Iron Prices Confirm That China's Economy Isn't Doomed

The skeptics believe that China is well on its way to undershooting its official target for 7.5% growth.

However, iron ore prices are defying China's slowdown, notes Morgan Stanley's Adam Longson.

While indicators like the manufacturing PMI index have fallen about 7% since spring, the industrial metal prices have shot up about 14%.

Longson says three things are driving up prices:

• Strong auto sales
• Robust white goods sales
• Signs that the government is still going to spend on infrastructure projects like high-speed rail.

On that third point he writes: "Other market participants have maintained that the State Council has agreed to increase investment in the construction of railway and urban infrastructure to prevent GDP growth falling lower than 7.5%."

Longson expects prices will probably drift lower, but will "remain resilient" at about US$110-143 per ton. Prices could go higher with more federal stimulus.

"In summary, the iron ore price strength adds to other evidence of a mild growth rebound in China," he says.