Chinese Take Away?

16/11/10 -- Cancel the sweet and sour chicken order for China, they've decided that they only want the boiled rice.

The overnight grains are down quite sharply, led by soybeans and oil with the latter down more than 100 points following overnight weakness in Malaysian palm oil after a Chinese newspaper referred to "price-controls" on some commodities.

As mentioned previously the problem with putting too many eggs in the one basket is what happens if the basket gets dropped?

Fears of a clamp-down on speculation in food commodities, coupled with possible interest rate hikes and/or a further tightening of fiscal policy is keeping traders nervous. Chinese demand has pretty much been largely responsible for pushing soybeans, vegoils and corn (and many other commodities too) to multi-year highs recently.

There is little doubt that the strength of the Chinese economy, and their demand for everything from copper to corn, was almost single-handedly responsible for dragging the West out of the recessionary mire it found itself in just a short time ago.

You may recall that whilst we in the West were pissing about and dithering over how to sort out our own self-induced mess, the Chinese acted swiftly and emphatically with a massive financial stimulus package of their own.

That package is now causing serious inflation, with food and housing prices the main culprits. Anecdotal reports suggest that food price inflation is in reality much higher than the official government figures show.

The Fed's recent decision to pump a further USD600 billion of new money into the US economy is likely to fuel Chinese inflation further - that is why Beijing is squealing so much - making further yuan appreciation seem likely.

With inflation rising and interest rates still relatively low, the average Chinese household is finding that the real purchasing power of the yuan in their pocket is diminishing rapidly.

Under such circumstances maybe forecasts for the relatively rapid adoption of a Westernised diet might be somewhat overoptimistic?

Meanwhile in Europe not that much has changed really, we are still dithering over bailing each other out, undermining the euro. A weak euro and a commitment to some serious budget deficit cutting all around the bloc doesn't put us in a position to go buying what China has to sell. So who else is going to do it?

The US? With the recent strong showing by the Republicans in the mid-term elections and the current discord between the US and China over "currency manipulation" it somehow doesn't seem likely.

If the US were to decide to play hardball with China over the yuan, you could certainly expect the Chinese to react with a few measures of their own. Would an import levy on US soybeans/corn be completely out of the question for example? Who needs who the most?

Maybe we are in for a giant game of "Chicken"?