An Urban's Rural View

Talk about a picture worth a thousand words. The nearby graph, from USDA's February 2015 report "China's Growing Demand For Agricultural Imports" (http://tiny.cc/…), tells the story of the evolving U.S.-China ag-trade relationship.

In the 1990s, we learn, both exports and imports were minimal -- generally less than $2.5 billion a year -- and fairly balanced. In one of the years -- 1993 -- the U.S. actually ran a tiny ag-trade deficit with China.

In the new millennium, ag exports to China have increased ten times while imports have merely tripled.

Further on in the same report we learn that in recent years China has zoomed past Canada and Japan to become America's Number One ag-export market. The U.S. in turn, continues to be China's single largest foreign provider of ag products. In 2014, the most recent USDA data indicate (http://tiny.cc/…), U.S. ag exports to China totaled nearly $30 billion.

And thus arises the question of the day: With China's economy now struggling and after a stock-market plunge that has wiped out $3 trillion in a matter of weeks (http://tiny.cc/…), can the good times for U.S. ag exporters continue to roll?

At first glance, the answer would seem to be yes. For although the economy's growth rate has slowed to 7% from 10%, China is still growing more than three times faster than the U.S. And while the decline in stock prices has been drastic, stocks account for only 15% of Chinese household assets. As the Economist put it, "Mercifully, the stock market appears to be as disconnected from economic fundamentals on the way down as it was on the way up" (http://tiny.cc/…).

The deeper problem is the troubling questions that have been raised about the competence of China's leaders. First the government inflated the stock market by encouraging investors to buy with borrowed money. Then, when the bubble burst, it not only intervened to buy stocks; it suspended trading in many companies' shares to prevent selling. Burned investors will be shy to buy in the future, knowing their money can be so easily locked up.

China's ag imports have been growing because its booming economy has lifted hundreds of millions out of poverty, enabling them to eat more protein. Hundreds of millions more await elevation, which means China has the potential to import still more.

But if the economy stagnates, that potential might not be realized. And if China's leaders don't understand how markets work, will they be able to reignite growth? As one of the world's leading specialists on the Chinese economy, Nicholas Lardy, argues in his book "Markets Over Mao" (http://tiny.cc/…), it's private companies that have made China boom. The state sector has mostly been a drag.

Make no mistake: With more than $3 trillion in foreign-currency reserves, China can afford to buy food. Famine does not loom.

And in the past, China's leaders have shown an ability to learn from mistakes. A year from now, we could easily be talking about a Chinese economic rebound.

But if we aren't, if demand for protein in the diet isn't growing, China might be importing less -- at least for a time. Just ask New Zealand's dairy farmers. So far this year New Zealand's dairy exports to China have fallen 69% (http://tiny.cc/…). It's a reminder that what goes up can indeed come down.

(CZ)

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