China’s ‘modest’ growth target should worry investors in BHP, Rio Tinto and Fortescue Metals Group

Last week, data from China’s manufacturing sector showed the biggest improvement in activity in more than a decade. Consumer mobility data is bouncing back. Even Chinese home sales rose for the first time in 20 months.

The apparent strength of the rebound had led some commentators, including Pantheon Macroeconomic China’s chief economist Duncan Wrigley, to speculate that Beijing could set a bold 6% growth target for 2023, albeit a conservative target of 5.5 %, in line with last year. , was more likely.

But on Sunday, Chinese Premier Li Keqiang announced a target of just 5%.

The number itself is arguably not the important thing, given longstanding and well-founded doubts about the veracity of China’s economic data. Rather, to mutilate this famous quote from The castleit’s the atmosphere of the target that counts here.

First, it’s surprising that the target is more conservative than the one China set – and largely missed – last year.

After nearly two years of severe shutdowns, most observers expected a sustained stimulus package to be unveiled during the year, focused on infrastructure but potentially spilling over into the beleaguered real estate sector that was at the center of a pre-COVID-19 crackdown on speculation.

But the modest 5% target suggests that there is no significant stimulus and that China is instead looking to bolster domestic demand by bolstering consumption of services.

Now, China is probably quite sensitive here. As Jonathan Garner, Morgan Stanley’s chief Asia equity strategist, said a few weeks ago, Chinese consumers have amassed between $640 billion and $850 billion in savings during the pandemic, which equates to 7 to 9% of consumption.

Garner expects real consumption growth to reach 9% in 2023 (from zero in 2022), fueling GDP growth of 5.7%.

But the focus on consumption is not particularly helpful for Australian iron ore miners, who would have liked to see support for property and infrastructure projects.

Instead, as Commonwealth Bank economist Joseph Capurso notes, the local government bond quota for infrastructure has actually been reduced from 4.15 trillion yuan ($887 billion) in 2022 to 3.8 trillion. billion yuan in 2023, implying a decline in demand for metals.

Housing news was mixed. Over the past six months, China has introduced what is now called the “three arrows” policy to support the strongest property developers by ensuring they have liquidity through bank loans, bond issues bonds and fund raising.

But Li also warned on Sunday that the government would remain alert to an “unregulated” expansion of the real estate sector, suggesting the policy measures will favor first-time home buyers over speculators.

Overall, real estate policy has changed little, with the focus on restoring the sector rather than using the sector as an engine of growth, as China has done in the past.

“For Australia, the focus more on services consumption and less on infrastructure investment is less supportive of commodity demand than expected,” says Capurso.

All of this is largely in line with forecasts from Morgan Stanley’s Garner, who says Chinese steel demand will remain steady at around 1 billion tonnes in 2023. As a result, he sees iron ore prices peaking over the course of the quarter of June at 140 dollars per ton, against 127 dollars. today – before dropping to US$100 a tonne in the September quarter and to US$80 a tonne by the end of the year.

Goldman Sachs, which updated its earnings estimates for Rio, BHP and Fortescue on Monday, sees a similar trend, with seasonal restocking expected to take iron ore to US$150 a tonne over the next three months. , before the price drops to US$105 by the end of 2023.

The big question, of course, is whether iron ore miners start looking expensive after their big wins.

Goldman Sachs is surprisingly bullish on Rio, with a price target of $140.40 from its current price of $126.43. But it is less bullish on BHP, with a price target of $48.30 in line with its current price. His price target of $15.50 on Fortescue suggests the stock will fall from its current level of $22.76.