China is going to do everything it can to support a five-year price war on iron ore and oil, and they will do so by keeping Fortescue Metals Group Limited (ASX:FMG), Hancock Prospecting and U.S. shale oil producers alive as long as possible. China wins from lower prices, even as the rest of the world loses.

Just from price reductions between 2013 to 2015 in two commodities — iron ore and oil — China has achieved a savings equal to 3.8% of GDP. This does not include savings from coal, copper, zinc, uranium or other Chinese imports.

This is simple math.

China is on track to import roughly 919 million tonnes of iron ore and 2.5 billion barrels of oil this year. With iron prices down by $77 per tonne and oil down $50 per barrel from 2013, “China Inc.” saves $193 billion a year in cash. Those two commodity price reductions equate to ~$145 per citizen in savings per year. The savings is equivalent to 3.8% of China’s per capita GDP, which currently sits at $3,865.

The narrative that China is shrinking is great for “China Inc.” since they receive low-cost imports and are able to store up hard currency, all done on the cheap. Why pay $135+ per tonne for iron ore or $100 per barrel for oil if you don’t have to?

The data shows that Chinese growth is flattening; some months, demand spikes down. On the whole, however, demand remains fairly firm. Meanwhile, major commodity companies are still on a massive supply growth spree to supply China and put smaller producers out of business.

While China’s growth is not increasing, neither is it shrinking. By selling the “non-growth” narrative, and by supporting a price war in iron ore and oil, China is saving $193 billion a year in cash. That is, on a market cap basis, China could buy Fortescue 25 times, VALE S.A. (NYSE:VALE) eight times,  BHP Billiton Ltd. (NYSE:BBL) two times, or half of ExxonMobil (NYSE:XOM) each year.

A theoretical $6-billion equity investment into Fortescue would keep the iron ore price war going for another two to three years. Structured as an equity purchase at five times current market price (something China could write off in 20 minutes), that investment would yield “China Inc.” a $150-200 billion ROI (in balance of trade) on the suppression of iron ore prices alone.

Sinosteel and other trading houses would get hurt in this trade, but the Chinese economy as a whole would benefit greatly. The more I do the math, the more I think China would want to do this to support higher-cost producers both inside and outside of China — in effect subsidizing them — to keep competition up and commodity prices low.

The short war to drive high-cost producers out of business might turn into a war like World War I, where everyone ends up battered, beaten and there are no winners. Except, of course, for “China Inc.”

Make CEO Chat a part of your day for macro discussions, microcap chat and junior resource ideas and analysis.