Guard Against And Deal With The Impact Of Commodity Super Market On China'S Economy In Advance

The rising price of bulk commodities started in April 2020 continues to accelerate after the Spring Festival, and the futures prices of various industrial products have set a new record. It is very necessary and timely for the State Council to pay close attention to the excessive rise of commodity prices and to start and deploy the work of ensuring supply and price stability. However, many research institutions have proposed that there is no need to worry about the price rise. They think that as long as the market does not trigger inflation, they do not fully realize the deep-seated impact and harm. We must refute and correct this kind of understanding and viewpoint in time, otherwise, it will have a serious impact on the comprehensive implementation of the State Council's deployment of ensuring supply and price stability, and then bring very serious consequences.

Is the sharp rise in commodity prices a risk to China's economy and how big is the risk? If we carefully observe the historical track of dealing with the 2008 international financial crisis 13 years ago, we can clearly find that after the super rise of commodities, it is a super decline. The super down market has great destructive power on China's economy. It is necessary to eliminate some erroneous views at present and resolutely implement the State Council's deployment requirements for price and stable supply. As soon as possible, we should cut off the development path of the super rising market of bulk commodities, get rid of the fixed thinking of bullish and harmless, and eliminate the hidden dangers that may be brought about by misleading people to speculate in prices.

1. The rise and fall of commodity prices affect the economies of big countries

With the outbreak of the international financial crisis in 2008, the commodity market experienced three stages: a sharp fall in half a year, a sharp rise in two years and a sharp fall in five years. In the first two stages, the economic situation of various countries is basically consistent with the market trend. In the third stage, the trend is divided. China's economy weakens and the US economy strengthens.

1. The international financial crisis led to a panic collapse in commodity prices and a sharp drop in global economic growth

In August 2008, the international financial crisis broke out, commodities were sold in panic, prices plummeted, and the market failed. The world's major economies have introduced rescue policies to turn the tide. Commodity prices at home and abroad stabilized at the same time. The South China Index of industrial commodities, which represents the price level of China's industrial commodities, stopped falling by more than 54% in December 2008. The CRB index, which represents the price level of international industrial raw materials, fell 37%. From the second quarter to the fourth quarter of 2008, China's GDP growth fell by 3.8 percentage points, OECD member countries by 1.2 percentage points, and the United States by 3.84 percentage points.

2. The economic stimulus policy has promoted the rise of commodity prices and the global economy has warmed up

The super rise in commodity prices lasted two years and four months. The South China industrial index rose by 140% and the CRB index by 102%. The economies of various countries generally recovered.

3. The price of commodities hidden in the tail of the crisis has fallen sharply, which has a different impact on the economy in different countries

Over the past two years, the commodity market has risen sharply, which has not only boosted the economy out of the crisis, but also buried hidden dangers. At the beginning of 2011, when the rescue operation came to an end, it was followed by a five-year decline. It was not until the introduction of China's supply side structural reform policy that the market was pushed out of the quagmire.

In the five years since commodity prices fell, China's economic growth has continued to slow down. According to the National Bureau of statistics, China's GDP growth was 10.00% in the second quarter of 2011, 9.4% in the third quarter and 8.8% in the fourth quarter. The growth rate decreased slightly from 2012 to 2015, and dropped to 6.9% in the fourth quarter of 2015.

Figure 1    Comparison of Nanhua industrial products index and China's GDP in 2008-2015

Data source: national cotton market monitoring system wind

The U.S. economy accelerated after a short, slight slowdown. The GDP growth rate of the United States was 1.72% in the second quarter of 2011, dropped to 0.95% in the third quarter, jumped to 1.61% in the fourth quarter, increased to 2.36% - 2.65% in the first three quarters of 2012, and maintained at 1.26% - 1.92% from the fourth quarter of 2012 to the third quarter of 2013, and the average growth rate was 2.78% from the fourth quarter of 2013 to the fourth quarter of 2015.

The economic growth of OECD member countries was earlier than that of China. The GDP growth rates in the second quarter, the third quarter and the fourth quarter of 2011 were 1.98%, 1.82% and 1.68%, respectively. Except for the slight weakening of the growth rate in the fourth quarter of 2012 and the first quarter of 2013, the growth rate generally maintained a warming trend. From the fourth quarter of 2013 to the end of 2015, the average growth rate of GDP was 2.4%.

　　    Figure 2   Comparison of GDP growth among China, the United States and OECD from 2008 to 2015

Data source: national cotton market monitoring system wind  

2、 The seeds that are unfavorable to China's economy are buried in the super rising stage

From the impact on China's economy, January 2010 is the market watershed. In the former stage, the market has a relatively positive effect on the economy, while in the latter stage, it is more negative. If the former is regarded as a rise, the latter belongs to super rise.

1. From December 2008 to December 2009, the rising prices of bulk commodities activated the power of industrial chain operation and helped the economy out of the crisis

After the crisis, the main force of commodity price rise comes from many aspects. First, the rescue policy starts consumption and encourages people to be optimistic about the future market. Second, during the crisis, enterprises in all links of the industrial chain put their stocks to the extreme and held money. The industrial chain has the power of re inventory. Third, the crisis will hit the market deep hole, once the price rebounds, it will retaliate. Fourth, the loose monetary environment reduces the operating cost of enterprise investment machine. The latter three factors are not found in the normal economic operation environment. As a result, the rising price of commodity futures after the crisis has explosive power and is easy to form a super market. When futures prices take the lead to stop falling and rising, enterprises start to purchase and put into production. Through all links of the industrial chain, they deliver to terminal consumption, and spot prices rise. From raw materials of bulk commodities to terminal commodities, the rising prices have been smoothly transmitted and digested in all links, indicating that the manufacturing industry has initially emerged from the crisis. The rising market from the end of 2008 to the end of 2009 pushed the economy out of the crisis pit. According to the data of the National Bureau of statistics, the industrial added value of China's Enterprises above Designated Size began to rise in February 2009, with a year-on-year increase of 11%. After June, the growth rate was more than double-digit, and in November and December, they were 19.20% and 18.50%, respectively, exceeding the level before the outbreak of the crisis.

Figure 3   Added value of industries above Designated Size in China from July 2008 to December 2015

And Nanhua industrial product price index

　　       Data source: national cotton market monitoring system wind

Figure 4   Trend of Nanhua industrial products index and CRB index from 2008 to 2015

Data source: national cotton market monitoring system wind

2. The rising market after January 2010 has become a hotbed of potential economic risks, and the seeds that are unfavorable to China's economy are quietly spreading

In addition to the economic growth, the driving force of the market at this stage is also mixed with a variety of negative energy. First, the story of hoarding and making a fortune spread throughout the industry. In order to expand profits, the inventory scale of raw materials, semi-finished products and finished products has been increased. Second, the market mechanism at this time has been distorted and turned worse. Increasing inventory and rising prices push each other forward. The objective and real market supply and demand pattern has become blurred. Third, the mind of the market has been blinded by greed, and it is easy to rise but difficult to fall. In fact, the people's Bank of China began to tighten the currency in early 2010. Fourth, the market signal is chaotic. The United States is still introducing stimulus policies, and it was only in 2013 that the United States began to discuss withdrawing from the stimulus policy. Fifthly, after rising again, the transmission of prices in all links of the industrial chain is not smooth, and the market is showing signs of fatigue.

According to the data of the National Bureau of statistics, the total profits of China's industrial enterprises increased by 119.69%, 81.64% and 55.01% year-on-year in February, may and August 2010. Even after excluding the low base effect of - 37.27%, - 22.85%, - 10.61% in the same period of last year, the growth rate is also very considerable. In November 2010, the growth rate was still 49.35% (7.76% in the same period of last year). In the first three months of 2011, the profit growth rate was more than 31.99%.

Behind the high profit increase is the accumulation of a large number of commodity inventory in the industrial chain. In a year after February 2010, the purchase volume and finished product inventory of industrial enterprises increased rapidly. The purchasing volume PMI of China's manufacturing industry purchasing manager index reached 60% in January 2010, and from January 2010 to February 2011, the average purchasing volume PMI was 56.08%, running at a high level. The inventory of finished products of China's industrial enterprises increased by 5.19% in February 2010, only 0.24% in November 2009, over 9% from May to August 2010, and exceeded 11% in November. In February 2011, the index exceeded 22%, 4.25 times that of the same period last year.

Figure 5   From August 2008 to December 2015, the year-on-year growth rate of total profits and finished goods inventory of China's industrial enterprises

Data source: national cotton market monitoring system wind

3. The super slump is the cash dispenser of financial capital and the bomber of physical manufacturing industry

The collapse of commodity prices directly impacts the normal operation of the real manufacturing industry, and the industrial chain falls into disaster. The impact of price fluctuation on the high-end enterprises in the global industrial chain is limited. Futures investment can be short, in the fall in the market to win huge profits.

1. The damage of super down market to traditional manufacturing industry is similar to the economic crisis

Some studies believe that the decline in the price of raw materials reduces the production cost of the manufacturing industry, which is conducive to increasing the profits of enterprises. The above principle is applicable to normal price fluctuation. For example, plant growth, under normal circumstances, rainfall is a good thing, but continuous rainstorm, is waterlogging, and even mountain torrents. The damage to traditional manufacturing industry is mainly manifested in two aspects.

First, when prices fall rapidly, multiple prices can be generated in one day. The market is highly unstable and uncertain. It is easy to make losses in the implementation of orders in hand, and it is difficult to sign new orders. Super down market on the normal order process disturbance is obvious. In the 58 months from February 2011 to the end of 2015, the manual order index of China's PMI was higher than 50 in March, April and 2012. The traditional manufacturing industry has been in recession for several years.

Figure 6   Comparison of China's PMI in hand order index and Nanhua industrial products index from 2008 to 2015

  Data source: national cotton market monitoring system wind

Second, once the super market changes from up to down, market participants have only one solution - leaving the market and dumping goods in a rush, resulting in greater selling pressure and collapse of confidence. At this time, no one takes over. From February to May of 2011, many futures prices closed at the limit for several consecutive days. Most of the commodities are located at the source of the industrial chain. Once the super falling market is triggered, a series of product prices in the downstream links will be lost instantly. The raw materials, semi-finished products and finished products in the hands of enterprises depreciate rapidly. In February 2011, the super decline of bulk commodities began to explode, and the losses of manufacturing enterprises increased rapidly. In February 2011, the total loss of Chinese industrial enterprises increased by 22% year-on-year. The index was running at a high level in the following two years, with an average of 55.9%. The fact that China's manufacturing industry has been bombarded by the super decline of commodity prices is the situation after the state has taken great efforts to hedge against it. From 2011 to 2013, China launched a number of temporary collection and storage policies for bulk commodities, determined the price of temporary collection and storage, and collected and stored unlimited quantities.

Figure 7   China's industrial enterprises in 2010-2012, the cumulative loss of enterprises and Nanhua industrial products index

Data source: national cotton market monitoring system wind

In the super decline stage of commodities, China's industrial product ex factory price index (PPI) was obviously under pressure. After recording - 1.12% in May 2012, China's PPI experienced 53 months of continuous negative growth, until October 2016, when PPI recorded 1.9%, realizing the transition from negative to positive. After nearly six years of PPI cooling, the assets of enterprises' finished products have fallen into the vortex of devaluation. The destructive effect on traditional manufacturing enterprises is not crisis, but also similar to crisis. For the whole year of 2012, the cumulative monthly average profit of China's industrial enterprises was - 1% and - 2% in 2015.

Figure 8   Comparison of China's PMI index and Nanhua industrial product index from 2008 to 2015

Data source: national cotton market monitoring system wind

2. For financial capital, the super slump of commodities is a rare investment opportunity

The decline in commodity prices bottomed out and stabilized in early 2016. From February 2011 to the beginning of 2016, the South China industrial products index fell by more than 60%. From April 2011 to the beginning of 2016, the CRB index fell by more than 37%. For example, China's cotton futures prices fell by more than 70%, while international cotton futures prices fell by 74%. According to financial media reports, in 2011, some futures investors took advantage of the slump, and their annual income exceeded 110%, and there were those whose investment income exceeded 300%.

3. In the declining market, the economic growth rate of China and the United States shows obvious differentiation

Comparing the PMI index of manufacturing industry between China and the United States, the United States is obviously in a stronger situation after October 2011.

Figure 9 Comparison of PMI index and Nanhua industrial product index between June 2008 and June 2015

Data source: national cotton market monitoring system wind

A variety of factors lead to the super decline of bulk commodities, and there is a big gap in the impact on the economy of different countries. One is the difference in economic structure. In 2011, China's manufacturing added value accounted for more than 32% of China's GDP. In 2011, the added value of US manufacturing industry accounted for less than 12% of US GDP, which was 20% lower than that of China. Second, the status of industrial chain. The U.S. manufacturing industry is generally at the upper end of the "smile curve" of the global industrial chain, with high added value and strong bargaining power, which is limited by the fall of raw material prices. Third, the financial industry has made a great contribution to the US economy, and the sharp fall in commodity prices has provided a substantial profit opportunity for financial capital.

Figure 10 comparison of profit growth rate of China's industrial enterprises and trend of Nanhua industrial products index from 2008 to 2015

Data source: national cotton market monitoring system wind

4. The super slump of bulk commodities has the function of long-distance impact on China's economy

Domestic and international commodity prices are closely linked and shadow each other. Hot money does not need to enter China, and the commodity super market can be formed. Between big financial countries and big manufacturing countries, the super slump of bulk commodities has the dual function of "long-range missile + money printing machine", so long as the market is super enough. The super index mainly shows that the price rise space is high enough, the rising time is long enough, and the inventory scale absorbed by the industrial chain is large enough.

4、 Countermeasures and suggestions

At present, as the response to the epidemic crisis has entered the middle and late stages, the commodity market has reached a new high point, with a rise of more than a year. Major developed countries are still increasing their prices to stimulate the economy. Domestic and foreign investment institutions are bullish on the future market. International Investment banks believe that they have entered the commodity super cycle. The scene is strikingly similar to the second quarter of 2010. Now is the key period to curb the upgrading of commodity market to super market, and the opportunity is fleeting. We should get rid of the fixed thinking that bullish is harmless, eliminate the hidden dangers that may be caused by misleading people to speculate in prices, cut off the development path of the super rising market of bulk commodities as soon as possible, and resolutely implement the deployment requirements of the State Council to ensure prices and stabilize supply.

1. Closely track the inventory level of raw materials, finished products and other industrial chain links. Timely eliminate hoarding behavior, let the market mechanism play a normal role. Cool the overheated market.

2. It is suggested that the State Council should allow the Ministry of Commerce to appropriately expand the quantity of import quotas for some bulk commodities, and the Ministry of finance should appropriately reduce the tariff rate. Reduce the purchasing cost of entity enterprises.

3. It is suggested that the State Council should instruct relevant state departments to crack down on price hikes, maintain market order and reasonably guide market expectations. It is suggested that think tanks and media organizations should pay more attention to the survival of traditional manufacturing enterprises and understand the difficulties they face. We should guide commodity futures investors to comprehensively and objectively understand the market supply and demand pattern, evaluate the market trend prudently, calmly and rationally, and do not blindly give full play to the role of financial service entities, rather than the opposite

4. We will resolutely implement the unified deployment of the State Council, unify our thinking, eliminate differences, clarify market signals, and improve the efficiency and intensity of implementing national policies. It is suggested that research institutions should be guided to better understand the concerns of relevant departments of the state from the perspective of national interests, pool market consensus and improve the efficiency of national policies. To prevent the national economic early warning from being marginalized and weakened.

5. National commodity reserve is the key guarantee to make up for market failure and maintain the normal operation of market mechanism. It is suggested to strengthen the national bulk commodity reserve system, strengthen the bottom line thinking, and prepare for the rainy days.

6. Further study on the interaction between commodity futures and the rise and fall of the real economy. We should establish the theory, practice and strategic plan of economic risk governance with Chinese characteristics, find out, early warn and respond early, and realize the formation of modern governance system of risk control.

7. We will accelerate the further enrichment of textbooks and reading materials for China's economy and finance. From the historical process, this paper summarizes the interactive relationship and law between the commodity market and Chinese and foreign economic operation, timely improves the content of the economic textbook system, and combines with the national conditions to construct the theory of China's bulk commodity market system in the new era and guide the practice and exploration.

Author: chief economist of China storage Cotton Information Center   Feng mengxiao