November 11, 2008

China stimulus plan to impact commodities sentiment, not demand


China's multi-trillion yuan economic stimulus plan will help boost sentiment in the agricultural commodities markets, but its impact on actual demand may not be as great, analysts said Monday (November 10).


China's State Council Sunday said the government will invest RMB4 trillion by the end of 2010 to boost economic growth, with an initial investment of RMB100 billion on construction projects in the fourth quarter.


As part of the plan, China will also implement value-added tax reforms, which will reduce the tax burden on enterprises by RMB120 billion.


"The RMB2 trillion-a-year plan will help drive the economy significantly, but there is a lack of evidence to show agricultural commodities will see a fundamental turnaround," said Xu Wenjie, an analyst at Tianma Futures Co.


China's domestic gross domestic product expansion slowed to a five-year low of 9 percent on year in the third quarter amid the ongoing global financial crisis.


Many manufacturing factories in coastal cities have already shut down due to the reduced external demand.


Cash demand for vegetable oil and feedmeals has also turned sluggish, while grain and oilseeds output this year has increased significantly on year, pressuring prices.


The package will bolster sentiment, said Gao Yanrong, Dalu Futures Co. analyst, helping a rebound in the agricultural commodities market, which has shown signs of weakening recently.


However, the market may only have touched a "periodical bottom" and could fall further in the longer run if global financial woes continue to weigh on demand, he added.


Agricultural futures traded on the Dalian Commodity Exchange and the Zhengzhou Commodity Exchange settled higher Monday, led by big gains in edible oil and soy futures.


The benchmark May 2009 soy contract on the DCE settled RMB85 higher at RMB3,349 a tonne, or up 2.6 percent, the largest single-day rise so far this month.


Analysts said the government's grain support policies issued last month, which led to the benchmark soy contract settling 4.8 percent higher October 20, will benefit agricultural commodities more than the RMB4 trillion plan.


The grain support plans include a hike in the minimum purchase prices next year and a substantial increase in grain subsidies.


"The market has already factored in the (grain support policies), which are included in the RMB4 trillion plan," said Dong Jianye, an analyst at First Capital Futures.

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