China will spend an extra US$10 billion to bulk up its commodity reserves and lift farm support spending by 20 per cent this year, measures that should aid local grain prices and may boost global metals and oil markets.
As China strains to maintain its eight per cent economic growth target amid a global slowdown that has caused demand for its exports to dry up, it is pushing more money to maintain farm incomes and ensure growing revenues for a rural majority that now includes millions of unemployed workers returning from the coast.
It also dramatically increased its budget for buying up excess supplies of resources from grain to metals to oil, putting hard money against stockpiling plans that have been afoot for months.
The budget will raise spending on reserves of grain, edible oils and materials by 61 per cent to 178.1 billion yuan ($26.0 billion), or 4.1 per cent of its budget, the Finance Ministry announced at the annual National People’s Congress March 5.
That includes 78.341 billion yuan ($11.5 billion) to stimulate domestic demand by expanding reserves of important materials, such as grain, edible oils, crude oil, non-ferrous metals and speciality steel, and developing storage facilities.
China has already been buying up commodities it lacks such as copper, crude oil and soybeans and helping struggling producers of other goods in oversupply, such as aluminium, zinc and cotton, by buying their production at an over-the-market price.
Most commodity markets were unmoved by the news on March 5 after big gains a day earlier aided by growing signs that the Chinese economy may be on the cusp of a recovery, but further evidence of government buying could aid the market’s mood.
“The main goal of the Chinese government announcement is to inject some confidence into markets. The comments will have a far greater impact on sentiment than on consumption, certainly for the next few months,” Barclays Capital analyst Yingxi Yu said.
China’s National Development and Reform Commission, the economic planning ministry, was blunt about the economic dangers.
“The impact of the global financial crisis and many outstanding problems at home have suddenly made it more difficult to keep our economy going strong,” it said.
Supporting the rural economy, a major source of domestic demand and migrant labour as well as farm produce, is a key area for promoting consumption, the Finance Ministry said in its 2009 budget, also presented to the NPC this month.
The NDRC, which oversees most pricing and commodity-related policies, warned increasing farm incomes wouldn’t be easy.
“Agricultural infrastructure remains weak. After five years of bumper harvests, it will be very difficult to keep grain production growing steadily,” it said. “There is great downward pressure on prices of farm products. The return home of many rural migrant workers and their difficulty in finding steady jobs makes it harder to keep rural residents’ incomes growing.”
China has for years imposed measures to protect its rural population of more than 750 million and to ensure food self-sufficiency, staving off the risk of needing to import corn or wheat because of rapid urbanization and increasingly sophisticated tastes.
Now China faces the opposite problem – last year’s booming commodity prices have slumped and China’s farmers, like its metals smelters, face oversupply, while state buying risks pulling in imports from sellers overseas.
China has already launched a 4 trillion yuan economic stimulus plan, including funds to improve agricultural infrastructure. The NDRC said grain production capacity would be increased by 50 million tonnes and plans to create national bases for commercial grain production would be sped up.
“We will stabilize the prices of major agricultural products, such as grain, edible vegetable oil, cotton, sugar and hogs, through a combination of control policies, including raising price floors, manipulating reserves, temporary purchasing and stockpiling, shipping to other regions and exporting and importing,” the NDRC said in its annual economic plan.