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Industrial metals get a policy boost from China
Key Takeaways
The People’s Bank of China (PBOC) has announced a broad policy package to inject growth into the Chinese economy, with additional fiscal support pledged by the country’s leadership. The immediate market reaction has been positive. We believe industrial metals, a sector closely tied to China’s economic health, stands to benefit from any impact the stimulus measures may have.
China’s policy announcements and why they matter
Beijing recently held a surprise Politburo meeting in September1, underscoring the urgency of addressing the country's economic situation. China’s leaders have committed to intensifying fiscal support for the world’s second-largest economy2. This announcement follows a series of measures from the central bank and financial regulators aimed at bolstering economic growth3.
The PBOC’s policy package is one of the most comprehensive in recent times, spanning interest rate cuts, property sector support, and stock market stabilisation efforts. Key components include:
| Countercyclical measures | Property support measures | Stock stabilisation fund |
| The seven-day reverse repo rate was cut by 20 basis points (Bps) to 1.5%, leading to a 30Bps cut in the medium-term lending facility (MLF) rate to 2%. This will lower banks’ loan prime rates (LPRs) and deposit rates by 20-25Bps. | Interest rates on outstanding mortgage loans will drop by an average of around 50Bps, and the minimum mortgage downpayment ratio on second homes will be lowered from 25% to 15%, matching first-home ratios. | A CNY500bn swap facility will allow securities firms, funds, and insurance companies to access liquidity to purchase equities. |
| Reserve requirement ratios (RRR) for large and medium-sized banks were cut by 50Bps, releasing CNY1 trillion in liquidity. | The PBOC will enhance the CNY300bn re-lending program for state-owned enterprises (SOEs) to acquire unsold property inventories. The program now covers 100% of bank loan principals, up from 60% in May. | A specialised re-lending facility of CNY300bn will support listed companies and major shareholders in buybacks and increasing holdings, with a re-lending rate of 1.75%. |
Source: South China Morning Post, WisdomTree, as of 24 September 2024
Among the countercyclical measures, the 20Bps cut in the seven-day reverse repo rate is notable as prior cuts were typically 10Bps. The 50Bps RRR cut is in line with previous moves, but the forward guidance for another 25-50Bps cut by year-end signals a shift toward better communication for effective policy execution.
Lower mortgage rates will ease household burdens and stimulate consumption in the property sector. However, the enhanced re-lending facility for SOEs to acquire housing inventories may be less impactful. Despite preferential loan rates, only 29 out of 200 cities have shown interest in the program so far. Additionally, with public housing rental yields around 1.5%, SOEs may rely on capital gains for positive returns, given borrowing costs are roughly 2%.
The stock stabilisation fund aims to boost market sentiment in the short term by supporting equity markets and household wealth, although it is unlikely to address China’s deeper structural challenges.
Industrial Metals and the Chinese Economy
China’s announcements as the world’s second-largest economy and top consumer of commodities have spurred a sharp rise in industrial metals. While the measures alone are unlikely to resolve the housing crisis, they could stimulate infrastructure investment, benefiting the metals market. Base metals are likely to receive firm support in the short term. If the Politburo’s announcements are accompanied by fiscal stimulus, such as the Ministry of Finance's planned issuance of 2 trillion yuan ($284.43 billion) in special sovereign bonds, the recovery in industrial metals could gain even more momentum.
Our latest Commodity Monthly Monitor noted that investor sentiment toward industrial metals has been cautious, as evidenced by weak speculative positioning in futures markets, driven by concerns over short-term oversupply. For months, we argued that rate cuts from the Federal Reserve and improved sentiment towards China were key to lifting the sector. Both catalysts have now emerged, providing the potential for a sector-wide boost from what we view as undervalued price levels. Early signs indicate that the sector is beginning to respond positively to China’s policy support.
1 Financial Times, 26th September 2024
2 Xinhua 26th September 2024
3 Reuters as of 24th September 2024
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