Boom or Bust for China?

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Global Trade

Articles out on the same day report conflicting opinions. On the one hand Graeme Rowley of Fortescue Metals Group says growth will continue at a robust 8% or more next year and that he sees no slow down in the country’s urbanization program and hence demand for metals. 20% of China’s steel consumption goes into the construction industry.

Xu Lejiang, chairman of Baosteel on the other hand is quoted as saying China is heading for a downward slide with iron ore prices likely to be lower next year than this. Finished steel prices are off 15-20% since July and demand is falling. Indian spot iron ore prices have come down from $195 to $110/ton, bulk freight rates from Australia are down from $50/ton at mid year to below $20/ton now and according to MySteel the Chinese steel industry is already in recession.

Six months ago no one would have imagined an economy could turn around so fast but we have since experienced the full force of the credit crunch and are now more inclined to believe anything is possible. Finally though commentators are coming to understand that China is not isolated from the rest of the world – that the twin effects of falling demand from overseas and their homegrown anti inflationary credit tightening have combined to spook the stock markets, severely tighten domestic credit, reduce consumer demand and limit exporters competitiveness by strengthening the currency and imposing export tax increases.

Will China go into outright recession? No, almost certainly not but the days of double digit growth are over for a while. The economy will have to rely on modest domestic growth to stay comfortably in positive territory, but for a country used to 12+% growth a fall to 6-8% still involves significant adjustments and will results in winners and losers who have bet on growth continuing at previous stellar rates.

–Stuart Burns

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