China’s shift to a domestic consumption economy will have drastic impacts on its need for soft commodities – and could exacerbate global problems of food prices and water scarcity, financiers have warned.
China’s objective of moving away from an export-led economic model, to one fuelled by consumption at home, implies greater demand for meat and grain.
Changes in the diet of the Chinese middle class, particularly towards meat and dairy, also has big knock-on effects.
“Unfortunately, meat eats 12 times as much grain as grain does,” Donald Hanna, managing director of global liquid markets research at Fortress Investment Group, told a business forum in Hanoi.
“The issue for China is scale: it really is huge. And the complication in markets for food is that when supplies get tight, markets don’t work very well.
“As consumers get concerned there might be scarcity, demand doesn’t fall with price increases: demand rises.
“And what do producers do? They don’t supply more, they supply less. You get this dynamic we last saw in 2008. [...] The markets go completely haywire.”
Chinese consumption growth could bring around these circumstances again, Hanna suggested at the forum, on Asia Insights: Maximising Investment and Capital Raising Opportunities.
“Until we can manage this process of growth” and improve efficiency, there will be potential for greater food price volatility, Hanna said. “That’s going to take hedge funds to some interesting places, but is not going to be very helpful in dealing with issues like poverty.”
Hiroshi Watanabe, president and CEO of the Japan Bank for International Cooperation (JBIC), said China’s consumption and industrialization was increasing the pressure on water needed for agriculture, not just in China but regionally.
“For agriculture, we need pure water, and unfortunately China doesn’t have very much of it. And now the inland provinces of China are going to use more water for industry.”
Using recycled water for industry, to retain sufficient fresh water for agriculture in Laos, Cambodia, Thailand and Vietnam, would require a greater level of integrated planning, Watanabe said.
“We need more international coordination, not only one private company or country.” Without it, “we are going to have a very sad situation.”
Anita George, director of infrastructure and natural resources at International Finance Corporation, the World Bank’s project finance arm, said the scale of water challenges is illustrated by Saudi Arabia’s investment into large tracts of land in Africa “to tap into this key resource”. The gap between water supply and demand – which is “already significant and promising to be one of the biggest crises the world has to handle” – can be filled “by demand-side management on the agricultural side”, she argued.
Chinese consumption is already causing major changes in regional exports. Paul Gruenwald, chief economist for Asia Pacific at ANZ, said: “Because of China’s rising demand for commodities, both soft and hard, Asean countries’ exports have actually done a U-turn in terms of their composition.”