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

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