Iron ore hangs on China stimulus

From Challenger Chief Economist Dr Jonathan Kearns

As economic growth in China has slowed to less than the 5% growth target for this year there has been growing speculation and focus on the size and timing of Chinese fiscal stimulus. China is by far Australia’s largest trading partner with exports to China accounting for over 8% of Australian GDP. The implications of fiscal stimulus for construction and manufacturing in China are particularly important as iron ore accounts for over half of Australia’s exports to China and over 20% of Australia’s total exports.

The iron ore price, having drifted below $US100/tonne, jumped two weeks ago with speculation of an impending announcement of fiscal stimulus by Chinese authorities. At just over $US110 the iron ore price remains well below its peak of just under $US150 at the turn of the year but is back near analysts’ expected average price for 2024. The small bounce in the iron ore price reflects that stimulus announced to date has been modest and that the iron ore price already incorporated some expectation of Chinese fiscal stimulus.

Some analysts continue to speculate that Chinese fiscal stimulus of up to 10% of GDP could be coming. However, while Chinese fiscal measures in the Global Financial Crisis aimed at boosting construction, the current problems in the property sector stem from lack of demand. So while construction would boost activity, it’s unlikely to be the focus of a fiscal stimulus package.

The ASX materials sector has underperformed the broader ASX index this year. Speculation on a Chinese stimulus package saw the ASX materials sector recover only a small part of this underperformance. The small move reflects that share prices of miners already incorporated some expectation of Chinese fiscal stimulus and that announcements to date have been relatively modest. Overall. at this stage spillovers to the Australian economy from Chinese policy stimulus also seem modest.