Across The Border
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Are skyrocketing garlic prices leaving the strong smell of rising inflation and economic stagnation in the air?

By the end of October, the wholesale price for the herb has jumped 70 per cent this year to reach 12.5 yuan per kilogram, the highest on record

PUBLISHED : Monday, 07 November, 2016, 4:08pm
UPDATED : Monday, 07 November, 2016, 10:19pm

China is in the midst of garlic mania, with hot money driving prices of the herb to record highs after the authorities tightened control on funds flowing into equities and real estate.

The rapid surge in garlic prices might be a worrying omen for a bigger-than-expected rebound in inflation for next year coupled with economic stagnation.

As one of the most crucial spices for Chinese cooking, garlic is usually provided for free at restaurants. But it may not be for much longer.

Garlic prices began to rising towards the end of 2015 after heavy rains, then snow, damaged the Chinese crop planted for the 2016 harvest, the report said. The jump attracted speculative buying, fanning the upward surge, according to analysts, looking to make a killing from price difference

By the end of October, the wholesale price for the herb has jumped 70 per cent this year to reach 12.5 yuan per kilogram, the highest on record, data from Wind showed due in part to poor weather, but mostly by a surge of interest from speculative buyers.

Separate data from China’s Development and Reform Commission revealed wholesale price soared 90 per cent year-on-year in October alone, while the retail price increased 68 per cent to 7.89 yuan per jin, a Chinese unit worth 500 grams.

That makes garlic almost as expensive as hog, which is priced at 8.2 yuan per jin ) by the end of October. Pork is the most popular meat in China.

“This is an extraordinary growth, ” said Qu Qing, an analyst for Hua Chuang Securities.

“Besides natural factors like the poor weather and reduction in output, the growth [in garlic buying] is primarily driven by speculative investors, who are seeking returns in other sectors after the authorities tightened control on money flowing into equities and real estate,”he said.

Garlic is an attractive target for speculators and quick-money merchants, as the herb is easy to stockpile and remains fresh for a long time.

In China, the main production base for garlic is in eastern Shandong Province, where cold storage is widely used.

Besides natural factors like the poor weather and reduction in output, the growth [in garlic buying] is primarily driven by speculative investors, who are seeking returns in other sectors after the authorities tightened control on money flowing into equities and real estate
Qu Qing, an analyst for Hua Chuang Securities

In addition, raw garlic is considered by the Chinese to have great health benefits, including boosting the immune system, acting as a natural antibiotic, reducing high cholesterol, even fighting cancer.

China also experienced garlic price bubbles in 2009 and 2010 when prices increased 100-fold, triggered by a reduction in output and rampant rumours nationwide that eating garlic could can prevent humans from catching the swine flu that hit the globe in 2009.

“The new round of garlic craze could lead to a rebound in inflation,” Qu said. “Meanwhile, speculative buyers may also expect that a possible harsh weather this winter could cause a further reduction in production.”

“We believe the economy faces risks of a larger than expected increase in inflation next year,” he added.

Besides garlics, ginger, cotton, white sugar, and even traditional Chinese medicinal materials such Chinese herb angelica and pseudoginseng have all experienced significant increases this year.

The wholesale price for ginger more than doubled in October from the same period last year, according to data from Wind.

Prices for Chinese angelica rose 38 per cent on-year, and pseudoginseng climbed 80 per cent.

Song Yiwei, an analyst with Bohai Securities, is worried the Chinese economy may already be falling in stagnation.

“China has printed excess currency, pushing up the real inflation level. But it’s not reflected yet in the consumer prices indexes,” he said in a recent research report.

Although the nominal CPI has shown a downtrend, Song said China’s calculation methods make the measure less reflective of the real inflation level.

Food prices account believed to accounts for around 30 per cent of the compilation of the market basket of consumer goods and services purchased by households that makes up its CPI, but the Chinese statistical authorities only reveal the major composites. The lack of specific detail has always irritated the public.

Song said the M1, a broad measure of money supply including cash and short-term deposits, has surged since the beginning of this year, suggesting the central bank has been trying to prop up economic growth.

However, economic growth remains weak, unchanged at 6.7 per cent in the third quarter from the previous two quarters, the slowest rate in 25 years.

“The coexistence of an economic downtrend and surging M1 is the first time in the past 20 years in China,” Song said.

“Money did not go to the real economy, but has stayed at short-term deposit accounts or flown into commodities or other assets, causing a mixture of inflation and a stagnant economy,” he added.

“We may be facing a special type of stagnation, which is not triggered by changed external circumstances, but showcased by a great amount of money going into the virtual economy and creating various asset bubbles ,” Song said.