Why China’s stimulus package could be good for SA mining stocks

Recently, China caught the market’s attention when it launched massive economic stimulus measures. It decreased interest rates by 0.5%, lowered mortgage rates, and injected $142 billion into banks. But the most interesting part is China announced plans to give funds, insurers and securities dealers, access to lending facilities to buy stocks. Following the announcement, Chinese stocks posted the biggest rally since 2008! So, the question is what’s the reason for China’s stimulus package?

What does China’s stimulus package have to do with the Chinese Real Estate crisis

For two years or so, China’s Real Estate Industry has faced severe challenges as several developers defaulted leaving behind large inventories of unsold apartments and incomplete projects. Evergrande, one of China’s real estate giants, filed for Chapter 15 bankruptcy.

As a result, China’s Real Estate Index collapsed +80% to levels last seen in 2008.

The problem is China’s property market is heavily intertwined with Chinese consumers. After all, around 70% of household savings are tied up in real estate. Ultimately, the collapse in home prices have crushed China’s consumer confidence.
Even worse, it’s also kick-started deflation in China. In fact, China is facing its longest period of deflation since 1999. Not even in 2008 did China experience five consecutive quarters of deflation.

Deflation is arguably worse than inflation

Deflation is a decline in overall price levels, and is the opposite of inflation, when prices rise over a period.

On the surface, deflation may sound like great news. After all, falling prices means your paycheque will go further and, in theory at least, you’ll have more purchasing power.

But the reality is deflation can severely hurt a country’s economy.

Firstly, if consumers know prices will fall tomorrow, next week or next month, why would they buy today?

This results in a fall in consumer spending, which in the case of China, is the engine that drives its economy.

So, what happens when consumers slow down on spending?

China’s economy freezes.

It also doesn’t help that the country’s unemployment continues to rise.

So, now you can understand why China recently launched stimulus measures last seen during the Covid-Crisis. If it wants to achieve the 5% GDP growth target, it desperately needs a resurgence in consumer confidence and spending.

So how can you take advantage of China’s stimulus package?

While China’s stock market is HOT right now, it doesn’t necessarily mean you should follow the herd and pile in. After all, nobody knows if the latest round of stimulus will be successful.

Sure, Chinese stock’s valuations are extremely attractive right now. And I think if China continues with stimulus measures, Chinese stocks could rally much higher. But just be aware there are risks.

On the other hand, one way to take advantage of China’s latest stimulus – without owning Chinese stocks – is through commodities.

Over the past week, iron ore is up 17%. Steel is up over 12%. And in the past month, copper, nickel, zinc, aluminium and others have rallied double digits.

Will China’s stimulus boost demand for commodities? We’ll have to wait and see. But I do think JSE commodity stocks are an attractive investment right now. Many are cash flush and trade at discounts to their real values. So, it may be a good time to add commodities to your portfolio if you don’t own any.