China has laid out plans to issue Yuan 3.75 trillion ($526.8 billion) of new local government special bonds this year, up from Yuan 2.15 trillion in 2019, which will boost infrastructure construction and benefit diesel as well as steel consumption.
The announcement came during Premier Li Keqiang’s address to the National People’s Congress on May 22, when he said there would be no GDP target for China in 2020 due to uncertainty caused by the coronavirus outbreak.
Li said the emphasis would be on maintaining employment levels and maintaining living standards rather than significantly boosting economic growth. While this may have sent out weak signals regarding commodities demand — and indeed iron ore futures declined initially — the focus on infrastructure should generate strong demand for steel and raw materials.
The new local government special bonds, which are designed to support infrastructure construction, could boost infrastructure investment growth from 3.8 per cent in 2019 to 7 per cent-10 per cent in 2020.
Iron ore traders were cautiously optimistic about the outlook for the rest of this year. A steel analyst said given the growing pressure of unemployment, traditional infrastructure was the best way of boosting investment and keeping employment at a decent level.
A pick-up in infrastructure project activity could also provide a boon for oil product prices. Construction projects can provide strong stimulation for gasoil demand. Fuel is burnt at construction sites, and is used to transport material and in industry to produce materials, like cement. Construction-related activities would account for up to 50 per cent of gasoil demand in China.
S&P Global Platts Analytics forecasts that China’s gasoil demand still sees year-on-year contraction of 1.9 per cent in Q3 but a growth of 1.16 per cent in Q4 this year, after declines by over 6 per cent in the first six months. Platts Analytics expects China’s total oil demand to fall by 3.8 per cent to about 14.2 million barrels per day in 2020, compared to a 4.6 per cent growth in 2019.
S&P Global Ratings in May forecast GDP growth of 1.2 per cent for China, noting that “China is healing, gradually” and expecting stimulus to be restrained this year.