Chinese slump may not slow demand

Evolving marketplace | Chinese consumers could eat more imported food, say analysts

Even if Chinese growth slows or temporarily stalls, some agricultural economists doubt Chinese demand for North American crops and meat will decline.

Instead, the new economic approach of the Chinese government will likely boost demand for food.

“They have this flexibility of letting their currency appreciate,” said Dermot Hayes of Iowa State University.

“The can continue to make their consumer better off by just giving them more buying power by letting their currency grow.”

Chinese premier Li Keqiang recently signaled a fundamental shift in the government’s economic strategy, shifting from aggressive growth fueled by investment in productive infrastructure, such as railways, factories and dams.

The new strategy mimics the “American dream” of providing a car in every driveway and a chicken in every pot. Li’s Chinese dream encourages consumers to spend on consumer goods rather than saving everything they can.

“He wants them to have an apartment and a car and access to good food,” said Hayes.

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“It’s a deliberate policy. Rather than just ramming a bunch of cheap exports down the world’s throat, they’re going to let their consumers benefit from the economic growth that has been created.”

That should increase demand for crops and meat from North America because those are key items of consumer interest, said Hayes and Al Mussell of the George Morris Centre.

The general sense of optimism in agricultural commodity markets, despite China’s possibly slowing its growth rate, is not shared in other commodity markets that rely on the investment-led growth that the Chinese government has pushed since the 1980s.

Copper and metallurgical coal are particularly vulnerable to slowing investment in heavy infrastructure and machinery in China

Barclays Capital recently issued a report that said a “hard landing” of about three percent growth for part of a year is “an increasingly likely downside scenario.”

That would crimp demand for many commodities, but Barclays forecast that the Chinese economy would soon right itself and be back to growth, even if only at a six to eight percent rate rather than the eight to 10 percent rate some have grown accustomed to.

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However, agricultural economists like Hayes and Mussell think food trade won’t be affected because growth will continue and increased consumer consumption is the point of the new policy.

Hayes said China has deliberately weakened its currency for years to suppress domestic consumption and promote export sales, but that will likely end.

The Chinese government needs to stop manipulating its exchange rate and that will give consumers more buying power, something that will draw in more foreign goods and commodities.

Even with only three percent overall growth, currency appreciation could make the average Chinese consumer “eight to 10 percent better off.”

Li appears to want to leave markets alone in pricing products and goods, so there should be a significant increase in imports of crops like corn and barley, which have been suppressed.

Once disincentives are removed, Hayes and Mussell expect China to import more North American grain. The kind of major increases seen in China’s soybean imports could be replicated in the other grains, they said.

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Li wants to move 400 to 500 million people from the countryside to cities, so there’s little reason to follow policies that encourage people to stay on the land and simultaneously hit urban consumers with higher than necessary costs, the economists said.