-- Posted Sunday, 10 December 2006 | Digg This Article
As the year rushes through the last month, the speculation about commodity bull run has surfaced again. There are many who think the commodities are a spent lot from now on, and there are those who think commodities bear phase is on at least for coming half a decade. The most common refrain for all these forecasters is that the US economy is likely to slow down - or even enter recession - and thus the Americans will not be able to buy as many goods from China as they are doing currently. And this will bring down the growth of China, and thus a drastic fall in the price of commodities.
While this is true that the US economy is surely going to go through a dampener of sorts, and the Americans are going to reduce their imports by a fraction, there is not much chance of China suffering on this count alone. First of all as I have explained in my earlier write-ups, China is making deep inroads in the markets of most other countries, and is reducing its export dependence of the US. For example, the way the trade volumes are expanding between China and India, it is a matter of time before China emerges the largest trading partner for India, displacing the US.
Besides, the claim that the falling US economy will reduce Chinese commodity consumption discounts one very important factor: that of China's internal demand. The Chinese growth story continues to amaze one and all. China has been growing at more than 7% per annum for more than a decade, and during last couple of years this rate has escalated to above 10%. The World Bank on November 14 raised its estimate for China's 2007 economic growth for a second time in four months. The World Bank said China's economy may expand 9.6 percent next year after advancing 10.4 percent in 2006. Certain other experts have claimed that China's growth rate during the current year may be as high as 10.7 percent. In case this looks a tall order, let us remember that during the second quarter the growth rate was an astonishing 11.3%.
Such a fast-paced economy has created a huge middle class in the country. And this middle class is not like the old-fashioned rich who took pride in saving money. The nouveau rich in Shanghai and Beijing love to splurge. These people are also aided and abetted by their government which encourages people to spend. "The government's policy", according to a Chinese economist, "to boost consumption will show better results next year." said Yao Jingyuan, chief economist of the National Bureau of Statistics, recently in Beijing.
According to him the government was serious about promoting consumer spending and that it should make a "greater contribution to economic growth, even though investment may slow amid the government's curbing measures."
Simultaneously, the government is doing everything to bolster the income of its citizens. Recently the government raised minimum worker compensation and increased welfare spending to get households to spend more and make the economy less dependent on investment and exports .
To add fuel to the fire, the government is encouraging microcredit development to boost employment. China's central bank is planning to establish a long-term re-employment system by perking up the microcredit enterprise. It is noteworthy that the government of China has always given great importance to the employment - a reason why it is dithering on the issue of revaluation of Yuan - and has never avoided the attempt to any solution that guarantees to mitigate the job scarcity.
Towards this end, China's financial institutions this year have distributed 7.45 billion Yuan in microcredit during the period January-September, which helped many laid-off people find new work. To make its reach even more comprehensive, the government is planning to rein in the services of Dr. Muhammad Yunus, the winner of the 2006 Nobel Peace Prize, and the founder of the microcredit phenomenon in Bangladesh.
It is a foregone conclusion that if these steps are taken with honesty, they will bear fruitful results. The rural poverty will be tackled with greater efficiency and China will be able to create yet another layer of society which has spendible moolah.
Of course, already more sections of the Chinese society are having better access to increased income. Take for example the farming community. Unlike in India - where the farmers in many regions are committing suicide - the farmers in China are faring well. Bumper crops are being churned out year after year and agriculture continues to add significantly to the country's GDP. China's farm produce exports reached 24.56 billion dollars in the first ten months of the year and are expected to exceed 30 billion dollars by the end of the year, according to a recent report by the Chinese Ministry of Commerce.
This growth story is not a year old phenomenon. >From 2001 to 2005, China's export of farm produce grew at an average annual rate of 11.65 percent, ranking the fifth in the world, according to figures from the World Trade Organization. Half a decade of sustained growth means the benefits of agricultural reforms are penetrating the lower layers of Chinese society.
These figures suggest that the growth rate of the country's farm produce exports was 12.7 percent in the ten months. It also proves that somewhere the farmers would be benefiting, and thus shall have extra moolah to spend on necessities/luxuries.
What all this shows is that the presumption about commodity prices crashing just because the US reduces its imports from China by 2% or 5% may be a bit far-fetched. So the commodity prices may come down a bit in 2007, but that may well be due to the increased capacity coming on stream or dwindling investor interest rather than the appreciation of Yuan by 3-5% or a similar fall in the Chinese exports.
©2006 Shailendra Kakani. All rights reserved.
Shailendra Kakani is the Research Head of Commodity Research Group, Bombay, India, and the Managing Editor of www.commodityresearch.in . He can be reached at editor@commodityresearch.in . or at
+91 98678 33034
Bombay, India
-- Posted Sunday, 10 December 2006 | Digg This Article
