SinoInsight 1
On June 13, China Banking and Insurance Regulatory Commission head Guo Shuqing said at the 11th Lujiazui Forum in Shanghai that “history has proven that there is a price to pay for over-dependence on property.” He added that China is “quite dependent” on the property market.
OUR TAKE
1. Guo Shuqing’s remarks are a dangerous signal for China’s property sector. There is a very good chance that property prices in China will fall sharply in the second half of 2019.
In our China 2019 outlook, we noted that “property prices will likely fluctuate drastically (small spurt in prices followed by sharp drops). Property prices in some areas may fall by as much as 30 to 50 percent.”
2. At last year’s Lujiazui Forum, Guo Shuqing criticized “financial chaos” in China. He noted that wealth management products with yields of over 6 percent “are questionable” while those with yields of over 8 percent are “very dangerous.” Those who purchase WMPs that promise yields over 10 percent “should be prepared to lose their principal,” Guo said.
Not long after Guo’s remarks, the Chinese authorities started targeting the P2P online lending sector, a move which led to many P2P closures.
SinoInsight 2
On June 12, the state-run Xinhua News Agency published an article which claimed that “nearly 80 percent” of summer crops had already been harvested and that China would see a “bumper summer harvest.” The agricultural ministry attributed the “bumper harvest” to “favorable wheat price policies, technological support to increase per unit area yield, as well as effective disaster-control measures,” according to Xinhua.
According to recently released data by the National Bureau of Statistics, the Consumer Price Index saw a year-on-year increase of 2.7 percent in May, up from the 1.5 percent increase in February. Also, food prices rose by 7.7 percent while non-food prices grew by 1.6 percent.
OUR TAKE
1. From our long-term research into the CCP, whenever regime propaganda claims that “all is well,” the reverse is usually true. We have good reason to suspect that China is facing severe food problems as opposed to enjoying a “bumper harvest.”
2. From the official records, summer harvest in China usually begins in June and ends in September. However, China’s National Food and Strategic Reserves Administration ordered local authorities to begin making grain purchases on May 7 this year, the first time that the authorities had ordered purchases this early in a year. Meanwhile, the official records also reveal that only 20 percent of the summer crop was purchased in June for the past two years (2017 and 2018). It is unclear how “nearly 80 percent” of the summer crop has already been harvested this year.
According to the official records, 18.24 percent (12.874 million tons) of wheat crops purchases were made by June 15, 2017. By September 2017, China had purchased a total of 70.54 million tons of wheat, or a decrease of 3.11 percent (2.27 million tons) from a year ago.
Per the official records, 6.7 percent (3.368 million tons) of wheat crops were purchased by June 10, 2018. When the summer harvest concluded in September, a total of 50.152 million tons of wheat was purchased, a decrease of 30.4 percent (21.907 million tons) from the previous year.
In general, Chinese farmers tend to sell most of their grain (after keeping some for themselves) to the Chinese authorities because imported food is usually cheaper than locally grown food. Meanwhile, the authorities guarantee the farmers that their food would be purchased at a fixed price point. In other words, grain purchase data in China tend to reflect grain harvest data. However, due to official corruption, grain purchase data is usually inflated. This means that grain harvest is always lower than grain purchases in China.
3. Another indication that all is not well with the summer harvest is the fact that China’s National Grain Trade Center has yet to announce the grain purchase process for this year. This suggests that the harvesting data could be very ugly and the central authorities are holding back on an announcement.
4. We previously noted that China is facing a food crisis caused by factors like pests and disease as well as official fraud. International food shortages this year and the depreciation of the renminbi has driven up the cost of food, yet another problem for China because the country imports about 100 million tons of grain each year.
Recent developments have verified our observation in our China 2019 outlook that “food shortages may worsen, and the price of staple food may rise sharply.”
