Iron ore, copper, and lithium stocks are soaring this week after China’s central bank announced a series of stimulus measures. The People’s Bank of China (PBOC) introduced interest rate cuts and property market support, triggering a rally in commodity prices and resource stocks. The S&P/ASX 200 Materials Index surged 2.4% on Tuesday and followed up with a 2.7% gain on Wednesday, marking its largest two-day rally since November 2022.
This surge comes as investors hope China’s measures will help its sluggish economy regain momentum. However, skepticism lingers among analysts about the long-term effectiveness of the stimulus.
China’s Central Bank Rolls Out Stimulus Measures
The PBOC made several key moves this week to stabilise China’s economy. These included a 20-basis point cut to the seven-day repo rate, which reduced borrowing costs for banks and businesses. The repo rate cut also lowered the medium-term lending facility rates by 30 basis points and the loan prime rates by 25 basis points, making credit more affordable across the economy.
The central bank also reduced the reserve requirement ratio (RRR) by 50 basis points. This cut freed up one trillion yuan (USD 142 billion) in liquidity, allowing banks to lend more. In addition, mortgage interest rates were lowered by 50 basis points, benefiting over 50 million households and easing interest repayments by 150 billion yuan (USD 21 billion). Down payments for second-home buyers were also reduced from 25% to 15%, boosting property sales.
Resource Stocks Rally in Response
The announcement from China triggered a broad-based rally in resource stocks, as investors anticipated increased demand for raw materials. Several major Australian mining stocks saw significant gains over the past two days:
- BHP Group: Shares rose 6.3% to $42.30
- Rio Tinto: Shares climbed 5.8% to $118.87
- Fortescue Metals: Shares increased 5.4% to $18.65
- South32: Shares surged 8.1% to $3.46
- Pilbara Minerals: Shares jumped 7.6% to $2.99
- Mineral Resources: Shares soared 11.5% to $40.98
- Lynas Rare Earths: Shares climbed 7.6% to $7.54
Iron ore futures in Singapore also surged 9% to USD 98 a tonne, while copper and aluminium prices rose 4%, reaching two-month and three-month highs, respectively.
Will the Stimulus Be Enough?
Despite the positive market reaction, analysts are cautious about the long-term effects of China’s stimulus measures. The property sector remains a significant concern, and while the new policies provide short-term relief, they may not be enough to spark sustained economic growth.
China’s economic growth projections were recently downgraded to 4.7% for the year, following disappointing industrial output, retail sales, and property prices. Economists are urging the Chinese government to introduce more aggressive measures to boost domestic demand and address structural issues in the property market.
Chang Shu, Chief Economist at Bloomberg Asia, noted that the simultaneous implementation of multiple stimulus measures was highly unusual and indicated the urgency felt in Beijing. However, she estimated the stimulus would only boost 2024 growth by 0.2 percentage points, with most of the impact being felt in 2025.
Similarly, Christopher Beddor from Gavekal Dragonomics cautioned that if Chinese policymakers fail to follow through with additional measures, the current market enthusiasm may quickly fade.
What’s Next for Commodity Stocks?
While resource stocks have surged this week, the sustainability of this rally depends on whether China can stabilise its economy. The PBOC’s measures have provided a short-term boost to liquidity, but underlying loan demand remains weak. Chinese consumers, who are grappling with declining corporate profits, rising unemployment, and falling property prices, may hesitate to spend, prolonging the country’s economic struggles.
For now, investors will continue to watch China’s economic data closely. If the latest round of stimulus fails to stimulate domestic demand, further government intervention may be required to keep the commodity rally alive.
In the meantime, Australian resource stocks, particularly those in iron ore, copper, and lithium, are enjoying a much-needed boost, with strong price rebounds across the board. However, the long-term outlook remains uncertain.
