Garlic or gold: what drives money crazy in China?

12:18, January 14, 2011      

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Feature story:Crazy Money

The targeting of garlic, ginger and mung bean by speculators is a situation that is unique to China and not seen in the rest of the world, said Yao Jingyuan, chief economist of the National Statistics Bureau of China.

He did not rule out the possibility of sweeping inflation partly driven by food prices if China's grain harvest cannot sustain a high yield in 2011.

In addition to that, the government has much bigger bubbles to be worried about. The property market has shown few signs of cooling despite the steady stream of tightening policies to deter developers and speculators.

Gold is certainly another opportunity for investors thanks to soaring gold prices in China in 2010.

Is speculation more active now in China? If it is, then why?

Easy and sensitive

Zhao Xijun, deputy director of School of Finance, Beijing-based Renmin University, gave a few reasons why agricultural products, like garlic, ginger and chilies, can be so vulnerable to speculation in China.

The market for agricultural products is controlled by supply and demand rather than the government. The small scale of supply and demand makes it easier for small speculative capital to control. And because consumers are very reliant on those products in their daily life, they are more affected by fluctuations in price.

Lv Suiqi, deputy chairperson of the Department of Finance of Peking University, said that speculation is increasingly more active in China due to the development of the market and growing demand for more investment opportunities.

China’s yet-to-be-developed stock market, which boasted the second largest capitalization but recorded one of the worst performances in major world capital markets in 2010, is another incentive for investors to shift to other better, easier opportunities, according to Lv.

Gold and real estate are traditionally thought to be good shelters for investors seeking to retain and raise the value of their wealth. However, they are reserved "for a smaller group of affluent players," Zhao said.

Even for that small group, the risks of those products should not be played down. Lv warned that the real estate as an investment is more vulnerable to policy changes and limited liquidity, while gold prices are largely subject to the U.S. dollar. Although the demand for gold is still high, in the long term gold prices could be hit hard by the rebound of the U.S. dollar because the U.S. economy is expected to return to a state of growth, he said.

Government intervention or market freedom

Speculation is not something exclusive to an inflationary economy like China. In the U.S. market, which is struggling with the deflation, speculation is not rare. Should the government step in and stop it and how?

Speculation is also normal on a market. However, when it sends wrong signals to the market, the government has to do something. Otherwise it could lead to distorted resource distribution.

But it is a hard task, Zhao said, explaining that it is difficult to judge whether the prices are reflecting the real picture of the market or not. The principle of any government intervention, he said, should be focused on avoiding any extreme scenario. Specifically, any government in the world would not allow market manipulation to take people's livelihoods hostage.

In addition, systematic risks in important sectors have to be avoided. The risk built into the property sector, for example, could trigger market collapse, which may hurt the whole economy. The global financial crisis, which began with the U.S. sub-prime mortgage meltdown, is a typical example of that.

Lv also stresses that market manipulation, which distorts the market order, the macro-economy and the public's livelihood, needs to be controlled. But he also warned that government has to be cautious in its intervention so that normal investment activities are not targeted.

Some of the government actions on curbing price hikes on food prices have aroused concerns over negative impact on the market-driven pricing mechanism. But the National Development and Reform Commission, the country's economic planner, has dismissed such concern as unnecessary, saying those measures are based on "legal grounds."

By Li Jia, People’s Daily Online


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