Analyst John Meyer has produced an interesting paper which claims that collapse of the US dollar effectively renders China more competitive, driving growth BUT will not force Chinese re-valuation. The State Council and Communist Party State Central Committee will meet over the next few weeks at the central economic work conference in China to decide on general policy in the coming year.
At the forefront of the agenda will be the objective of maintaining stable economic growth and political and social stability. China , after all, does not have to concern itself with elections which cause swings in economic policy in the West. The huge investment in dollar bonds will also come under scrutiny as there has recently been growing evidence of a preference for Euros rather than US dollars for the country’s currency reserves. The point has already been made by the deputy governor of the Bank of China that there is no intention to devaluing the currency despite pressure from the Bush government and international markets.
The brokers are of the view that China has set its own internal targets at a rate of around 7 per cent -9 per cent in terms of growth in gross domestic product, and that it will stick to this come what may. This could allow 10 per cent -20 per cent metals demand growth within China, much of which will need to be sourced internationally.
There is bound to be some scare mongering from metals traders in Asia over potential Chinese re-valuation and over Chinese consumption levels. But it is Numis’s view that China will continue to consume substantial and increasing quantities of raw materials, particularly copper and steel related raw materials such as iron ore, nickel, manganese and chromite ores. These commodities are effectively forming the foundations of China’s new economic era and development and China is unlikely to consider the demands of the rest of the world in its drive to develop its infrastructure and economy.
While China is happy to trade with the rest of the world, its stated policy is to manage a relatively small trade surplus/deficit and to remain as independent as possible from the rest of the world. Fortunately for western mining companies China is relatively short of a number of key raw materials which it continues to import. Chinese mining concerns have been slow to discover new prospects and their safety record has not been good, so much so that the authorities were reported to be closing many small coal mines.
Mining may be one of the world’s oldest professions, but China appears to have lagged the west in the development of large-scale mining and exploration organisations. This may be due to the unusual expertise required to discover and develop efficient mining projects. Alternatively it may also be due to the difficulty in discovering prospects in a geology where there is a lack of rock outcrop and where overlying sand cover effectively masks underlying prospects from many geophysical techniques.
There is little doubt that Chinese miners, who traditionally worked in mines in Cornwall, the US and Australia in the 18th and 19th centuries, may now discover more in their back yard but the prevailing geology of China may continue to retain its riches and new discoveries may take some years to bring to fruition.
John Meyer concludes that the Chinese may therefore remain a net importer of many key raw materials for some years and that Western mining concerns should continue to benefit from a continuing high level of demand within the region. Bulk shipping companies and recycling businesses should also continue to fare well from a continuing increase in this trade as will miners which are able to operate in US-dollar based currency zones where they benefit from its weakness..