The forces that prompted China to tap its strategic pork reserve may explain more than just the price of pig in Beijing.
They might also, when it comes to it, help to explain much else that’s happened in financial markets in recent months, from a rebound in the price of oil to a recovery in riskier assets.
The Beijing municipal government moved this week to begin what it said was an unprecedented 3m-kilo (6.6m pound) release of pork from frozen reserves, in an effort to ease record prices, up about 50% over a year. China keeps a reserve of frozen pork against just such events.
While there are supply issues in China’s pork industry, a recent vertiginous rise in prices has coincided with a massive injection of credit into the economy by authorities. Pork has also risen alongside prices and trading in other more financialized commodities. The price of iron ore is up by more than 50% year-to-date. Zhengzhou’s cotton market traded enough bales in one day last month to make everyone on earth a new pair of blue jeans.
This has all happened as China, fearful of a slowdown in its economy, engineered a huge increase in credit and lending. Total social financing, the broadest measure of credit in the economy, rose 37.4% in the first quarter from the same period a year earlier. Bank credit was up 25.4% year-on-year in March.
It seems likely that some of this money is driving food and other commodity price rises. Egg futures on Dalien’s commodity market have spiked by as much as a third since November, a price rise not reflected in end-consumer prices, at least not yet.
And there is evidence of both speculative froth in some property markets and of an increase in infrastructure investment, neither of which seems warranted by fundamental demand.
All of this paints a picture of an economy enjoying, if that is the right term, the effects of a credit-fuelled sugar buzz. This causes problems, like the high price of pork, but by no means implies that a bust of any kind is near. It certainly stores up issues for the future, in that China is carrying on making low-quality investments and speculations.
It may also give us good reason to query some of the other more global market phenomena which have also come alongside China’s credit-based revival.
Monpol or just China credit?
Ever since a meeting of the Group of 20 finance chiefs in Shanghai at the end of February there has been marked improvement in trading on global financial markets. Not only has the yuan stabilized, but the dollar has fallen, easing pressure on many, and the price of oil has rebounded.
This has prompted a certain amount of probably pointless speculation about a tacit deal among nations, not least because in the aftermath most concerned parties have either turned more dovish or de-emphasized the further extension of negative rates.
The Fed has effectively backed away from earlier projections of rate rises in coming months, the Bank of Japan has held tight and shown reluctance to push rates further down and the European Central Bank has pushed credit easing in lieu of rate moves.
All of this has led to some arguing that central banks are trapped, left without sufficient ammunition and acting in concert as a result.
Joachim Fels, global economic advisor at fund manager Pimco, while acknowledging that policy makers are acting as if they had a deal, argues that policy has not lost its punch.
“Everything we have seen last year and this year has shown monetary policy still is very powerful,” Fels said, speaking at a conference on Thursday.
“Monetary policy, even sheer talk rather than action, can be very powerful. It was the mere talk about rate hikes which caused a lot of problems last year; when the Fed became more dovish in March things got better.”
Things did get better, but perhaps this gives short shrift to the power of China’s credit creation machine. It is impossible to look at Japan, at the US or at the eurozone and find signs of policy-engineered economic activity that bear any comparison with what is happening in China. No analogous speculative bubbles, or soaring pockets of inflation in corners of the economy, no frenzied trading in obscure commodities.
In the event the new calm on global markets is made in China then it is there it must be supported, and there it will, eventually, be unmade.
(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication he did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)
