It’s an issue observers have talked about for years. But in recent weeks it seems to have reached a tipping point — at least according to general consensus from a cacophony of commentators.
China is slowing down. Its stock market has fallen sharply since mid-June and the government is panicking, leaping into action with a host of supportive measures like closing some share trading for upwards of six months.
A government halting trading is unprecedented, and would never occur in a more free market-oriented economy. Moreover, China has lowered its lending rate four times since the start of the year and cut its reserve requirements in an effort to boost the economy. Despite all the drama, the actual drop in the Shanghai composite does not have a significant wealth impact on all of China. Nevertheless, our concern is that near-emergency measures offered by the Chinese government may be seen as a signal that it is no longer able to manage GDP growth. The concern is Chinese debt has risen to unsustainable levels, offering new risk to China, which has been trying to shift its economy from one based on exports to one led by consumption.
China has roughly had 1.3 billion people since it installed the “one-child policy” in the early 1970s. The world agricultural community has been counting on China’s huge population to be the saviour of agriculture. But it was not until the early 2000s that China became a WTO member and a significant importer of a host of commodities. This growth in Chinese import demand correlates with China’s rapid increase in GDP rates beginning in 2001-02. When China’s GDP rates went from $1,000 per person to nearly $8,000 today, China’s demand for soybeans and a host of other commodities exploded.
The question is whether China’s soaring per-person GDP rates can be sustained for the next five years. This is the issue everyone involved with global commodity markets should be looking at very closely.
The IMF, in its latest outlook, projects a decline in the rate of growth of China’s total GDP and in per capita GDP in the coming years. Per capita GDP is projected to increase 7.5 per cent in 2015 and just over six per cent in 2016. Growth will still occur, but this is notable change from annual boosts in income of 10-30 per cent seen since the early 2000s.
Declining marginal economic growth, coupled with farm policies that encourage production — but also imports — has triggered a huge surplus of commodities in China, most notably in wheat and feed grains. Chinese corn and soymeal futures — solid agricultural indicators — have been in retreat in recent months, with corn having plunged some 20 per cent since early May.
China’s growing appetite for meat during its unprecedented rise has been a boon to global grain and oilseed markets, most notably soybeans. In recent years, strong Chinese import demand for soy has been the only thing supporting and driving prices higher. But discouraging signals are starting to appear. According to the Chinese National Bureau of Statistics, pork production in the country fell by five per cent in the first six months of 2015.
The classic assertion that as per capita income continues to grow (albeit at a slower pace) and more people come to urban areas, meat consumption will increase likely still holds true in the case of China. The five per cent decrease in pork production perhaps clouds the larger picture, as some of the decrease can be attributed to natural losses in the pork sector and even a government-led crackdown on the Chinese tradition of wasteful overconsumption at banquets. Pork prices have recovered recently, and we very well may see a recovery in pork production and consumption over the next six to 18 months.
Still, the unsustainable growth of recent years, along with simply too much supply, has triggered questions surrounding China’s demand for raw materials over the next one to two years.
AgResource Company’s thesis since 2012 has been that adverse weather or much-improved Chinese demand is needed to sustain any lasting agricultural commodity rally. Weather, of course, is unknown. But increasingly it looks like China will not be a driving factor in 2015 or 2016.