LONDON, Aug 7, 2018 /PRNewswire/ --
China has come a long way from the zì lì gēng shēng – "regeneration through one's own efforts" – of Maoist economic policy. The nation that once so steadfastly insisted upon economic self-sufficiency has since opened its markets, and in the 17 years since it joined the World Trade Organisation it has grown considerably from the benefits of global trade.
But in an ironic twist, this has left the country vulnerable, as its commanding presence within the global manufacturing production chain –– as well as the demands of its burgeoning middle class –– has come with a heavy footprint in commodity markets. China needs raw materials, the demand for which must necessarily be met through imports. With a general trade war comes the threat of supply constrictions and rising prices.
For metals markets, global trade has given Chinese businesses access to higher-quality raw material, as is the case with iron ore, where imports make up 87% of the country's consumption. As illustrated in the chart below, despite having proven reserves of over 7 billion tonnes of contained iron, poor quality ore grades mean that domestic supply cannot substitute for cheaper and better-quality material imported from Australia and elsewhere. Disincentivising domestic production also allows the Chinese government to address the nation's pollution epidemic: by taking steps such as reducing air pollutants from steel plants using lower quality raw materials, revoking mining licences for polluting and unprofitable iron ore mines or forbidding bauxite miners from using conventional mining processes such as the use of pneumatic drilling and dynamite, China was reducing smog levels at the expense of domestic supply; with demand nonetheless remaining strong, the supply gap would be increasingly bridged by imports in these sectors. That, at least, was the plan.
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