IRF lunch - China Stimulus to Shift from Talk to Funding
PRC Macro
The Lansdowne Club, 9 Fitzmaurice Pl, London W1J 5JD
Wed 11 Oct 2023 - 12:30 BST
Summary
William Hess and Song Gao discussed how China’s outbound investment is key to the commodity supercycle. They believe that their external investment has only just begun which is going to be very bullish for metals demand. Global metals producers and metals demand is de-risking from China’s property woes as the energy transition, manufacturing upgrades and strong exports in BRI countries are now the main drivers of metals consumption. Expect Chinese ODI to reach USD 18 trillion by 2045 rising from USD 180 billion currently. We are seeing a pivot from forced deleveraging to reflation through debt swaps, rate cuts, debt relief, unconventional asset purchase, bank recapitalisations and fiscal capital injections. There will be manufacturing restocking through housing completions which has been historically consistent with a rebound in A-share prices, the RMB and commodity process. China IS leading the Energy transition charge which is supporting strong infrastructure growth in power grids and generation. Chinese ODI will accelerate urbanisation and industrialisation in the global south, and will support lower RMB interest rates and policy de-dollarisation.
Topics
The July Politburo meeting marked an inflection point for policy, pivoting from deleveraging to reflation. The effects of this shift are already evident in credit flow and interbank market data
Metals demand in China has held up despite bearish sentiment and disappointment with a lack of specific funding for top-down policy measures. Despite market skepticism, policymakers have been delivering on their promises. The official message is “whatever it takes” to stabilise growth and market confidence
Our outlook for the remainder of 2023 and much of 2024 has been anchored in expectations that the manufacturing inventory will shift to restocking. An inflection point for the inventory cycle leads a turn in prices for metals, the exchange rate, and even onshore equities as a function of improved fundamentals
Drivers of this process should include the property completions cycle, strong investment in the power sector and related infrastructure, as well as the auto sector
Peak China bearishness is occurring as the skew for policy expectations is clearly to the upside. Xi’s policy put extremely is thus trading at a significant discount
