China’s recent shift in economic policy and its potential for fiscal stimulus reflect an evolving approach to support economic stability. Following previous monetary easing measures, including a reduction in the Reserve Ratio Requirement and interest rate cuts in late September, China’s National People’s Congress (NPC) Standing Committee has now approved a local government debt restructuring plan. This plan allows for up to RMB 10 trillion (~US$2.54 Trillion) in debt adjustments, including a one-time increase of RMB 6 trillion in the special debt ceiling over 2024-2026, and an additional RMB 800 billion in special bond quotas annually from 2024 to 2028. These measures align with expectations, the catch – it’s estimated to add just 0.1 per cent to China’s GDP.

Naturally this left the market disappointed and saw Chinese equities shredded. But it’s more than the lack of direct demand-side stimulus. It’s the vague guidance on the use of bonds for banking sector recapitalisation as well as poor outlining on housing inventory buy-backs, and idle land. It’s all a bit, ‘nothing’.

Now we admit market expectations had been high, so price falls were inevitable, but the metals prices post-meeting were telling from both a short- and longer-term perspective. First support for the housing market may be limited in the near term, given that primary home sales for top developers turned positive up 15 per cent year-on-year from June last year and home prices rose slightly 0.4 per cent in 50 cities September to October.

Second is a possible trade war and having some powder dry as it gears up for the next four years of a Trump 2.0 administration. Fiscal Stimulus is clearly going to be part of this.

And already we have seen Finance Minister Lan Foan, in comments to the South China Morning Post  discussing this very point. He pointed out that China’s Ministry of Finance has a readiness for fiscal expansion starting in 2025 and that China’s current debt-to-GDP ratio (68%) provides fiscal headroom, especially in comparison to Japan (250%) and the U.S. (119%). So is that suggesting it’s a ‘when’ not an ‘if’?

From a trader and markets perspective the answer may come at the Central Economic Work Conference in December is expected to outline specific fiscal measures for 2025, potentially focusing on reducing housing inventory, boosting infrastructure, and enhancing social welfare and consumption. 

The market consensus is for between RMB 2-3 trillion in fiscal expansion over the next one to two years, likely with an initial emphasis on infrastructure investment over consumption support. We should point out this could be a “fourth strike and you’re out” territory as expectations for delivery since Gold Week celebrations have been 0-3, a fourth miss might see the markets completely ignoring what has been promised.

However if it does eventuate looking historically, such investment-heavy stimulus cycles have bolstered demand for steel and other raw materials.

China’s past stimulus responses, particularly during the 2018-19 U.S. tariff period, included fiscal stimulus and currency depreciation, indicating that fiscal policy could adjust in response to global economic factors. However, China’s approach to fiscal expansion this time may differ slightly from past cycles:

Reason 1: Steel Demand: Prior fiscal expansions, such as during 2009-2010 and the 2018-19 tariff period, drove strong steel demand growth. Investment in steel-intensive infrastructure, for example, boosted annual steel demand by approximately 200 million tons (a 30 per cent increase) between 2016 and 2019, raising the steel intensity of GDP by 7 per cent. Given China’s high cumulative steel stock—estimated at around 8.5 tons per capita (approaching developed-nation averages of 8-12 tons per capita)—the scale of future infrastructure investment may be more limited, as large physical projects are increasingly complete and the need for new largest scale projects is moderating.

Reason 2: Shift To Consumption and Social Welfare: Since 2018 China has subtly and gradually shifted fiscal efforts toward consumer support and social welfare to address deflation risks. This shift is likely to accelerate, as policy moves to an emphasis on stimulating internal demand through social spending. 

Now historically China has often favoured investment-driven stimulus to support GDP growth targets, which could mean another infrastructure-led, steel-intensive approach if economic conditions demand it, albeit possibly on a smaller scale than in the past, but again 0-3 on promises, there are risks it doesn’t materialise this time around.

The next part of the story for commodities and a China stimulus story is the impending trade war. China is clearly facing headwinds for its exports, given the likely policy changes from the second Trump administration. The biggest issues are the 10 per cent tariff on all imports and up to 60 per cent on Chinese goods. The timing and specifics of the tariffs are uncertain, but using his 2016-2020 timelines as a guide it’s likely to be one of the first programs enacted and new tariffs could emerge as early as the first half of 2025. 

Currently, more than 20 per cent of China’s steel production is tied to exports—11 per cent directly and 12 per cent indirectly through products like machinery and vehicles—any new tariffs on Chinese goods would likely impact steel output and, subsequently, iron ore demand. 

During the 2018-19 tariff period, China’s direct steel exports to the U.S. declined, but this was balanced by growth in indirect steel exports via manufactured goods and bolstered by domestic infrastructure demand which is hard to see this time around.

2025 strategies China might deploy to counteract any new tariffs could include currency depreciation, reciprocal tariffs, re-routing exports to new markets, and increased fiscal and monetary stimulus. Interestingly the U.S. comprises only 1 per cent of China’s direct steel export market, it the larger share for indirect exports, particularly machinery ~20 per cent that is the issue. Since 2018, China has expanded its steel-based goods exports by focusing on emerging markets—a resilience that will likely be tested further if tariffs intensify next year.

So where does this leave iron ore? Current iron ore prices, hovering around US$100 per tonne, seem to reflect current market fundamentals pretty accurately. The substantial net short positions in SGX futures, which were prevalent prior to the late-September stimulus, have notably diminished in the past 6 weeks 

China’s recent policy adjustments have mitigated the downside risks for steel demand for the remainder of 2024. This is coupled with solidifying demand indicators and restocking activities, which may bolster seasonal price strength as the year concludes. 

Nevertheless, the potential impact of a seasonal price rally may be constrained by relatively high port stock levels, which presently stand at about 41 days of supply which again underscores why price around US$100 a tonne is accurate.

Looking ahead to 2025, the Ministry of Finance in China signalling forthcoming fiscal expansion suggests a potential upside risk. However, potential new tariffs from the U.S. may pose challenges to steel export volumes, potentially counteracting the positive effects of domestic fiscal measures. China’s response to such tariffs—potentially through currency depreciation, trade redirection, or additional fiscal and monetary stimulus—will be crucial in mitigating these pressures. But this would be a zero-sum game effect. Thus any upside risks are counted by downside risks – this leads us to conclude that China is not going to be the White Knight of the past. And that 2025 is going to be a tale of two competing forces that sees pricing see-sawing around but finding equilibrium at current prices.

This also leads us to point to equities – iron ore and cyclical plays have benefited strongly over the past 24 months on higher prices and the long COVID tail. 2025 appears to be the year that tail ends and a new phase will begin.

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