Civil Unrest, 8% and the Metals Super-Cycle

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Last week, Stuart offered a thoughtful piece on metals prices and when to buy. The gist of that article really had to do with the demand numbers inside China. Stuart predicted that the Chinese government will do everything in its power to stimulate growth, primarily through infrastructure development to keep that growth alive mainly to avoid civil unrest. We know China has been growing by over 11% a year, but how bad is single digit growth?

According to a piece from Forbes, anything less than 8% has very serious ramifications. In other words, if Chinese growth slips below 8%, Beijing feels that the chances for civil unrest increase dramatically. How China intends to spur that growth is also newsworthy. The first policy announcement is not calling for infrastructure development (sorry, Stuart). It’s calling for farm policy reform. Say what? China is trying to change farm policies for its 730 million farmers, according to the Forbes article. What is even more shocking about the reforms? They will allow farmers to “have a free market for the land that they till.” The goal is to double the income of China’s farmers by 2020. The article goes on to discuss Beijing seeking to give farmers additional property rights so that they may sell, lease transfer etc their property. Additional incentives include more subsidies for farm equipment, fertilizer and irrigation equipment.

The ramifications of these announced policies are huge. It’s something our next President will undoubtedly have to deal with, particularly since Beijing is not going to pay too much attention to any WTO rules on farming and agricultural subsidies (and one can see why).

And how does this relate to our world of metals? That 8% figure provides some guidance as to the “floor” on Chinese growth. The logic follows that if the strategy works and Chinese farmers earn more and achieve an ever higher standard of living, demand will follow, both for infrastructure and for consumer goods within China. With a civil war at stake, I’d put my money on the super-cycle of Chinese growth.

–Lisa Reisman

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