China, Revolution—and Food Price Shocks

Flag of the People's Republic of China
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Flag of the People's Republic of China

If you were forced to choose a single word in which to encapsulate the collective obsessions of China's ruling elite you could do worse than to pick this one: Stability. And so data suggesting spiking prices of Chinese foodstuffs may stoke the regimes fears of their bête noire.

First, some background.

The history of the latter half of the 20th century in China— a history very much within the living memory of China's ruling class—is one fraught with chaos and violence.

In the United States during the 1960s and '70s, the word "revolution" may have been bandied about a good deal, but, with few tragic exceptions, such as the Kent State shootings, the fundamental social order remained intact.

Not so in China. Mao's "Cultural Revolution" was a study in tragic and unintended consequences: The Red Guards, an organization of students and young people first mobilized by Mao to combat crypto-capitalism, were eventually branded "counter-revolutionary" themselves—and were ultimately suppressed by China's People's Liberation Army.

Common sense would lead us—and doubtless the Chinese leadership as well—to a quite sensible conclusion: Nothing threatens political stability more than a starving population.

All this is prologue.

In an index created by Citi, China is shown leading the world in a category the Chinese governing class would very much hope to avoid: Vulnerability to food price shocks.

(The story comes to our attention today through Neil Hume, reporting for the Financial Times blog Alphaville.)

Hume quotes a Citi research report on the countermeasures undertaken by the Chinese:

"The 2007/8 food price shock resulted in some dramatic monetary tightening in the first six months of 2008, when interest rates across 22 emerging economies rose in net terms by 1,375 basis points. Economists sometimes get wrapped up in the idea that a change in food prices is 'just' a change in relative prices, to which policymakers don't need to respond. The experience of 2008 suggests that policymakers themselves might have a different view."

And the news keeps getting worse, according to Citi's research.

First, climatological factors:

"The food price shock that kicked off in the northern hemisphere's summer of 2010, due to bad weather, seems unlikely to end soon. Simple arithmetic strongly suggests that food price inflation is likely to continue rising in the next few months, and other factors create additional risks: the food supply situation is uncertain; demand pressures in EM are strong; and monetary conditions in many countries are relatively loose."

And also energy prices:

"On top of that there is now an additional threat to food prices that wasn't apparent in the summer of 2010, in the form of rising energy prices. Higher energy prices—which were a key cause of the 2007/8 food price shock—affect food prices in two ways: i) by raising food production costs; and ii) by increasing the world's appetite for biofuels. The claim on agricultural output that comes from biofuels production is growing each year in any case, but the evidence from 2008 is that high energy prices supercharge biofuels demand."

Those are the global factors that provide the overarching context for food price inflation.

But Citi also cites factors at the national level, which makes China more vulnerable to price shocks than other nations.

Perhaps the most interesting among them is this: "[nations are at greater risk when] growth is strong—the chances of contagion from food prices to core CPI are strongest when demand pressures are in any case robust."

That presents the Chinese government with a delicate balancing act indeed: counterposing demand for growth on the one hand against the necessity of stable food prices for an enormous population on the other.

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