CRU’s bold calls on China stimulus were right

Premier Li Keqiang announced a stimulus package worth 6% of GDP or RMB6 tn ($840 bn). No GDP growth target was announced for 2020. Markets were disappointed. In contrast, the package is bang in line with our expectations. We see it as net positive news for the economy and commodities markets in 2020.

A target for unemployment but not for GDP growth

• What we expected: No growth target. Employment of primary concern.
• Announced: No growth target. Aim to create more than 9 million urban jobs, and target for the urban registered unemployment rate at 5.5%.

As expected, China’s government decided not to set a target for GDP growth in 2020. They justified this with respect to the high uncertainty in the aftermath of the Covid-19 crisis. They confirmed their focus on maintaining employment, people's livelihood, and intentions to eliminate poverty among all rural residents.

Fiscal stimulus of 6% of GDP

• What we expected: Fiscal stimulus of 5-8%.
• Announced: Fiscal stimulus of 6%.

Today’s announcements include:

• 0.8 percentage point increase in the target deficit ratio to rise to more than 3.6%.
• RMB2.5 tn of total tax and expense cuts (VAT cuts are part of this but no further details yet).
• RMB1 tn special treasury bonds to battle Covid-19.
• RMB1.6 tn rise in the quota for local government special bonds up to RMB3.75 tn.

The tax and expense cuts announcement is on top of the RMB1.6 tn tax and expensed cuts that has already been announced in February and March 2020. Taken together China’s stimulus package for 2020 is a total of 6% of GDP. That is RMB6 tn (or $840 bn). Details of our calculations can be seen in Table 1 below.

Monetary policy

• What we expected: small changes to LPR and RRR, no QE.
• Announced: prudent policy in a more flexible and appropriate way.
  • CPI target at around 3.5% for 2020.
  • Increase financial support to business, especially small businesses by providing further delays of loan interest payments.

Commodity sectors gain from stimulus

• What we expected: spending on new (i.e. high tech) infrastructure and bringing forward of existing traditional types of infrastructure (e.g. roads and railway).
• Announced: spending on traditional infrastructure was stressed in addition to the new infrastructure.
  • RMB100 bn of investment in the national railway.
  • 39,000 existing residential estates will be renovated and replaced.
  • Improve the development of transportation and water conservancy.
  • Advance the agricultural sector by extending machinery use to an additional 5.3 million hectares of land.

CRU sees this is a good stimulus package. It puts GDP growth rate in 2020 firmly in the 2-3% bracket. The focus on infrastructure spending this year is good news for commodities markets.