08/09/2007, 00.00
CHINA
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Food prices reach alarming levels

by Maurizio D'Orlando
Hikes in grain prices are hard to explain, but what is clear is that they are affecting pork, China’s staple meat whose consumption has reached record levels in the country. More grain is being produced and Wen Jiabao has spoken of releasing government reserves, the largest in the world. Here is synopsis of an article by Maurizio d’Orlando to be published in AsiaNews’ monthly magazine.
Milan (AsiaNews) – Since December last year AsiaNews has been reporting on rising food prices in China whilst the prices of other consumer products have fallen. In the last three months food has become more expensive reaching alarming levels. Three other factors are raising great concern because they might have serious consequences: the growing GDP, the huge grain reserves, and Prime Minister Wen Jiabao’s failure to release grain reserves into the market to keep prices in check.
At the end of May AsiaNews reported that rice and meat prices double or even tripled in some cases in just a month (see AsiaNews May 29). In June, Premier Wen Jiabao stated that he wanted to solve the problem by releasing some reserves onto the market. The same month China’s Central Bank also announced its intention to intervene to halt rising food costs (see AsiaNews June 6).
According to agriculture ministry figures, live pork prices rose by 71.3 per cent year on year. On July 19 AsiaNews reported that whilst the GDP rose by 11.9 per cent in the second quarter of 2007, consumer prices jumped by 4.4 per cent, with food rising by 7.6 per cent in the first half of the year.
This was a surprise to some, a dark spot on China’s otherwise bright economic “miracle” which saw the country become the world’s workshop. Such a surprise also meant bad news for China’s stock exchanges, which had become a favourite investment outlet for banks and brokers. But such surprises were not unexpected; in fact AsiaNews first wrote about them three years ago, in March 2004, in an article with a title that said it all: “Food alarm sounded as grain production falls.
Even though the amount of farmland under cultivation dropped from 2000 to 2005, there has been a sharp increase in grains production. Whether we use data from the Food and Agriculture Organisation (FAO) for China or those by China’s National Bureau of Statistics (NSB), the increase in production in recent years still ranges from 15 to 20 per cent. It is difficult to fully grasp the significance of the rise since crop yield per hectare rose by + 7.22 per cent from 2003 to 2005 (by author using NSB data) and the amount of farmland under cultivation increased by 3.18 per cent over the same period (ibid).
Chinese authorities have known the situation for some time and have done everything technically possible—like greater use of fertiliser.
Yet despite this, the Chinese Communist leadership has failed to put in place medium- or long-term policies to prevent the current situation, substantial increases in price. Since we can neither doubt the leadership’s instinct for self-preservation nor their political determination to avoid risks, their evident failure to cope with the situation begs further questions.
It is our opinion the farm sector is going through what the oil sector went through in the early 2000s when China ceased exporting energy and raw materials and became instead a major importer as a result of turning into the world’s workshop.
Like OPEC and OECD economists (from oil producing and consuming countries) before them agriculture experts are now not sure what to make of their own mistaken estimates about China’s energy needs.
China’s development model is resource intensive, both material and human. This is not an accident but the outcome of a deliberate exchange rate policy designed to keep the yuan’s below its real value.
Based on World Bank data for 2006, China’s GDP is estimated to be around 5.5 per cent of the world’s GDP at the current exchange rate, but if its real value were actually taken into account it would be instead about 15.1 per cent. As for the exchange rate, the US greenback would not be worth 7.56 yuan but 2.73.
Why does China need an undervalued currency? It needs it to maintain high employment and support its population’s purchasing power which, in turn, is necessary to keep a lid on social and political tensions that might overwhelm its current repressive capacities.
In fact, let us remember that despite such a favourable exchange rate about 40 per cent of all state-owned enterprises are money losers.
Given the inherent inefficiencies of China’s economic system, should its Central Bank allow the exchange rate to push the yuan closer to its real value, most of its companies would go belly up. Not only in the public sector, but also many in the private sector, and not only those which are export-oriented but also those which produce for the domestic market. Inevitably this would lead to untenable job losses.
From a technical and industrial point of view, China’s chosen development model is highly resource-intensive (human and material), wasteful even since they are sold below value for export-generated capital that is largely illusory. But the system’s makes sense for those at the top who have a well-developed sense of self-preservation.
Key to this distorted development model is low inflation. Spiralling prices would push up wages and eat away China’s comparative advantages. It would be the straw that broke the camel’s back and end China’s economic miracle.
As we have seen the official consumer price index rose by just 4.4 per cent, but this is meaningless for most Chinese. Food remains the largest ticket item for hundreds of millions. For these masses what counts is the cost of food.
For example, when China’s agriculture minister announced on July 16 retail pork prices had shot up 74.6 per cent in a year that was something quite significant for the world largest pork consumer and producer.  At 65.5 million tonnes (carcass weight equivalent) China represents 59.2 per cent of the world’s total consumption (FAO data elaborated by AsiaNews). Pork in fact represent 77 per cent of all meat consumed in the country and altogether the Chinese eat just over 30 per cent of all the pork consumed in the world.
But if higher food prices, especially pork, did not set off any alarm bells around the world, they do explain why China’s Prime Minister Wen Jiabao spoke at a meeting of the Central Bank on such an apparently marginal and sector-specific issue, even when the inflation rate was only 1 per cent higher a year, insignificant when compared to the real problems that official statistics do not show.
Ostensibly Wen said he was in favour of opening government food reserves to stabilise supplies and prices. At 156.4 million tonnes China’s has the largest grain reserves in the world (calculated by author) out of 403 (also by author) or 38.81 per cent of the total. No other country has such reserves, neither the United States nor the European Union which have 35 and 33.5 respectively.
Data on meat reserves are hard to come by but are not that important because they are usually kept low since meat can’t be preserved for too long and refrigeration is very expensive.
In any event the price of livestock (grass-fed or lightly fenced which is the case for pigs in China) is directly influence by feed costs and to a lesser extent farm incomes, historically very low in China.
Just the announcement that grain reserves might be auctioned should have kept prices in check even at the wholesale level, but nothing of the sort happened.
And any delay in making the announcement cannot be attributed to red tape since holding down inflation, especially food prices, is essential to maintain the regime’s political stability and is thus always under closely monitored. Releasing large quantities of grains should have been a simple step even for China’s state bureaucracy. It is therefore significant that in a very tense situation Prime Minister Wen did not order the immediate release but only expressed hope that some reserves might be released. It is too strange not to have a closer look.
If the head of the government can only propose and not decide how to use state food reserves it means that someone else is holding the key to these strategic reserves. That key is indeed in the hands of the armed forces.
Indeed China’s military-industrial complex is a state within a state that functions according to its own rules, and does not respond to any outside economic, financial or bureaucratic power.
It is clear that those who are in charge of the armed forces are not so isolated from reality that they cannot see that high food prices, especially pork, can have explosive economic and financial consequences.
The reason for withholding grains is thus to be found elsewhere and might be explained by considering other factors such as world peace.
Twice Benedict XVI expressed concern for the fate of world peace and the dangers of nuclear war. It could be that in light of the Pope’s general alarm, China’s armed forces might know something that convinced them that a major conflict is not a far-fetched possibility. As history has shown ready access to food and other resources is often the key to success.
Hence, let us speculate about possible extreme scenarios.
Israel is said to have 200 warheads and the means (uranium included) to build 200 more. If it wants to maintain its nuclear monopoly in the region it must prevent others, i.e. Iran, from developing a similar capability.
For its part Iran has shown since the Muhammad Danish cartoons controversy that it knows how to exploit public passions among Muslim masses to its benefit.
In case of an attack by Israel or the United States or both, Iran is likely to get the backing of Muslim populations, if not their governments.
In such an extreme scenario China might be forced to take sides, and probably already has. It might have to choose between a would-be Islamist block that might stop oil and gas supplies and the West (Americas, Australia and Europe) which provides much of its food imports, grains included.
The facts are clear. Even considering coal, which China has in great quantities (for at least 200 years) but which is hard to get, China’s energy reserves are limited. By contrast, its food reserves are plentiful.
China’s failure to release food reserves to keep inflation in check shows two things. First, the Pope’s fears about peace are not to be underestimated. Second, in case of a major war China is likely to side with those who will ensure it what it needs the most, namely energy, especially oil.
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