July 24, 2012


China's food price spikes may rebound on global grain prices surge



Concerns of a possible repeat of the food price spikes in China have been raised due to the recent surge in global grain prices, according to Barclays.


The risk of a significant rebound in inflation in the second half would constrain the on-going monetary policy easing, hurting growth prospects.


According to Barclays their study shows that while China is going to be increasingly exposed to bouts of food inflation, there are little signs of a meaningful "food event" on the near-term horizon, even if assuming a further 20-40% pick-up in global grain prices.


Their benign outlook is based on the latest surge in prices being driven by supply not demand shocks, and the fundamental drivers for China's cyclical inflation, excess liquidity, output gap and inflation expectation being well anchored in 2012.


"In our view, the rapid rises in food prices in China were usually more a symptom than a cause of China's inflation problem. Food inflation remains largely domestically determined, despite greater reliance on imports. Other than soy, there is relatively small immediate pass-through from global food prices to domestic CPI", Barclays said.


Domestically, a bumper summer harvest has been secured and benign weather conditions point to healthy crop yields ahead. The pig production cycle suggests that sufficient supply will keep meat prices controlled. A major transmission channel for food supply shocks is through expectations, hoarding and speculative behaviour.


Barclays added that firstly, China is self-sufficient for wheat and rice, and yields are expected to be healthy this year. Rice and wheat are the most important crops for the nation's food security. Second, the immediate pass-through of global corn prices to domestic prices is small, though in the longer term they show strong co-integrating relationships. Third, the largest pass-through would be from rising global soy prices, and here the effect to CPI is small but cannot be ignored. China has been the world's largest soy importer, and its reliance on imports has reached 80% of its consumption.

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