But if the commodity dimension of the global economy lives by China, doesn’t it also risk dying by China?

To put it differently, is the worldwide commodity sector overly dependent on Chinese demand?

Unfortunately (from the perspective of sustainability), the answer to both of the previous question is a resounding yes, from a wide range of perspective:

1. Commodity prices are directly dependent on Chinese demand and to a certain degree, the fact that China will continue to be a demand powerhouse has been priced in. What this means is that should a game-changing paradigm shift occur, a compelling case could be made that markets are anything but ready for this and that panic selling in one form or another will ensue
2. This panic selling would not merely affect investors. Commodity-rich nations have for the most part made the mistake of becoming overly-dependent on revenue sent their way from China… think of it as a more incompetence-related form of Chinese demand being priced in. It is difficult to envision a panic selling scenario related to commodities which doesn’t result in many of the top commodity exporters becoming effectively insolvent due to insufficient export revenue coming in, unless of course a game-changing positive counter-force manifest itself to fill this gap, which isn’t amazingly likely in a commodity price crash scenario
3. Aside from investors and sovereigns, entire multi-national industries would be disrupted to such a degree that contagion would be all but assured, a state of affairs which leads to… well, the elephant in the room, which is that a wrench would effectively be thrown into an over-leveraged worldwide economic system that is more vulnerable than meets the eye if we are to look at “indicators” such as US stock prices

These perspectives ultimately lead to an important question: if China stops being commodity-hungry, would this risk generating game-changing consequences when it comes to the global economy as a whole, perhaps even a financial calamity many experts consider long overdue (with history backing up their concern, in light of the fact that there has never been such a long time between recessions and while past performance does not guarantee future results, it is a data point worth considering)?

Once again, the answer is unfortunately affirmative in our view.

Simply put, the worldwide economy is so over-leveraged, vulnerable and dependent on “cheap” money being thrown around that multiple bubbles have been inflated, with each being more than capable of bringing down the financial system as we know it. In aggregate, due to the unprecedented nature of our problems, it is difficult to the point of impossible to determine what the consequences might end up being.

Finally, this discussion leads us to a logical question for anyone concerned about the commodity-related status quo, the question which constitutes the title of this article: will China always be commodity-hungry?

To better address the topic, it would perhaps be wise to split the topic into two distinct dimensions:

1. China is a large nation, with a population in the roughly 1.4 billion zone and an economy that tends to be more infrastructure/construction-oriented than others. Infrastructure that needs to be maintained, occasionally modernized so as to conserve adequate functionality and so on. Therefore, it is quite difficult to envision a scenario in which China does not continue remaining commodity-hungry compared to other nations
2. The second dimension, however, tends to be less optimistic and to address it, we would have to add a qualifier to the previously mentioned question: will China always be as commodity-hungry as in the present? The answer to this question is a lot closer to being negative, especially since pretty much all experts now understand that China has been switching to a different economic model and is essentially forced to continue maintaining this course. For this reason, it would be nothing short of reckless to assume that the commodity market can continue proverbially partying like it’s pre-2010 (to borrow a dot-com bubble reference). On the contrary, the rules of the game have changed and one of the price tags associated with the maturing Chinese economy unfortunately will most likely also pertain to commodity demand

As a bit of a conclusion, it is fairly safe to assume that the commodity landscape will continue changing, as it adapts to the new model(s) China is moving toward. Disruption is ultimately inevitable and yes, the consequences can be dire if the commodity market ends up experiencing an unexpected demand shock coming from the direction of China.

There is a silver lining, however, one represented by the fact that while impressive demand from China persisting tends to be priced into commodity prices, the market also has a chance to price in trend changes with respect to Chinese demand (including the slowdown dimension/component). As long as majorly disruptive black swan effects do not occur and the market has adequate time to adapt to new commodity-related realities, it wouldn’t be a stretch to assume that there will be a soft landing for this sector. As always, however, we urge caution and highly recommend having an optimistic outlook on life but being pessimistic when planning, with the ChinaFund.com team being at your disposal should you be in need of assistance with the latter.

One of the top reasons was, in the opinion of quite a few experts, represented by oil price shocks brought about by geopolitical instability. More specifically, the 1973 OPEC embargo on the one hand and the 1979 Iran revolution (surely an interesting tidbit in light of 2020’s developments) on the other, both of which essentially leading to oil prices doubling within months. Others have alternative scenarios in mind, for example Milton Friedman who believed improper central banking policies were to blame.

Regardless, stagflation eventually stopped representing an issue.

Why?

It depends on whom you ask.

Some believe this was a result of the fact that as of 1979, Paul Volcker took over as the Federal Reserve Chairman and made decisions in line with Milton Friedman’s recommendations, whereas other experts point out that oil prices also went down a lot… with, of course there being the possibility and we would say even reasonably high probability of a more complex equation where both of these elements are in the spotlight. Welcome to the wonderful world of economics, where nothing is set in stone!

Fast-forward to the present and in 2020, we had issues such as the US – Iran tensions which generated quite a bit of fear (especially since they led to oil price spikes right from the beginning). This generalized fear was anything but unfounded, in light of the fact that many of the potential aces Iran has up its sleeve revolve around measures which affect oil prices, for example blocking the Strait of Hormuz (something we have analyzed through a stand-alone article which can be accessed by clicking HERE).

While the attitude of the United States should be more than obvious to anyone who has an Internet connection and/or follows mainstream media outlets, the same cannot be said about China, with opinions as to how it stands with respect to potential Iran-related oil shocks being all over the place: some experts believe China is more than content with the current state of affairs and willing to tolerate oil price shocks if this means the geopolitical position of the United States deteriorates in a meaningful manner, whereas others believe China cannot afford sustained oil price shocks.

The opinion of the ChinaFund.com team tends to be closer to the latter.

As explained on other occasions, China is not (yet) the number one game in town with respect to oil consumption, the United States still holds position #1. As far as oil IMPORTS are concerned, however, that changes. China represents the world’s #1 oil importer in light of the fact that its domestic production is only enough to account for roughly 1/3 of its needs at this point in time. Therefore, from the perspective of how dependent a nation is on oil imports, the position of China is verifiably more vulnerable than that of the US.

Does this mean China cannot “afford” oil price shocks?

It ultimately all depends on which timeframe we are referring to.

Would China be willing to tolerate short-term fluctuations if they come (as a package deal, if you will) with let’s say a meaningful deterioration of US relations with a major ally? Most likely.

If we look at the mid to relatively long-term picture, however, things are anything but rosy for China from this perspective. In an ideal scenario in which the economy of China were on more robust ground and its position as a safe haven jurisdiction clearly established, the equation would look a fair bit differently. That is, however, not the case. Not yet, at least.

GDP “growing pains” are more than obvious, as is the need of the Chinese economy to continuously evolve toward a more significant role for domestic elements and from a “risk-on” as opposed to “risk-off” perspective, no, China is most definitely nowhere near close enough to being considered a safe haven jurisdiction such as the Untied States, a jurisdiction scared investors flock toward whenever storm clouds appear to be gathering. On the contrary, it is still among the destinations investors are quick to flee whenever they suspect global economic pain is coming.

Moving on to the let’s call it “very” long-term perspective, it all depends on whether or not the market will finally grant China a safe haven status as well as whether or not China’s GDP growth sustainability will be properly tackled. Should that be the case, China will of course be resilient enough to withstand longer-term oil price shocks and under the right geopolitical circumstances, be willing to pay what now seems to be an unreasonably high price in exchange for the deterioration its adversaries’ geopolitical position.

For the time being and as a bit of a conclusion, let’s just say oil price shocks don’t exactly represent good news for China and Persian Gulf developments need to also be seen from this perspective, with China having more than enough economic reasons to act as a force which opposes instability in the regions it relies on for oil as well as other commodities. For a more in-depth perspective on how oil price shocks might impact you as an investor and/or your organization, the ChinaFund.com team is at your disposal. Simply get in touch by visiting the Contact section of our website and we will do our best to be of assistance.

The effects of 1979’s first batch of imports were quite impressive, not just economically but also culturally. Just imagine going from quasi-autarky to seeing a Chinese person drinking Coca-Cola instead of tea, as he watches something on his brand-new Panasonic television set wearing Pierre Cardin clothes.

As of 1980, if that person wanted to exercise, he could do so with his new Nike sneakers and if he wanted to drive somewhere to work out, Volkswagen cars became an option as of 1984. 1985 can be considered the year of communication, electronics and European relations, with Germany’s Siemens, Philips from the Netherlands and Finland’s Nokia entering the Chinese market. US-based Motorola and KFC followed in 1987, P&G in 1988 with its Chinese lifestyle-altering personal care products, Louis Vuitton and Microsoft in 1992, Walmart in 1996, IKEA in 1998, Starbucks in 1999, Costa Coffee and Zara in 2006, Apple in 2008 and the list could go on and on.

Nowadays, the fact that a major brand establishes a presence in China is no longer even noteworthy but rather something that is to be expected. Not only that, but in a lot of cases, it’s even hard to start doing business in China without this market becoming your #1 income-generator.

It’s of the utmost importance to understand that China most definitely does not have a strong tradition of embracing foreign entities. On the contrary. If you’ve read our brief economic history of China post, you know that reluctance has always been the status quo when it comes to China’s relationship with anything non-Chinese.

As a civilization that spans millennia, Chinese authorities have always considered the country the center of the economic and cultural universe. A country other nations gravitate to rather than one which can benefit from international trade. While they actually had navigation technologies centuries before the Europeans, the project was scrapped relatively quickly and other than a few missions which involved them spreading the word about China’s greatness, nothing much was done. From Ancient China to Mao Zedong’s China, engaging in international relations was never considered a priority.

Fast-forward to the 21st century and the idea that tea has been replaced with Coca-Cola brand beverages or Starbucks coffee might seem downright shocking. However, it would be a mistake to perceive things in a negative manner. On the contrary, the mistake was ignoring the importance of international relations for so long.

From the loss of the Opium Wars to mistakes when it comes to international trade made thereafter, the previously-mentioned reluctance on China’s part to trade with other nations properly has cost this country tremendously.

As soon as this attitude changed, the full force of China’s humongous economic potential was unleashed and the policies implemented by Deng Xiaoping and his successors made it crystal-clear that not only should China not be afraid of trade, it should actually embrace international relations because this is precisely the type of environment a country such as China thrives in.

As of approximately 139 B.C., Zhang Qian (China’s most representative trail blazer) established the Silk Road through which China was able to “import” primarily horses, gold and silver. As time passed, the so-called Maritime Silk Road came to fruition during the 6th and 7th century, enabling China to import different kinds of products such as condiments and glassware.

One of the world’s other famous trail blazers, Marco Polo, took advantage of the Silk Road and managed to reach China in the 13th century, with goods from Italy not being brought to the attention of the Chinese. Roughly two centuries later (around the 15th centurt), Zheng He led his fleet throughout Southeast Asia and even arrived in Africa, returning with all sorts of condiments and precious stones.

Later on, in a manner which still haunts China to a certain degree, a wave of Western commodities ranging from textiles to meat (Berkshire pigs from Great Britain) was pretty much forced upon China during the two Opium Wars. Due to the fact that European nations were technologically superior as a result of embracing the First and Second Industrial Revolution (as opposed to China, who initially refused to import technologies such as steam engines in a way that left little room for interpretation), they ended up dominating China militarily as well and essentially forced trade upon China.

As of the early days of the 20th century, however, China did start importing advanced Western technologies. Initially when it comes to shipbuilding and then exchanging commodities for German weapons and machinery in the 1930s and 1940s. Economically speaking, this put China in a less than desirable position, one similar to that African nations currently find themselves in. By limiting yourself to exporting commodities rather than nurturing a domestic industry that’s capable of putting more complex higher value-added products on the table, you’re essentially (with or without realizing it) accepting a bottleneck which can even risk strangling your economy.

After Mao Zedong’s forces managed to control China in the aftermath of World War II, many of the previously-mentioned tensions with respect to trade being forced on the Chinese ended up manifesting themselves, with the Mao Zedong regime being less than willing to embrace robust relationships with Western nations, preferring its complex (in ways one can consider both good and bad) relationship with the USSR.

Only when geopolitical conditions changed and China’s relationship with the USSR became problematic did Mao Zedong start accepting the idea of collaborations with the West, a collaboration which ultimately became inevitable, as illustrated by Richard Nixon’s 1972 visit. While relationships with the West did improve as time passed, it would take until Deng Xiaoping’s reforms kick in for things to really be put on the right track but more on that in another article.