Since the beginning of the 21st century, China has been a mover and shaker of the global commodities market covering energy products, various metals and agriculture. In a lighter vein it used to be said, ‘if China sneezes, the world commodity market catches cold’.

For two decades, the Chinese economy has largely been driven by investment-led growth (mainly fixed asset investment, including infrastructure, power, etc). Because such investment necessitates massive consumption of various commodities, China had to turn to the world market for large-scale import of raw material.

China’s ravenous appetite for commodity consumption (crude oil, industrial metals such as iron ore and copper, precious metals like gold and platinum as well as agriculture, covering mainly soyabean and cotton) and strategic stockpiling of critical goods helped keep global commodity prices buoyant from time to time.

In 2015, the Chinese policymakers took a conscious decision to gradually shift from investment-led growth to consumption-led growth. This move gave a big boost to sectors such as automobiles, white goods and livestock. The emphasis on consumption resulted in subtle and not-so-subtle changes in the composition of China’s import basket of commodities.

The importance of China in the global commodity ecosystem is expected to continue into the future, too. This is clear from the strategy announced last month by the Chinese government for 2021-2025 which emphasises increased domestic production and domestic consumption with reduced dependence on import. At the same time, exports that are key to the Asian major’s growth, especially high value-added goods, will continue to be supported with requisite supply-side reforms.

The strategic plan for 2021-2025 envisages rapid urbanisation of the country that is expected to encourage domestic consumption as well as provide productivity gains through technology adoption.

It is clear, China’s commodity intensity of growth is unlikely to diminish anytime soon. Planned expansion of urban areas is sure to boost construction activity (dwelling, commercial and urban infrastructure, including commuting) which, in turn, would demand commodity consumption.

It is also becoming increasingly clear that to meet its import requirements, China would seek to reduce its dependence on goods from the US. The US faces a record trade deficit with China as it is a large importer of a range of Chinese goods. Going forward, China’s emphasis on moving towards greater self-reliance and subtle ways to reduce dependence on US goods is likely to exacerbate the already strained trade relations. The last word on the US-China trade war has not been said yet.

Commodity producers around the world are closely tracking developments in China. Many see an opportunity to service the Chinese market and snatch a part of the US share. For instance, Brazil supplies both soyabean and cotton to China, in partial replacement of US goods.

India, too, is facing a trade deficit (about $60 billion) with China. It is time a strategic approach is made not just to reduce imports from China but to boost India’s export to that country. It is not just volume of export, but quality of goods and pricing would become critical factors to service the Chinese market.

( The author is a policy commentator and commodities market specialist. Views are personal )

Related Topics