From a peak of 13% in 2007, the year before the financial crisis started, China’s debt-fueled growth has been dropping steadily every year. If the government’s figure is to be believed, China will grow 7% this year.

What the actual number maybe matters: It determines how much longer the current bear market affecting the resource industry will continue.

A $9 trillion economy growing at 7% suggests a continuing healthy demand for many kinds of commodities. Instead, what the world has been observing is just the complete opposite: a drop in steel output, lacklustre demand for copper, molybdenum, manganese and many other commodities, leading to a collapse in iron ore, crude and coal prices.

Seven per cent would be a respectable number if it were true. Given a shrinking and aging workforce, a mountain of bad debts, excess industrial capacity, and a housing bubble, the actual number in all likelihood is a lot lower.

The real number will never be revealed. It’s a state secret. However, there are ways to deduce the true state of the economy. One Western source – Lombard Street Research – estimates that China’s actual GDP growth last year was a modest 4.4% as opposed to 7.4% announced by the government.

(A recently published book – China’s Faustian Bargains by Aaron Ken Lee – provides an independent, ground-breaking look at the massive unproductive spending that had inflated GDP growth in past years and a preview of what’s to come. The picture is not pleasant.)

If China is still growing at 7%, there should be a corresponding increase in electricity consumption. Instead, according to the Institute for Energy Economics and Financial Analysis, Chinese power consumption grew just 3.95 from January to November of last year.

There are other clues pointing to sluggish growth: a drop in imports (down 20% in March compared to a year ago), record outflows of capital, weakness in the value of the currency, continuing slumping property prices, a steady reduction in foreign investment, and trillions of dollars of non-performing loans suggest the 7% is a fig leaf to hide the rapidly deteriorating picture.

But assuming for a moment that China will meet its 7% growth target this year, given the damage to the environment in pursuit of that growth, the true number will be a lot less. According to an estimate by the World Bank, environmental damage exacts a toll of 5.8% of its GDP every year.

Today an annual growth rate of 3% may seem unimaginable to the Chinese public, but within a few years it will be accepted as the norm. That China will grow at a slower pace in the coming years – and decades to come – is a given. What is unknown is the pace and depth of the decline. What that trajectory maybe depends largely on what the government does now. Will China follow the Korea/Taiwan growth model (high initial export-driven growth tapering to a more sustainable level of 2.5% – 4%) or will it catch the Japanese deflationary disease as a result of the government’s inability to deal with bad debts?

The top Chinese leaders know the downtrend is inexorable and they are have been conditioning the public to accept the inevitable through selective speeches and coverage in the state-owned media.

Why would the government massage growth numbers? Maintaining face is one reason. It would make the new leaders who have been power for the last two years look bad if somehow under their reign, the economy shrinks drastically. Their political survival, too, is at stake.


If the government’s figure is correct, that suggests another four more years of pain for the industry: At 7%, China’s economy still has a long way to get down to a more sustainable level of 3% or less.

If on the other hand, China’s actual growth is already in the 4% range, then that suggests we are nearing the bottom of the current commodity downturn. After all, China’s economy has to stabilize first before commodity prices stop dropping. That would be the good news for commodity producers of all kinds. Another two more years of scraping the bottom isn’t all that bad. Time flies.

For companies and investors with cash, there will be plenty of opportunities to choose from. For those juniors already saddled with a huge negative working capital, their management will just have to find a new job somewhere.