It is well known that the growth rate of the Chinese economy has slowed. It is also well known that the slow down has affected the price of many commodities that Australia exports to China.
However, what is not well known is the changing composition of the Chinese economy, which is shifting from being primarily driven by manufacturing to more of a service driven economy. The services industry now comprises 54.1 per cent of the Chinese economy, which is significantly larger than the manufacturing sector, which is 39.4pc of the economy. Interestingly agriculture, forestry and fishing now only makes up 6.5pc of the Chinese economy.
This changing composition of the Chinese economy is likely to continue, with the national accounts published by the China National Bureau of Statistics (NBS) highlighting efforts to cut over capacity, reduce inventory and lower costs in the manufacturing sector. The Chinese government appears to be reducing production by inefficient state owned enterprises. They note that the output of domestically produced coal fell by 9.7pc year on year.
The advantage of reducing inefficient domestic production is that China can buy the same product more cheaply on the international market. The result is that Chinese imports of bulk commodities have increased despite the overall economy slowing. China NBS notes that in the first half of the year, China imported 494 million tonnes of iron ore, an increase of 9.1pc. China also imported 187 million tonnes of crude oil, an increase of 14.2pc. China further imported 108 million tonnes of coal, an increase of 8.2pc. Interestingly, China also imported 2.74 million tonnes of copper – a whopping increase of 22pc.
Chinese growth is supported by continuing investment. China NBS notes that growth in investment in fixed assets was up by 9pc in nominal terms. Most of this investment was from the public sector. State holding enterprises lifted their investment by 23.5pc. Private investment rose by 2.8pc. Still, the private sector provided 61.5pc of total investment.
In conclusion, Chinese GDP appears to have stabilised at a growth rate of 6.7pc in the June quarter. As growth stabilises, restructuring of the Chinese economy is allowing China to reduce non-productive and inefficient parts of its manufacturing and mining sector. This is to Australia’s benefit. In the first half of the year we have seen a significant increase in Chinese imports of iron ore, crude oil, coal and copper. It is for these reasons that we believe we have seen not only a bottoming in commodity prices through the year, but also more recently a sharp recovery in the price of some commodities such as coal. This bodes well for our main resource stocks after what has been a challenging time for the sector over the past six years. As previously highlighted in this column our preference in the sector remains BHP for its quality low cost assets, strong balance and diversified portfolio of commodities that it produces.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410
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