China giveth, China taketh away.
China giveth: Its boom years boosted prices of commodities, from crude oil to copper to corn. A country of 1.3 billion people whose economy is growing 10% a year consumes a lot of commodities.
China taketh away: Because it is the world's largest consumer of many commodities, absorbing more than half of the world's output of some of them, its inevitable economic slowdown savaged commodity prices. The Chinese economy's growth rate fell to an estimated 7% last year. The Chinese government's target for the next four years is 6.5% annual growth.
So there's no joy in commodity-ville. Producers' giddiness has given way to desperation, as prices of crude, copper and corn dive below the cost of production. Everyone is asking whether China can eventually fix its economic problems and bring demand back to commodity markets.
My hypothesis: The answer will not be the same for crude and copper as it is for soybeans and DDGs. I believe there's more reason for optimism about China's future demand for agricultural commodities than for those used in manufacturing.
Mind you, I'm talking about the long run, however long that turns out to be. In the short run, there's only confusion and chaos, occasioned mostly by the government's clumsy and counterproductive efforts to keep the stock market from finding a bottom. Control freaks never learn.
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If anything, the short run may bring worse news for American farmers and ranchers in the form of a weaker yuan and stronger dollar. Contrary to what American critics of Chinese "currency manipulation" charge, China's government has actually been trying to keep the yuan from sliding. To prop up the currency as the market tried to take it down, China last year shelled out more than $300 billion of its $3 trillion in foreign exchange reserves.
But the market pressure on the currency is unrelenting. China's financial authorities must be very tempted to let the yuan slip further in the name of boosting exports and conserving reserves. In the short run, then, brace for the possibility of a further decline in U.S. ag shipments to China, which until recently was our biggest overseas market.
Economists are swarming over China's economic mess like vultures on road kill, feasting on the opportunity to issue opinions on what's broken, how seriously, whether it's likely to be repaired and what it means for other economies. Global stock markets seem to be assuming the worst.
Amid the din, there are a few things economists agree on. China over-invested in manufacturing even as its wages were soaring and undermining the country's export competitiveness. It over-invested in real estate, as well. Forests of newly built apartment towers stand empty. By some accounts the country produced as much cement in two recent years as the U.S. produced in the entire 20th century.
The government's strategy for dealing with this is to nudge the economy away from manufacturing and towards services. Service economies, being less productive, require more labor. A service-focused China, then, would keep people employed and paid even if fewer factories turned out fewer goods. Like our economy, this one would rely more on consumption than on investment for its growth hormones.
Here's where my hypothesis kicks in. Imagine the implications of all this for commodities. Imagine the government pulls off its strategy, which despite its current bumbling it might in time do.
In China's new service economy of the future, demand for crude, copper, zinc, aluminum and other commodities used in manufacturing wouldn't be as ebullient as in its old manufacturing economy. Demand for agricultural commodities, on the other hand, would pick up again, as a burgeoning new service sector puts more Chinese to work.
I am, I admit, speculating. And oversimplifying: China will remain a manufacturing powerhouse, even if it relies more heavily on its service sector for growth. The difference between past and future may be only a shift of a few percentage points in the sources of economic growth.
Still, that shift may matter. It is possible to conjure up a not-too-distant future in which China's demand for agricultural commodities and food rebounds smartly. It is hard to see that happening anytime soon for manufacturing commodities.
China's demand for commodities will continue to giveth and taketh away. But in this re-conceived future Chinese economy, all commodities will not be created equal.
Urban Lehner can be reached at email@example.com
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