$220bn stimulus on the cards for China: Great for commodities, bad for inflation

China’s Ministry of Finance is considering US$220bn in stimulus, used to pay for infrastructure spending, according to Bloomberg. 

The stimulus will enable local governments to sell up to 1.5tn yuan of special bonds in the second-half of 2022, in a last-ditch effort to shore up economic growth and ease housing market pains.

This would be the first time bonds are sold before the start of the new budget year, in January 2023.

Expediting the funding timeline requires review and approval from policymakers including the State Council and National People's Congress, Bloomberg reported.

Source: Bloomberg

Miners rejoice

China is pulling an infrastructure classic in an attempt to get its covid-ridden economy back on track towards its GDP growth target of 5.5%.

Massive Chinese stimulus in the first-half of 2021 drove a boom in demand for steel, pushing iron ore prices to all-time highs of more than US$220 a tonne.

That said, today's circumstances are a little different.

Australia and Brazil are ramping up iron ore production, surging energy prices is taking a toll on Chinese steel mill margins and China's property market is trying to dig itself out of a deep, debt-ridden rut.

Nevertheless, China trying to pull forward stimulus is good for commodity market sentiment.

Exporting inflation

The stimulus comes at an awkward time when Western economies are aggressively raising interest rates and tightening financial conditions.

So what happens when the world's largest consumer of commodities takes a complete 180 policy decision to deploy stimulus for infrastructure spending?

Interestingly, global equity markets have been rallying in the past few days as investors react to a sharp pullback in commodity prices, which has eased inflation and interest rate expectations.