LAUNCESTON, Australia, May 11 (Reuters) – China’s efforts to re-energise its economy through interest rate cuts are probably not enough to give much of a boost to commodity import demand, but oddly enough may act to boost some commodity exports.
The People’s Bank of China cut interest rates for the third time in six months on May 10 in the wake of weaker-than-expected trade and inflation numbers.
Analysts are divided on whether the rate cut will have much of an impact, with a seeming consensus that at best it will act to halt the slowing of economic growth, rather than increasing the pace.
For natural resource producers, already pressured by prices close to multi-year lows for several major commodities such as iron ore and coal, even a stabilisation of economic growth around Beijing’s 7 percent annual target would be good news.
However, for China’s commodity demand to rise in any meaningful way, it’s likely that fiscal stimulus in the form of increased spending on infrastructure and social housing will have to be put in place.
While this option is definitely on the cards, it will take some time for measures to be enacted and result in a boost in commodity imports.
What’s more likely in the short term is that the authorities make concerted efforts to maintain employment levels, as keeping jobs is generally viewed as a higher priority for Beijing than ensuring profitability, especially in the giant state-controlled enterprises.
Many of these enterprises are in the resource sector, such as steel mills and aluminium smelters.
It’s no secret that both Chinese steel and aluminium producers have been struggling to stay in the black in recent years, given overcapacity and slower economic growth.
Additionally they are confronting pollution issues and government policies that are encouraging a move toward a more consumer-driven economy and less reliance on export-orientated heavy manufacturing.
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