We’ve all been very keen lately on China’s battle with inflation and their proposedhike in interest rates last week, especially since it did so much damage to grain prices. What no one expected was that it might just have been a ploy to cheapen the world price of commodities ahead of a big corn purchase.
Here is a recap:
China’s National Development and Reform Commission (NDRC) announced two weeks ago that retail prices of food increased through the month of October with the rate of inflation having exceeded their expectation of 3%. The Chinese government also confirmed that prices of agricultural goods have changed from occasional fluctuations to a constant and steady increase.
That’s not good news for Chinese consumers as rising prices of commodities like corn and soybeans directly translate into higher prices of food – not to mention rising prices of everything else. The Chinese government, of course, isn’t one to stand idly by as economic prosperity for Chinese citizens comes under threat.
Subsequently, rumors surfaced late last week that the Chinese government is considering taking serious aim at cooling inflation and “might” increase their lending rate by 25 basis points.
That threat produced a tidal wave of speculative liquidation and sent markets plunging, taking corn prices with it.
Here’s the punch line: Market analysis say China just signed a deal with the Argentine government over the weekend for up to 8 million metric tons of corn. That’s twice as big as their prior corn import record of 4 million metric tons done back in 1995/96. Beef, wine and other agricultural goods from Argentina were also said to be included in the agreement between the two governments.
China threatens an interest rate hike, sends corn prices plunging, and then signs a deal for their biggest corn purchase on record. If that’s a coincidence, it’s quite an extraordinary one.
Meanwhile, the rumored interest rate hike that the Chinese government threatened last week still hasn’t happened. Even if it does materialize, economists say such a rise in China’s interest rates would accomplish little in cooling the Chinese economy.
This raises a question about China in the future: Would Chinese leaders ever seriously commit to pressuring domestic demand and slowing their economy? Since there seems to be an unwritten contract between the Chinese government and the people that the government deliver economic prosperity in exchange for political rights, China could never be counted on to seriously constrict its economy.
But assuming the rumors over the weekend are true, there is one thing we can count on: China can and will use its weight to leverage markets in its favor. After all, 1.3 billion people are hard to ignore.