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China solves credit crisis with more credit

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If you are feeling reassured about the apparent Chinese recovery, think again. China is making more steel, a lot more steel, mountains of the stuff. A leap in steel output was a big component of the surge in industrial production announced by the national statistics bureau this week. But China's steel makers have been losing money, pouring more liquid metal into a global supply glut. So, where is the demand for all this new steel, you might ask?

The answer must be the not-so-gentle government stimulus package that Beijing quietly implemented in the summer, pumping money into local governments through the state-owned banks. That means more bridges, tunnels and railways.

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Only last August, Baoshan Iron & Steel, China's biggest steel mill, gave a warning that supply would continue to outstrip demand in the People's Republic. Surplus capacity is 300 million tonnes, twice the steel output of Europe, but government figures revealed yesterday that steel output rose by an astonishing 16 per cent from a year earlier, contributing to a 10.4-per-cent rise in industrial output. These were much better output figures than expected, and the world breathed a sigh of relief.

The figures also chimed nicely with a tub-thumping article by Li Keqiang, the Chinese Premier, published on Monday in the Financial Times, who shooed away the doubters, predicting that "our economy will maintain its sustained and healthy growth." A lot rides on a sustainable Chinese recovery, not least sales of Apple's new range of cheaper plastic phones, announced this week and clearly targeted at the Chinese consumer. Tim Cook, Apple's CEO, will have been comforted by a 13-per-cent rise in Chinese retail sales, but there are good grounds to believe that what is driving China's recovery is more button-pressing in Beijing.

Where is all the industrial output going? While steel was hugely up, Chinese construction weakened and new housing starts are down. What is expanding is infrastructure investment, which moved sharply higher while the private real estate investment sector slumped. This will come as no surprise to those who followed the news last month of a quiet loosening by Beijing of the credit taps to cities and local governments. In August, the South China Morning Post reported that Agricultural Bank of China, a major state lender had agreed a credit line of 250 billion yuan ($42-billion) to the City of Shanghai, in an effort to boost the local economic engine. China Development Bank has been making loans to three provinces, Hebei, Jiangsu and Qinghai, for slum renewal, roads, railways, airports and water works. It is classic pump-priming, but it is unclear whether the low-profile stimulus package will be any less cyclical than the credit boom unleashed by Beijing in 2008 following the Lehman crash.

If the markets were expecting China to unleash consumer and private sector energy with real structural reforms, they will now be disappointed. Instead, we will get a pile of shiny metal loaded on to bulk carriers, sailing to an unknown port, where it will be dumped at a loss, hidden from view. Over the long term, this is not going to help Tim Cook to sell more iPhones.

Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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