China’s building binge gets its economy back on track


Last month, China’s state railway operator announced plans to double the size of its high-speed rail network over the next 15 years. In July, investment from China’s state-owned enterprises, including giants such as China National Offshore Oil Corporation and China Mobile, surged by 14 per cent compared with the prior year, according to Standard & Poor’s analysts. (Private companies, by comparison, bolstered investment by just 3 per cent.)

Loading

In Guangdong, the country’s most populous province, regional officials plan to spend some 700 billion yuan ($145 billion) this year on public medical facilities, 5G networking and transportation infrastructure.

In February, the coronavirus outbreak prompted a lockdown of much of the country’s economy, the second largest in the world after that of the United States. From January to March, China’s economy contracted by 6.8 per cent, the first decline the country has acknowledged in roughly half a century. Industrial activity stopped, causing metal prices to plunge. Copper and aluminum prices all dove roughly 20 per cent in that period, while iron ore fell about 15 per cent. The sudden pause in demand from such a big buyer immediately strained several countries that have built large parts of their economy around digging ore out of the ground and shipping it to China.

Australia’s exports to China — mostly iron ore and coal — tumbled roughly 20 per cent, as the country fell into its first recession in nearly 30 years. Metal exports from Brazil, Chile and Peru also slumped, driven by cratering demand from China and declines in mining production, but also because miners were forced to halt operations as the coronavirus spread locally. The share prices of global mining giants, which get large portions of their revenue from China, cratered. In local currency terms, Vale in Brazil and the Anglo-Australian giant Rio Tinto both tumbled roughly 40 per cent from January to March.

But the response of the authoritarian government in China — its state-led model that gives Beijing significant influence over the direction of the economy — was enormous, helping China post one of the fastest recoveries of any of the world’s largest economies in recent months.

Goldman Sachs’s estimates of Chinese budget deficits — a measure that includes both official budget deficit numbers and a variety of off-balance sheet government support that is common in China — ballooned to 20 per cent of gross domestic product in the first half of 2020 from about 10 per cent at the end of 2019, as the country pumped money into the economy.

The price of iron ore has jumped by 40 per cent since March.

The price of iron ore has jumped by 40 per cent since March. Credit:Bloomberg

Recent economic reports from China show where that government money has flowed. August data on industrial production revealed 5.6 per cent growth over the same month last year, firmly establishing a V-shaped recovery for the sector. Industrial production in sectors tied to infrastructure, such as cement, steel and iron, all posted strong gains. Other official data on investment showed growth in utilities, road and rail construction.

Economists at the Organisation for Economic Cooperation and Development expect that China’s GDP will actually grow by 1.8 per cent this year, making it the only member of the Group of 20 nations that will not suffer a recession this year. That’s the best expected performance of any of the countries the organisation tracked in its latest economic update.

“The recovery in GDP is much faster and stronger than elsewhere,” said Bain of Capital Economics.

Loading

That’s good news not only for metals markets, but could also herald better times for the global economy. Analysts have studied the prices of some metals as a leading indicator of global economic growth, even referring to copper as “Dr. Copper” because of its supposed ability to predict the direction of the economy as well as any economist with a doctorate.

“People’s perception of the economy is how weakened it is, yet all the industrial metals are telling you a very different story,” said Chris Verrone, an analyst and partner at Strategas Research in New York. “We think copper is the market trying to tell us that the economy is stronger than we expect.”

The New York Times

Market Recap

A concise wrap of the day on the markets, breaking business news and expert opinion delivered to your inbox each afternoon. Sign up for the Herald‘s here and The Age‘s here.

Most Viewed in Business

Loading