Who Knows What’s Going on in China’s Centrally Planned Economy?

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China will try to do what’s right for her, not for Australia. But sometimes we’re not sure China even knows what’s ‘right’. There are so many competing forces in a centrally planned economy that no one knows what’s going on.

At least in an economy organised along capitalist lines (and not distorted by central bankers throwing darts at an interest rate board) free individuals act in their own self-interest and generally don’t bump into each other too much.

But in a commune, unfree individuals still try to act in their own self-interest and bump into a lot of things. Before long there’s carnage all over the place.

And so it is in the Chinese steel industry, that hungry animal that has been gobbling up all our iron ore for the past decade.

According to this story China’s steel factories actually produced much more than thought in 2011. The culprit? Central planning.

China previously reported steel output for 2011 of 683 million tonnes, and that this was in excess of actual demand. But according to the 21st Century Business Herald, output was closer to 730 million tonnes.

Why the difference? Cheeky little Hebei province has long been under-reporting its steel production to the central planners. According to the story, the central government asked local governments to shut down steel production using old technology to improve energy efficiency and reduce pollution.

They could do that. It might take some work and it would certainly upset some fat cat party members who rely on the old mills for status, influence and money. Or they could just under-report the production numbers. Give them what they want and no one asks questions.

What a racket! And this is the industry whose coattails Australia has ridden on for years?

Regards,

Greg Canavan
for The Daily Reckoning Australia

From the Archives…

The Pin-Up Stock of the Iron Ore Boom
31-08-2012 – Greg Canavan

How Australia Grew Fat and Lazy Off the China Boom
30-08-2012 – Greg Canavan

Why You’ll Never Change Our Mind About Inflation
29-08-2012 – Nick Hubble

The Make Believe World of Economists, Continued…
28-08-2012 – Bill Bonner

Iron Ore, a Love Story
27-08-2012 – Dan Denning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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