15 March 2019

Bob Cunneen, Senior Economist and Portfolio Specialist

                             China’s production vs iron ore price

                             Source: Datastream.

China’s recent economic growth performance has been remarkably stable. China’s industrial production has been running smoothly between 5% to 7.5% annual growth over the past three years (blue line). This is astonishingly resilient considering that the Chinese central bank had been tightening credit conditions to constrain debt growth. President Trump’s ‘trade war’ on Chinese exports over the past year should also have significantly curbed production growth.      

However two recent academic studies* have highlighted concerns that China’s economic growth is significantly less than the government’s data. These studies examined a range of growth measures such as government tax revenues, railways cargo volumes and even satellite images of lighting activity at night to estimate China’s actual growth rate. Notably these studies suggest that China’s annual economic growth is between 1.7% to 3.4% less than the government’s data.   

These dim sums on China’s growth could prove to be a harsh reality check for Australia. Slower Chinese growth has important implications for our key commodities such as iron ore, coal and gas. Having spent enormous sums during the mining investment boom to boost our production capacity to meet China’s demand, has Australia overstated China’s potential appetite for our commodities? If so, then a slower China growth profile could suggest considerable downward pressure on future iron ore prices (red line).

* Academic papers:

‘A forensic examination of China’s national accounts’, Brookings Papers on Economic Activity, 7 March 2019,

brookings.edu/bpea-articles/a-forensic-examination-of-chinas-national-accounts/.

‘Illuminating Economic Growth’, John Hopkins University, 11 December 2018, econ2.jhu.edu/people/hu/paper_HUandYAO.pdf

Source : Nab assestmanagement March 2019 

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