Copper Helped by China’s Move to Stimulate the Troubled Real Estate Market

Faltering China Recovery

China's post-pandemic recovery is faltering, with a constant stream of disappointing data over the past several months. GDP grew by a scant 0.8% q/q in the second quarter of the year and trade activity has been diminishing.

After the boost at the start of the year, factory activity has plunged and Thursday's official Manufacturing PMI showed the fifth consecutive month of contraction. There is some hope for a bottom though, since the 49.7 print marked the third straight improvement.

At the same time, the country grapples with deflation, as consumers keep their purses tight amidst economic uncertainty. CPI shrunk by 0.3% y/y in July, which was the first negative reading in more than two years. The situation is worse on the producer side, as PPI stayed in deflation territory for the tenth month in a row.

Troubled Property Market

China's important real estate market suffered from the pandemic and fears around the beleaguered industry have now reemerged. The poster child of the recent property crisis, Evergrande, filed for bankruptcy in the US in August ^[1] and its stock dropped this week, after resuming trading in Hong Kong from a seventeen-month suspension. ^[2]

Rival developer Country Garden meanwhile, posted a distressing loss of around US$ 7 billion (RMB 51.461 billion) for the first half of the year, in a sharp reversal from the profitable H1 2022. What's more, the firm warned of a default if the financial performance continues to deteriorate and said it will consider "various debt management measures". ^[3]

Support Measures

Chinese authorities are not standing idle, with measures to bolster consumer demand, support private investment, boost investor activity and improve liquidity in the financial system. However, they still appear reluctant to embrace big stimulus and efforts to support the property sector had been underwhelming, given the magnitude of the problem.

The central bank had slashed the one-year prime loan rate (LPR) by a modest 10 bps last month to 3.65, in the second cut in three months. However, it surprisingly kept the five-year LPR unchanged, which the reference for most mortgages.

This week however, authorities ramped up their efforts to revive the property. They announced adjustments to housing credit, which among other things,will allow some borrowers to apply for lower mortgage rates, staring September 25. ^[4]

Copper Analysis

China is the world's largest economy and the top consumer of Copper, which is heavily used in buildings construction, so the performance of its property industry affects the commodity's prices.
Copper made a strong 2023 start after China's abandoned its stringent zero-Covid policies, but lost ground as the recovery began to wane and runs a mixed year. August was negative as fears around the country's important real estate sector resurfaced, but is upbeat this week, helped by the stimulus measures to support the industry.

The commodity moves back to profits for the year and above the EMA200, which brings 4.026 in the spotlight, but we are cautious around its ascending prospects and 4.196 looks distant. Despite the rebound, Copper remains is precarious position. As such, there is risk for sub-EMA200 moves that would make it vulnerable to 3.624, but catalyst would be needed for a breach.