Commodities Daily Focus

俄罗斯VTB银行股份公司 Wiktor Bielski


　　After a series of weak data points in recent weeks, the sharp decline in China’s official May PMI to 50.4, down from 53.3 (see chart) and well below consensus forecasts of 52.2, signals a need for significant government stimulus to boost growth, in our view. Although the first (inevitable) market focus has been on the possibility of a further RRR cut, this might not be the ideal solution. There have been three RRR cuts already this year, while new loans in 4mo12 totalled RMB 3.14tn, up 4.9% YoY and on track to meet the full-year lending target of RMB 8tn. Furthermore, with short-term rates at about 2.4% and one-year swaps at 18-month lows of 2.3%, liquidity appears ample. Recent data suggests that borrowing has picked up strongly in the past two months, as evidenced by Toyota sales figures for 5mo12 up 26.1% YoY and sales of new flats in Beijing up 25% YoY. Nevertheless, we think business remains cautious, waiting for more definitive signs from the government, hence FAI in April fell to 20.2% YoY (see chart), its lowest level since December 2002, with infrastructure spend very weak. Indeed, infrastructure FAI in 2011 slumped to just +2% YoY and in 1Q12 investment in power, water and transport (particularly rail) was only about 10% of already lowered full-year targets.

　　As a result, we think recent government plans to fast-track about RMB 1tn of infrastructure and industrial projects is definitely a step in the right direction, and we expect more positive measures in the weeks ahead, particularly as the fast-approaching People’s Congress in October makes this compelling. Although a repeat of the RMB 4tn stimulus in 2009 is unlikely, in our view, given the speculative excess that created, we think a smaller but more focused and targeted programme could have a much more positive and sustained impact. In turn, a significant pick-up in infrastructure spend is likely to have a positive effect on steel, bulk commodity and metal demand in 2H12, and despite the ongoing deterioration in European demand we expect this to underpin prices. Furthermore, with a sharp shift to destocking in China in 2Q12, the likelihood of renewed restocking in 2H12 is likely to provide a further boost.