China's Commodity Feast Far from Over
04/08/2011 12:50 pm EST
When a Chinese vase that might be barely a century old fetched $18 million recently at a Sotheby’s auction in New York—obliterating its pre-sale estimate of just $1,000—that was surely based on inflation fears and money printing by the Federal Reserve.
Conversely, when the sale of a much more esteemed ceramics collection failed to live up to the hype Thursday night in Hong Kong, clearly worries about slowing economic growth were to blame, exacerbated by Chinese monetary tightening.
I jest, of course. In fact, the record-breaking New York sale late last month is part of a conspicuous consumption boom that has made China the world’s biggest art market.
The trend is rooted in Beijing's mercantilist policies, which flood the country with the surplus dollars from its chronic trade surplus with the US. This is easy money made in China, not at the Fed. Better that this froth should be absorbed by trophy art and gold, which no one truly needs, than by the price of crude, corn, or copper.
Meanwhile, the wares on sale in Hong Kong may not have been gaudy enough to excite the nouveau riche Chinese buyers.
Even though we can now track hundreds of disparate markets, our understanding of those movements tends to be simplistic. Just because we know how zinc and cocoa fared today, it doesn’t mean the traders of those commodities share our preoccupations.
I bring this up because not a day goes by that oil doesn’t rise because of fighting in Libya and Middle East unrest. To read the news, you’d never know that the global trade in the most common energy source could depend on any other factors.
In fact, high oil prices might have something to do with the fact that Chinese oil consumption rose 13% last year, was recently up 9% year-over-year, and is expected to rise another 6% in the next year. And then there’s the fact that, despite such blistering growth, China still uses nine times less crude per capita than the US, and much less than Taiwan or Korea used at a comparable stage of development.
Similarly, rising copper prices might have something to do with the fact that Chinese copper consumption per capita is about a third of that seen in the more advanced Asian economies. In fact, several mining giants have said recently that output won’t keep up with growing Chinese demand this year.
So there is a single common explanation for the rising prices of crude, copper, and Chinese vases after all. But it has little to do with the Federal Reserve—and everything to do with the fact that China, India, Brazil, and a host of other nations are growing richer relative to the developed world, and closer to claiming their fair share of natural resources and bragging rights.
This secular trend can only be expressed in the decline of the dollar relative to their domestic currencies and relative to the stuff everyone wants, from art to zinc. It’s why the bull market in commodities resumed, full bore, after the crash caused by the last cyclical downturn.
As for Chinese equities, I don’t know whether they’re in a secular bear market. I do know that, according to MSCI Barra, they’ve returned 14% annually over the last ten years, which looks more like a secular bull to me. The Shanghai Composite is also up 7% year-to-date, slightly ahead of the S&P 500, and has recently assumed a bullish posture above all the usual moving averages.
To believe that China’s economic ceiling is anywhere near where it is today, you’d have to think that it’s doomed to stay much poorer than almost all its Asian trading partners, much less the US. I happen to believe it will shrink the wealth gap over time.
That’s bullish for unusually cheap Chinese stocks, and for commodity prices that still don’t fully reflect future demand from emerging markets.