese economy of the dynamism it previously enjoyed. The new package of government bonds announced Tuesday will, ironically, give the central government more control over stimulus efforts.

    The third problem is the possible – many would say probable – victory of Donald Trump in November’s US presidential election. The introduction of new tariffs on Chinese goods could create a further handbrake on growth and would likely ratchet up trade tensions that have simmered down in recent years.

    Iron ore futures dipped 1.1 per cent on Tuesday following the announcement of the growth target, and prices are down 20 per cent since the start of the year. At $US115 a tonne, the iron ore price is probably closer to fair value, but it’s hard to see the price pushing higher in the short term.
 
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