Doubts emerge on China's growth

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China's economy has held up remarkably well throughout the global downturn, boosted by strong government spending, but doubts are emerging over how sustainable its growth pace is.

The emerging giant's demand for Australian iron ore and other commodities has been crucial to keeping Australia's economic expansion on track through the financial crisis.

China said this month that iron ore imports rose 37 per cent in the first 10 months of the year to 514.8 million tonnes, while steel exports dropped 65 per cent from a year ago to 18.4 million tonnes.

The gap underscores the drop-off in global demand, putting more focus on the true health of China's domestic economy.

"They'll continue to consume commodities at a higher than normal rate and that will be good for commodities," said ANZ head of commodity research Mark Pervan. "But at some stage, there has to be someone using these commodities. And that is a risk."

Australia sold goods and services worth more than $39.3 billion to China in 2008-09, with more than half in the form of iron ore and concentrates, according to the Department of Foreign Affairs and Trade.

Doubts on domestic growth
 
When the financial crisis hit late last year, China's announced a stimulus plan aimed at spurring domestic growth and easing some of its dependence on the world - particularly the US, where a significant retail recovery in still not in sight  - as an export market.

So far, it seems to have worked, with the Chinese economy growing at 8.9 per cent in the year to September, from 7.9 per cent.

However, Mr Pervan and others question if local demand can really pick up to the slack in the export market.

Mr Pervan said the risk is the Chinese government is funding the building of apartment blocks and freeways and no one is using them.

Looking at official statistics, a sudden drop-off in demand would seem to be the last thing for Australian resource companies to worry about.

Chinese industrial production grew 16.1 per cent in the year to October, according to the National Bureau of Statistics of China, in data released this month. The official data also showed heavy industrial output rose 18.1 per cent year on year.

But even these numbers have caused analysts to question the sustainability of China's growth.

At this pace, heavy industrial output would be doubling every four years, said Fat Prophets commodities analysts Nick Raffan.

"If it held at that level for a decade, you'd be looking at four times the current level of imports in eight years time, and I don't think any country is ready for that in terms of infrastructure."

The RBA has repeatedly cited China's demand for Australian resources as the key factor explaining the resilience of exports during the financial crisis.

In a speech earlier this month, Reserve Board Governor Glenn Stevens said: "The emergence of China and India is a benefit to Australia, but we stand to have a heightened exposure to anything going seriously wrong in those countries."

ANZ's Mr Pervan said a few years ago, the fear was that Chinese officials were trying to downplay GDP growth to dispel fears that the economy was overheating. "GDP became a fudgy number."

Mr Pervan believes the current GDP numbers are ''probably pretty accurate ... but should it be running at 9 per cent just through government stimulus?"

"The issue is: is there end-demand behind the stimulus? And that is definitely a risk."

Wholesale fudge?

Others, such as US-based hedge fund investor Jim Chanos of Kynikos Associates, have doubts about the accuracy of the numbers coming out of China.

Mr Chanos knows something about sketchy numbers. The hedge fund manager was one of the first to sound alarm bells about Enron before the ill-fated energy dealing company collapsed in 2001.

He said recently there seems to be a "wholesale fudge-factor" with the countries' official statistics coming from China.

- © Fairfax NZ News