China's New Asset Bubble

[Catalan]

The truth behind China’s “recovery” is starting to float to the surface of the mainstream media. Today, The Economist offers its perspective on China’s new asset bubble: this time, in the garlic industry. The article, The Price Also Stinks, states:

According to reports in China Business News, prices in Jinxiang, China’s garlic-growing capital, have seen a fortyfold increase since March. Further down the supply chain, garlic prices have jumped tenfold on wholesale markets in big cities and fourfold nationwide. That compares with a meagre doubling in the price of copper this year and a 77% increase in the Shanghai stockmarket.

But, it’s amazing that The Economist is unable to make the link. They open the piece up with the following:

On November 25th China tightened the rules on foreign-currency transfers by individuals in a bid to control flows of hot money into the country. But signs of frothiness are also cropping up in odd places: garlic has become an unlikely target for Chinese speculators.

First of all, can a foreign investor make a buy in China using foreign currency? That is, do Chinese entrepreneurs accept foreign currency, and can they in turn use it in China to trade? If not, it is clear that at some point the dollars will have to convert to renminbi, and so the real source of “hot money” is an increase in the stock of renminbi.

The piece closes with:

That said, there appears to be much more demand for garlic from speculators than consumers. Trading activity has created such intense need in Jinxiang for cash that banks and cash machines are having problems keeping up.

It would seem obvious, therefore, that the bubble is fed by China’s central bank. It seems as if the theory that “foreign capital inflow” causes instability has taken root amongst mainstream media writers, and they haven’t paused to look at how they contradict themselves.

In any case, at least we now have a better look at what “recovery” is really taking place in China.

[DanielMuffinburg]

Certainly, China also has its misallocations, especially in exports. However, I’ve read that much of their stimulus bill has gone to the much-needed water resources sector. Anyway, so at first the problem what that the Chinese were giving us all their sayings, thereby, causing the bubble in America, but now the problem is that the rest of the world is giving all of its savings to China, thereby, causing a bubble in China? How ridiculous!

[Cam_Nedland]

This should be interesting…

[WisR]

China’s real asset bubble is its own housing bubble that hasn’t really popped. Housing prices have only come down a little from the peak here in Shenzhen (after increasing 300+% over a period of 6-7 years), and it seems the same is true in Shanghai (despite the fact that in the latter city the poshest developments, extremely modern condos set just off of the bund, are still mostly sitting empty) although I haven’t been there in a while / checked.

But food prices and the like are also rising.

That’s pretty strange about Garlic.

[Kakugo]

Not surprising, the agricultural commodity sector is a complete mess worldwide and prices in many sectors (rice for example) are predicted to skyrocket in the next five years. An ideal target for speculators looking for alternatives to traditional commodities.

[Marko]

@Jonathan M. F. Catalán

The piece closes with:

That said, there appears to be much more demand for garlic from speculators than consumers. Trading activity has created such intense need in Jinxiang for cash that banks and cash machines are having problems keeping up.

It would seem obvious, therefore, that the bubble is fed by China’s central bank. It seems as if the theory that “foreign capital inflow” causes instability has taken root amongst mainstream media writers, and they haven’t paused to look at how they contradict themselves.

Hmmh, but what specifically do you think their central bank has done to fuel this?

[Catalan]

@Marko

Hmmh, but what specifically do you think their central bank has done to fuel this?

According to “Mish”, monetary expansion in China is radically higher than in the United States. I believe he uses a figure of 25% YTD for 2009 (compared to 2008).

[Student]

@Jonathan M. F. Catalán

The piece closes with:

That said, there appears to be much more demand for garlic from speculators than consumers. Trading activity has created such intense need in Jinxiang for cash that banks and cash machines are having problems keeping up.

It would seem obvious, therefore, that the bubble is fed by China’s central bank. It seems as if the theory that “foreign capital inflow” causes instability has taken root amongst mainstream media writers, and they haven’t paused to look at how they contradict themselves.

In any case, at least we now have a better look at what “recovery” is really taking place in China.

I interpret the quote from the article differently. You seem to be reading this as saying that banks are increasing the supply of money. Personally, I see this as saying that individuals are increasing their demand for money. After all, by “cash machines”, I assume they mean ATMs and not printing presses.

[Catalan]

@Student

I interpret the quote from the article differently. You seem to be reading this as saying that banks are increasing the supply of money. Personally, I see this as saying that individuals are increasing their demand for money. After all, by “cash machines”, I assume they mean ATMs and not printing presses.

I agree with your interpretation. There is an increase in demand for renminbi, not necessarily an increase in credit. But, my point was more that the speculation is using Chinese currency, not dollars, so the idea that a foreign currency can directly fuel speculation in a country where that currency is not used should be dispelled. The speculation is being done in Yuan, and the supply of Yuan can only be controlled by the People’s Bank of China.

In any case, the excerpt is ambiguous. It says that the increase in demand for garlic is originating more from speculators (i.e. investors) than from consumers. It would make sense then that we are not talking about an increase in demand for Yuan to carry and spend, but an increase in demand for loans to invest in the garlic market.

I simply don’t think that the article is specific, and that the author isn’t really thinking about it (or might believe that the demand for money and demand for loans is the same).