ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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No Weakening of China's Economy

A "Bear Stearns" moment in China is not round the corner.

China accounts for 60% to 70% of the world demand for iron ore; so when its price dips quite significantly, more than 20% so far in 2014, there is a bit of a tremor in the global financial markets. The stock prices of the world’s largest exporters of iron ore, BHP Billiton and Rio Tinto, have fallen in anticipation of a drop in their net profits. Predictably, their managements pointed to the long term, assuring investors that steel capacity in China is still on a significant upward trend, estimated to rise from 800 million tonnes to one billion tonnes by 2025. The big iron-ore exporting countries, governments of Brazil and Australia, are, however, estimating a loss of tax revenues as a result of an anticipated fall in demand. But, more important, questions are being raised about the Chinese steel industry’s overcapacity – its over-investment in plant and equipment leading to world productive capacity far exceeding world demand for steel.

China’s overall merchandise exports have grown by a mere 1.6% in January-February over the same last year, and analysts are wondering whether the country will meet its gross domestic product growth rate target of 7.5% for the year. The sharp deceleration in the growth of Chinese exports is, of course, due to the stagnation of the economies of the Triad – North America, western Europe and Japan. The unprecedented investment and export-led growth that China witnessed from 2001 to 2008, and in the wake of a significant slackening of export demand as a result of the great financial crisis, the revival of Chinese economic growth geared by a massive fiscal stimulus, this time mainly investment-led growth, seems to have reached its limits by the end of 2012.

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