Ok. I will fess up. I am an unabashed, non-apologetic, gee-golly-willikers Chinaholic.
You might even say I’m addicted.
Because every morning when I fire up the computer, the thing at the forefront of my mind is: What has China done while I was sleeping that will impact world trade in general and the commodity markets in particular?
Because let’s be blunt about it – China is very much becoming the tail that wags the dog.
The latest market crisis is the ongoing meltdown of China’s benchmark Shanghai Composite Index. The SCI dropped 345 points in a week of trades to close at 3017 (January 11).
The ongoing collapse in the Shanghai Composite is likely negatively impacting Asian markets, not to mention crude oil and copper futures.
For years, China rapaciously gobbled up all the commodities it could get: fuels, metals and, of course, crops, led by soybeans.
Since China joined the World Trade Organization in 2001, it has been increasing bilateral trade with the United States. In the past 14 years, U.S. exports to China have increased from $19.1 billion to $106.1 billion.
And China is the United States’ current top trading partner.
But perhaps 2016 will be different because China’s economy is trending lower.
China purchased plenty of commodities in 2015 by taking advantage of low prices, especially for oil, soybeans and iron ore.
But weak economic data is causing some U.S. traders to question whether China may pull back on imports in 2016.
For example, China’s Managers’ Index (PMI) in December inched up from the previous month’s 49.6 percent to 49.7 percent. Any number under 50 suggests a contracting economy.
China’s attempt to re-balance its economy toward consumer spending versus exports has not been smooth sailing.
China averaged about 10 percent gross domestic product (GDP) growth between 2006 and 2014. China’s gross domestic product fell to less than 7 percent in 2015 and is forecast by the International Monetary Fund to grow by only 6.3 percent in 2016.
Meanwhile, China’s inflation is edging upward.
So, what is China to do, if anything, to prop up its gross domestic product?
There are some obvious choices. For one, it could continue to gamble on its borrow-and-spend-more strategy by running a larger budget deficit to boost demand.
It could also require its state-owned companies to borrow and spend. But neither of these outcomes is an ideal long-term fix because of China’s already big debt. Economist Michael Pettis suggests China’s debt may be more than 200 percent of its GDP.
Some economists think that – by trying to pump up GDP with cash infusions – China has also been increasing debt, which if allowed to trend significantly higher could become counterproductive to future growth potential.
China’s economic mess was at the root of the Federal Reserve’s reluctance to raise borrowing rates last fall until its most recent meeting in December.
Further rate hikes in 2016 may depend in part on whether China roils the global market place. In its December minutes, the Fed indicated:
“…the appropriate path for the federal funds rate would depend on the economic outlook as informed by incoming data. Members stressed the potential need to accelerate or slow the pace of normalization as the economic outlook evolved.”
All of this makes China a nation to watch in 2016. I’ll have on my computer.
About Dave Dickey
Dickey spent nearly 30 years at University of Illinois at Urbana-Champaign’s NPR member station WILL-AM 580 where he won a dozen Associated Press awards for his reporting. For the past 13 years, he directed Illinois Public Media’s agriculture programming. His weekly column for Big Ag Watch covers agriculture and related issues including politics, government, environment and labor. Email him at firstname.lastname@example.org.
This column reflects the writer’s own opinions and not those of Big Ag Watch.