Throughout human history, garlic has been used as a spice and as medicine. It’s a staple in the Asian diet, part of everything from monosodium glutamate (MSG) to desserts. Garlic is believed to aid digestion, protect against viruses – and even ward off vampires.
But today garlic may also serve another purpose – as a warning sign of inflationary pressures building in the Chinese economy.
China is by far the world’s largest garlic producer, harvesting over 25 million tonnes in 2016, to account for about 80 percent of global supply. And the price of garlic has been surging. China’s Commerce Ministry says that garlic bulb prices are up over 80 percent since last year.
The renminbi price of physical garlic started to rally in late 2015. That’s partly due to heavy rains, and then snow, that damaged the crop planted for the 2016 harvest in Shandong province, which is where most of the country’s garlic is grown.
In what has become a familiar pattern in Chinese markets, a jump in price attracted speculative buying, the rising market fed on itself, and prices skyrocketed higher.
However, unlike other commodities targeted by Chinese speculators, there are no garlic futures in China. So to bet on a rise in the price of garlic, an investor has to by actual garlic – that is, the type that people chop up and eat.
Large garlic traders generally set up business in Jinxiang, China’s “garlic capital” in eastern Shandong province. Garlic is easy to grow, harvest, transport and store. Modern cold storage facilities – some bigger than a football field – can keep garlic bulbs fresh for up to two years. This gives investors a long selling window.
There are many stories of traders making millions by going to Jinxiang, buying 5 or 10 warehouses, packing them with garlic from the spring harvest, and then slowly selling as garlic prices rally later in the year.
China’s “great ball of money” on the move
Once again, China’s “great ball of money” has been squeezed out of a bubble market by Chinese authorities, only to inflate other markets, like garlic. How does this work? Faced with a slowing economy, the Chinese central bank has provided easy credit to one sector of the economy after another to help stimulate growth.
For example, in the summer of 2014, margin rates (which are the interest rates brokerage firms charge clients who want to borrow to invest) were reduced to help spur investment in the stock market. This move helped inflate a stock market bubble, as the Shanghai Composite Index gained 125 percent over the next 10 months.
When Chinese authorities decided to deflate the country’s stock market by restricting equities trading, the “ball of money” turned to commodities. Chinese speculators used easy money to buy everything from steel rebar and hot-rolled steel coils to cotton and polyvinyl chloride (also known as PVC). Bubbles in those markets quickly expanded – then popped.
The government then turned to the languishing real estate market. It lowered rates and in effect encouraged speculation, which helped push real-estate prices in China’s “Tier 1” cities (like Beijing and Shanghai) as much as 60 percent higher over the past year.
In a replay of the 2015 stock market boom, in October Beijing tightened credit in the hottest housing markets. And now the bubble money is moving out of tier one real estate into other markets – including obscure commodities like thermal coal, coking coal, Shanghai zinc and garlic.
Garlic – a bellwether of high inflation?
Garlic, though, is a food staple that’s integral to the Chinese diet. Higher prices hurt the spending power of Chinese consumers. And in the past, garlic has been a bellwether of impending China inflation.
In 2007, a spike in garlic prices foreshadowed a jump in China’s CPI (consumer price index, used to measure inflation) from 2 percent to 8 percent over the next year. In mid-2009, rising garlic prices preceded a surge in China’s consumer price index, which peaked in late 2011. Rising prices could put a crimp in Chinese consumers’ buying power – and the government is counting on consumers spending more to drive economic growth.
China’s CPI grew at its fastest pace in six months in October due to rising food prices. The producer price index (PPI) – which measures price changes at the wholesale level – also moved higher, rising 1.2 percent year-on-year last month. This put an end to 54 months of negative PPI growth.
Deflation has been a concern for several months in China. So you might think that the Chinese government would welcome a slight uptick in inflation. The country’s CPI growth target is set at around 3 percent, so October’s 2.1 percent figure is in the range of what the government is aiming for.
However, the worry for Chinese policy makers is that surging prices sparked by speculators in garlic and other commodities might spill over into the general economy. A persistently rising CPI would pose a dilemma for the People’s Bank of China (PBOC), which has been focused on spurring economic growth, and supporting a weakened industrial sector.
Should the recent rise in garlic prices – along with inflation in other vegetable, pork and fuel prices – continue, the PBOC might have to choose between higher rates to dampen inflation, and low rates to support growth.
So don’t be surprised if China cracks down on garlic speculators and other frothy commodity markets. Then the question will be, “Where will China’s ball of money move next?”
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