The Commodity Super-Cycle and the Chinese Economy

by: Gary Dorsch

The Reuters Jefferies CRB index of 19 commodities reached a high of 349.56 on Jan 30th (see analysis here). But how did the Reuter’s CRB index reach record levels in the first place? The Chinese economy has an indisputable role in this run:

Demand for Imports: Chinese demand for imports has soared by 330% from roughly $15.5 billion per month in early 2002 to a record $64.4 billion in December 2005. China is the world’s fifth largest importer, and bought $632 billion worth of goods in 2005.

World's Fourth Lartest Economy: China's economy overtook France and the Great Britain to become the world's fourth largest last year, and will grow an estimated 9.4% this year. The European Union and Japan expect growth of 1.9% this year.

Money Supply: Exports are a key driver behind the Chinese economic miracle, with China's currency exchange controls and trade surplus with the US topping $204 billion in 2005, a 25% increase on the previous year and nearly 30% of the total US deficit. The lynchpin of Chinese exports is the low yuan /dollar exchange rate pegged at 8.11 per dollar, undervalued by 30% to 40% on a trade weighted basis. The People’s Bank of China increased its M2 money supply by 18.3% last year, issuing more yuan to soak up foreign currency earned through foreign trade and direct investment into Chinese factories from abroad.

Oil: China’s crude oil imports rose 4.4% in the first 11 months of 2005, and are expected to total 130 million tons of crude (2.5 million bpd) in 2005. Crude oil production from China's biggest oil field, Daqing, fell about 3% to last year. China, the world's second-largest oil consumer, expects to secure foreign energy supplies with foreign deals for its economy, after it turned into a major oil importer and still suffers from severe power shortages. China's oil giant Sinopec signed a $70 billion oil and natural gas agreement with Iran, to buy 250 million tons of liquefied natural gas over 30 years from Tehran and develop the giant Yadavaran field. Iran is China's biggest oil supplier, accounting for 14% of Chinese oil imports. In return, Tehran’s Ayatollah is demanding a Chinese veto at the UN, to shield his secret nuclear weapons program from international sanctions.

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