Chinese economic data Monday showed strong growth in exports but a disturbing 21 per cent year-over-year drop in imports from Australia raised questions as to the accuracy of China's official numbers, and the strength of its recovery.
Iron ore dominates Australia's exports to China, and, when iron ore prices recently fell, the popular assumption was that higher-quality Australian ore would replace the marginal Chinese product. China's industrial production, fixed asset investment and retail sales were all reported ahead of analyst expectations and supported the consensus view of economic stabilization. But import growth, reported at 2.4 per cent higher year-over-year, was a full percentage point lower than economists projected. The huge drop in imports from Australia, was a disturbing outlier.
It is possible that the decline in imports results from an attempt to burn off existing inventories of raw materials. But this theory is less likely in light of reports showing that almost half of existing iron ore inventories in China are of such low quality that few steelmakers trust it enough to use. The more ominous possibility is that the recent surge in bank lending, part of a government plan to spur further infrastructure development, is not having the desired effect of generating actual steel production and, by extension, construction.
The pace of Chinese imports from Australia is only loosely tied to the performance of domestic mining stocks (click here for the chart) so it would be premature for Canadian investors to panic. But it remains the case that the 21 per cent decline in Australian imports has been exceeded only once, by the 37 per cent decline in January 2009 during the depths of the financial crisis. With Chinese economic data already the root of growing investor suspicion, aberrant data points like these are a worrying development.
Scott Barlow