China Growth Plans Give Commodities Bulls Little to Run With

China’s annual National People’s Congress, the first since Beijing brought an abrupt end to three years of crippling Covid Zero restrictions, has begun with a modest target for economic growth and few hints of past stimulus extravagance.

(Bloomberg) — China’s annual National People’s Congress, the first since Beijing brought an abrupt end to three years of crippling Covid Zero restrictions, has begun with a modest target for economic growth and few hints of past stimulus extravagance.

Here’s a rundown of what commodities and energy markets need to know after the first day of the meeting.

What are Beijing’s plans for the post-Covid economy?

The government reiterated it wants to boost growth by raising domestic consumption, alongside proactive fiscal policies. But the 2023 targets underlying that stance will disappoint bulls hoping for more ambitious support as the economy reopens.

Although Beijing promised increased state spending and a wider budget deficit, the headline GDP growth figure of around 5% is at the low end of expectations. The target for local government bond sales — the backbone of infrastructure investment that drives much of China’s raw materials demand — was modest too, suggesting the government is seeking to strike a balance between supporting the economy and strained finances, plus the need to prevent runaway commodities inflation.

None of the official documents released on Sunday suggested appetite for the kind of massive boost deployed to right the economy after the financial crisis or even at the beginning of the pandemic, when Beijing drove markets for materials like copper and iron ore to record highs in 2021, forcing authorities to intervene.

There was some solace to be found in the rhetoric around China’s need to increase consumption — good news for commodities that benefit from consumer spending, including oil and agricultural products — but there were few concrete measures to point to. The central bank has also reiterated that it won’t roll out excessive stimulus, relying instead on consumer confidence and investment to improve as the economy strengthens.

What are the priorities for commodities markets?

China’s anxieties over its reliance on overseas suppliers to feed its vast population and supply the raw materials it needs are never far from the forefront of government policy, but the combination of Covid disruptions and Russia’s invasion of Ukraine placed both toward the top of the list of this year’s concerns.

Some of extra spending will be deployed on projects to enhance energy and food security, including an increase in the country’s capacity to produce grain. The government also wants to bolster the domestic supply of materials like iron ore, for the steel industry, and lithium, for electric vehicle batteries, which are deemed crucial to promoting self-sufficiency.

Beijing will maintain tight price controls on energy and agricultural commodities to help meet this year’s 3% consumer inflation target, the top economic planning agency’s vice chairman told a briefing on Monday. And it will continue to expand domestic oil and gas output to avoid becoming too dependent on foreign sources.

Raising defense spending has also emerged as a top priority, and while procurement is likely to be highly secretive, it could lift demand for rare earths and other metals used in weaponry.

How did environmental and climate policies fare?

Environmental targets included a small drop in energy intensity for the year — about 2% — and a pledge to control fossil fuel consumption, although that message was muddied by the shout-out for the role played by coal as the country’s mainstay fuel.

Stung by widespread power outages in recent years, the government has pushed production of the dirtiest fossil fuel to record levels. Output rose 10% last year to 4.5 billion tons, while natural gas also hit an all-time high and crude oil rose above 200 million tons for the first time since 2015, helping to cut China’s reliance on pricey energy imports.

Breakneck expansion is testing miners’ limits and concerns over safety are once again in the news after a deadly mine collapse in northern China last month cast a spotlight on the dangers inherent in the country’s effort to prioritize energy security by boosting coal production.

The government will push ahead with its plans for massive solar and wind projects based inland, and with power grids upgrades. Cracking down on carbon data fraud will also be a priority as the authorities work to strengthen the nation’s ailing emissions trading system ahead of a planned expansion.

What about the outlook for property and infrastructure?

Local governments will be allowed to sell 3.8 trillion yuan ($550 billion) of new special bonds, which are mainly used to fund infrastructure spending. That’s more than the 3.65 trillion yuan set at last year’s meeting, but lower than actual issuance of 4.04 trillion yuan in 2022. Bloomberg Economics calculates the government’s spending plans translate into a broad budget deficit, including local government bonds, of 5.9%, compared to 5.8% of GDP in 2022 — higher than it expected.

Infrastructure accounts for the biggest chunk of China’s steel consumption, so that sector in particular will benefit from more public works to buttress the economy’s recovery and to alleviate the crisis in the real estate industry.

But the type of investment is changing as spending turns from the old economy to the new. That means more solar farms, power storage facilities and expansions of the grid, perhaps using less steel and cement but requiring more materials like copper and aluminum that are critical to the energy transition.

The government’s support for the embattled property market, for example, which accounts for almost one-third of Chinese steel demand and as much as one-fifth of appetite for base metals such as copper, aluminum, and zinc, was equivocal. Premier Li Keqiang said China needs to prevent a disorderly expansion of the sector, as policy makers seek to pull a crucial economic growth lever without piling on financial risks.

Sunday’s plans suggest Beijing isn’t quite content to let the economy motor along under its own steam after an unexpectedly robust revival in factory activity in February. But it isn’t about to unleash old exuberance.

The Week’s Diary

(All times Beijing unless noted.)

Monday, March 6

National People’s Congress in Beijing, running through March 13
- National Development and Reform Commission briefing, 10:00

Tuesday, March 7

China’s 1st batch of 2023 trade data through February, including steel, aluminum & rare earth exports; steel, iron ore & copper imports; soybean, edible oil, rubber and meat & offal imports; oil, gas & coal imports; oil products imports & exports. ~11:00
China foreign reserves for February, including gold
BNEF China forum in Beijing, 14:30
EARNINGS: MMG Ltd.

Wednesday, March 8

CCTD’s weekly online briefing on China’s coal market, 15:00
China farm ministry’s monthly crop supply-demand report (CASDE)

Thursday, March 9

China inflation data for February, 09:30
China to release February aggregate financing & money supply by March 15
Wilson Center webinar on geopolitics of minerals critical to the clean energy transition
EARNINGS: CATL