Commodities Cannot Rely on China Coming to Their Rescue as in 2008

RIO DE JANEIRO, BRAZIL – At the peak of the global financial crisis a decade ago, China’s massive spending on construction and infrastructure has restored demand for commodities and reversed the sharp drop in prices.

As the coronavirus pandemic risks an even worse crisis, it is unlikely that the Beijing government will be able to achieve the same kind of impact.

With the world on the verge of entering a severe recession, China is signaling additional fiscal stimulus measures on top of the initiatives already taken, which have revolved around injecting liquidity into the economy.

But hope that China will be able to boost demand for raw materials such as copper and iron ore is undermined by uncertainty over the timing and scope of any new investment.

“During past recessions, China was quite aggressive, not only boosting the country, but also driving the rest of the world through Chinese demand,” said Xiao Fu, head of strategy at BOCI Global Commodities. “The benefit of starting a large infrastructure package now would not have as much impact as it did ten years ago.”

This is a major change compared to 2008, when the Communist Party invested four trillion yuan (US$560 billion) in a number of projects, such as high-speed trains, airports and sewage works. The measure sustained China’s economy, eased the global crisis and set the tone for a decade of growing sales of raw materials to the Chinese market.

Differences

But there are some crucial differences with respect to the current situation. First, China needs to restart operations after the self-imposed shutdown to reap the full benefits of government spending. The economy was operating at roughly 90 percent of its normal pace by late last week, according to Bloomberg Economics.

More importantly, the frantic construction of the past decade has left China’s economy in debt. The government has sought to prevent new asset bubbles and financial risks. The housing sector, one of the main drivers of demand for metals, is unlikely to see a major policy shift for that reason.

China has many major traditional projects in store behind the scenes, from connecting cities around Beijing or on the southern coast, to poverty reduction programs or environmental spending.

However, details on the plans are scarce, and other factors weigh against measures that would provide a decisive boost to metals.

Instead, Goldman Sachs expects “targeted investments in infrastructure,” for which it sees ample room, according to a report released earlier this month. China is likely to “give up” a large-scale stimulus on an equal footing with the financial crisis or during the 2014-2016 slowdown, according to Nomura International.