EconoChina

A blog on Chinese economy & society

Posts Tagged ‘Resources

Why does everyone cheer for the rise of Chinese consumers?

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Yes, I do. But the question is why does practically everyone agree with me?

The world has a finite amount of resources. More consumers naturally leads to higher prices, way higher prices given China’s scale, and a substantial reduction in living standard for the developed economies. Isn’t this obvious?

There are a few exceptions though, like Alexandre Schwartsman (Bank Santander, Brazil, via A Fistful of Euros) who wrote in his research note discussing the impact of RMB appreciation:

Indeed, we believe the main channel of transmission to Brazil is likely to be through commodity prices. We argue, with the help of a small theoretical model, that a stronger yuan should imply higher commodity prices in dollar terms. In fact, it is possible to show that, if dollar commodity prices do not change in response to a stronger yuan, there would be excess demand for commodities, which would eventually drive their dollar prices up.

As Edward Hugh went on to explain:

Basically, it depends on two points:
i) China’s domestic demand growth is more energy intensive than the OECD average
ii) China is large enough to be (to some extent) a price setter, and not simply a price taker.

…The net consequence of this, is that the Santander analyst expects the dollar price of commodities like oil to rise sharply on the back of any significant yuan revaluation, making China richer (in relative terms), and logically the developed world poorer. … as the Yuan and other emerging market currencies rise… Brazil and other resource rich emerging economies stand to benefit…The main losers…[are] the developed world, and those living in poor countries with few natural resources.

In plain English, what he’s saying is that China’s domestic demand growth consumes more energy per unit of growth than that of the developed economies, i.e. China is less efficient with energy. And since China is big enough, its demand will help set the prices of resources, upwards in this case. What’s left unsaid is the assumption that China will continue to grow. All these factors will drive up the prices for natural resources tremendously, to the detriment of the OECD nations.

Gregor Macdonald, who offers real insight in the energy sector, noted the same theme in his earlier post about the appreciation of the Singapore dollar:

And finally, the question of revaluation in Asian currencies I think now has an answer: instead of a weaker currency through which to export goods, it may be time to have a stronger currency through which to import resources.

The naivete of Western leadership, especially in Washington, towards the developing world’s hunger for resources is very much part of an overall, generational philosophy that the US can always obtain energy cheaply while innovating its way to wealth…The problem in its current form, as I see it, is that the developing world is once again racing ahead and driving up the price of resources–but that this forward-macro-thrust from the developing world hurts, more than helps, the economies of the OECD.

After all, the world has barely come out from the worst recession since the 30’s, but oil is at about $90. The last time it was at this price level, the world was close to bubbling over. China is now trying to expand its domestic market by steadily building up its middle class. So while RMB revaluation is not imminent, it will come eventually, when China has more to gain from having cheaper resources. What the developed economies will see is income deflation coupled with commodities induced inflation, the worst nightmare of any economist. Last time I check, cattle prices have gone up by 20% in the US.

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Written by Cindy Luk

April 19, 2010 at 1:46 am