Beware China gunning for speculators

November 23, 2010

James Saft is a Reuters columnist. The opinions expressed are his own.

There is a pretty good rule of thumb in global financial markets: if you want to know where problems are beyond the reach of policy, look for places where the authorities are blaming “speculators”.

So it was in Europe, where last spring, as the depths of the euro zone’s problems were becoming clear, officials railed at the speculators who had the temerity to point out the obvious: that several nations would not have the money to repay their debts.

Greece and Spain went so far as to put their intelligence agencies on the case of tracking down speculative “attacks.”
So, it would seem, is it now in China, with food prices.

Chinese official media last week reported that the state would aim a “one-two punch” of actions to control food costs, including a crackdown on speculation in agricultural commodities and the imposition of price controls. In addition the commerce ministry warned that it would track down any speculative inflows into China that were trying to pose as foreign direct investment.

While it is certain that there are speculators in the Chinese food market, just as there were hedge funds and others making bets against Greek and Irish debt, the symptoms are not the true problem.

Needless to say, it often makes good sense to bet with the speculators and against the authorities, and it is always a good idea to view the authorities’ ability to control whatever forces are attracting speculators with a particularly beady eye.

The food component of Chinese consumer price inflation rose by more than 10 percent in October compared to a year before, far above the overall reading of a chunky 4.4 percent. Those figures may actually flatter reality; Xinhua, the Chinese news agency, reported that a basket of 18 commonly purchased vegetables was an amazing 62 percent higher in the first 10 days of November against the same period a year ago.

Inflation gets even more intense in China when you turn to delicacies and substances used in traditional medicine. Inflation in substances used in traditional medicine is exploding, according to the Association of Traditional Chinese Medicine, which says that prices of more than a quarter of herbs have risen by between 50 and 100 percent in the past year.

WAVING AT INFLATION AS IT GOES BY

What’s driving all this and will China be more able to rein in its speculators than Europe was? In part, of course, Chinese price rises are driven by local conditions and policies, over which China has more sway than does Europe over the hedge fund community.

A huge stimulus over the past two years and a banking industry which is bankrolling much speculation on property and other assets are some of the domestic culprits. China’s move to raise its bank reserve requirement ratio by 50 basis points last Friday to a record 18.5 percent is evidence of a resolve to stem inflation, with more expected between now and February.

Some, however, of China’s inflation is driven by the Federal Reserve, which is creating global liquidity conditions that are suited, perhaps, to a limping U.S. but utterly wrong for a booming China. Not to mention a policy of quantitative easing which is aimed squarely at driving down the value of the dollar, perhaps as a tweak to China or perhaps simply to make U.S. goods and services more competitive.

Albert Edwards, the prescient strategist at Societe Generale, draws a line between Fed policy and rising food prices in China, as well as the related risk of hunger in China and elsewhere in Asia.

“One consequence of the Fed trashing the dollar is that commodity prices have been surging,” Edwards wrote in a note to clients.

“The surge in China’s inflation rate to 4.4 percent in October was primarily driven by rapid food price inflation and its high weighting in its CPI. This rapid inflation, if it feeds through to wages, will force a more rapid rise in the yuan real exchange rate, despite the nominal exchange rate remaining essentially fixed.”

This is perhaps a subset of a larger problem: capital flows to China and seeking to capitalize on China will remain huge, a function of its strong story and the weakness of the developed world. All of these are far more powerful than some food broker stockpiling garlic in a regional Chinese city, and less receptive to Chinese official bidding.

This scares China, and with good reason. The Chinese unrest which culminated in the bloody crackdown in Tiananmen Square in 1989 was driven partly by a 28 percent jump in inflation.

At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.

4 comments

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The substantial amounts of liquidity actually available in the world risk to cause an uncontrolled inflation affecting all industrial nations. China will eventually “export” is inflation.
Central banks are playing a dangerous game and we all will pay the price.

Posted by jacqo | Report as abusive

Beware China gunning for speculators | Analysis & Opinion |…

Here at World Spinner we are debating the same thing……

If the US deflates its currency, which is the policy these days, then naturally all those commodities traded via that currency will inflate until the supply and demand once again reaches equilibrium, to compensate for this. Unfortunately this is manipulated pricing, and not ‘market’ forces at work. It can also be called currency manipulation on the part of the US.
Get schooled Mr. Saft, it’s educational…..

Posted by edgyinchina | Report as abusive

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