Beijing spells out steps to spur local demand: Update

Updates throughout with impact on steel and iron ore, property tax details and market reaction

Beijing will increase funding to local governments for infrastructure projects and cut taxes and payouts by corporations to stimulate domestic demand this year, which is broadly supportive of ferrous markets.

China will cut its value-added tax (VAT) rate from 16pc to 13pc for most industries and from 10pc to 9pc for the transport and construction sectors, premier Li Keqiang said in his inaugural speech at the annual national people's congress that started in Beijing this morning. Lower taxes could save companies several hundreds of billions of yuan and may translate to lower prices of some products.

Steel exporters are waiting for further clarity on how the VAT rate cut will affect export tax rebates. China's steel export prices are inclusive of the 16pc VAT. Rebar exports receive a 13pc VAT rebate, so fob China rebar prices include the net of 16pc minus 13pc, or 3pc VAT, after the rebate. HRC exports receive a 10pc VAT rebate, so fob China HRC prices include the net 6pc VAT.

Iron ore importers will also save on costs to the extent of the VAT rate cut, but with the near-term outlook looking bullish, there is unlikely to be much downside to prices because of the cut. Market participants expect the tax cut to be implemented in May.

The total amount of tax and social security contribution reductions for corporations will lead to a loss of 2 trillion yuan ($298bn) for the government, leading to a higher fiscal deficit this year.

But a dampener for broader financial and commodities markets was the projection of a slower gross domestic product (GDP) growth rate at 6-6.5pc for 2019. While a broad GDP range gives the government flexibility of adjusting policies through the year to guide the economy towards the growth level it is comfortable with, there seems to be little doubt that the Chinese economy will grow at a slower pace this year compared with 2018. Li acknowledged that the US-China trade war has affected certain sectors of the economy and affected market perceptions. The most active iron ore contract was lower by 1.27pc on the Dalian commodity exchange, while the rebar contract was down by 0.73pc.

Li has also called for quicker legislation to introduce property taxes in China, spooking ferrous markets as they are widely expected to squeeze real estate speculation and possibly slow real estate investment growth. He did not spell out the specifics of the tax. Such a proposal was also part of last year's legislative agenda but did not see much forward movement.

Apart from the property tax, Li did not dwell much on the real estate sector in his speech, only mentioning the need for better regulation and reforms. Li did not talk of curbing real estate price gains or signalled any tightening of restrictions on home purchases that could have pressured steel demand. He said that China's policy of building new houses in urban shantytowns will continue this year. The government is likely to build 5.8mn such units in 2019 compared with 6.27mn units in 2018.

The government will also ensure sufficient liquidity in markets, although it stopped short of promising further reductions in the cash reserve holdings of banks or a cut in policy lending rates. Li also ruled out any major infusion of cash to stimulate the economy. The yuan is expected to remain stable at a "reasonable" level.

Beijing will expand issuing special bonds to local governments by Yn800bn from a year earlier to Yn2.15 trillion. These funds are used for construction of new and continuing infrastructure projects. Li specified total investment in the railway sector will be around Yn800bn this year.

Steel markets expect a higher inflow of funds into infrastructure to translate into additional steel demand, offsetting an expecting slowdown in the real estate sector that is unlikely to repeat last year's near 10pc growth in investment.

Li did not spell out any capacity reduction targets for the steel sector, adding that market forces will be allowed to play a bigger role in reducing steel capacity. Adopting ultra-low emissions for the sector will be accelerated, he said. The key steel-producing province of Hebei has a 2020 deadline for all its steel mills to adopt these emissions regulations.