In other dispatches about the impending Chinese domination of the world, the FT also notes that the country is keen on buying up farmland in Africa and South America. Here, the more honest if brutal face of realpolitik figures into the equation as the country seeks to secure food supplies in the wake of rising food prices. Thus, farmland overseas is the next frontier for China's agricultural concerns should the country get its way. Whether other countries will allow China to own vast tracts of farmland while employing Chinese workers to work in those fields is a good question:
With their choice of assets restricted to expensive land, bank deposits yielding a negative real return and shares rising like a Chinese rocket, investors were hardly being irrational. But they were exuberant and driven by market momentum rather than fundamental analysis, which is why so many observers concluded that this was indeed a bubble.
Loose talk, says Lombard Street Research's Charles Dumas in a new book on China and the US. Assume, at the very worst, that the true p/e ratio after adjusting for cross holdings was 100 at the peak, giving an earnings yield of 1 per cent. Adding in
's trend real growth of nearly 10 per cent implies a potential all-in yield for Chinese stocks in double figures, once any dividend yield is added to growth to give a total real yield. That, says Mr Dumas, implies a decent 3-4 per cent premium to the S&P 500 long-term real stock market return of 6.5-7 per cent. China
Whether that premium makes sense in relation to risk is a question. Clearly the political and economic risks in
Chinaare great, as are the risks in 's deficient corporate governance and the authorities' tendency to intervene in the markets. Yet the underlying point remains. Any free cash flow from stocks in an economy growing at a trend rate of 10 per cent is icing on the cake. China
That is not to say bubbles can be ruled out in future. They are inevitable unless the aggressively mercantilist exchange rate policy, which floods the economy with liquidity, is changed. Mr Dumas thinks it is now in the country's interest to let the yuan appreciate.
He suggests that current policy fails to address the inherent conflict between the desire to prevent inflation in an overheating economy and the wish to keep an artificially low, semi-fixed exchange rate. The conflict cannot be removed without either a painful and unnecessary domestic deflation or abandoning the undervalued yuan-dollar rate.
Even if this policy prescription were adopted soon, there would be a considerable trade surplus for some time. The problem, as Mr Dumas correctly predicted in an earlier book in 2005, is that
UScapacity to absorb 's excess savings (which are a counterpart to the trade surplus) is now impaired. With the credit crisis, debt exhaustion has set in and US households are rebuilding their savings. So he suggests the Chinese authorities should allow private individuals to export capital. China
could absorb the resulting flow via equity rather than debt markets. This would be less politically contentious than conducting the flow through state-directed sovereign wealth funds. And since Chinese investors would probably be content with a return rather lower than the long-term return on US equities given their poor domestic choices, this would provide a prop for the US equity market when earnings are under pressure. US
The prescriptions are eminently sensible. The snag is that
has never been very susceptible to outside advice, however sane. And confronted with a proposal for liberalisation, a communist regime is no doubt instinctively reluctant to relinquish controls while presiding over a stressful industrialisation in the world's most populous country. Beijing
Yet the economy's expansion is out of control and a protectionist backlash looms. The stakes in this game are uncomfortably high.
Chinese companies will be encouraged to buy farmland abroad, particularly in Africa and South America, to help guarantee food security under a plan being considered by
. If approved, the plan could face intense opposition abroad given surging global food prices and deforestation fears. However an official close to the deliberations said it was likely to be adopted. “There should be no problem for this policy to be approved. The problem might come from foreign governments who are unwilling to give up large areas of land,” the official said. Beijing
A proposal drafted by the Ministry of Agriculture would make supporting offshore land acquisition by domestic agricultural companies a central government policy.
already has similar policies to boost offshore investment by state-owned banks, manufacturers and oil companies, but offshore agricultural investment has so far been limited to a few small projects. Beijing
The move comes as oil-rich but food-poor countries in the
Middle Eastand north Africa explore similar options. Libyais talking with Ukraineabout growing wheat in the former Soviet republic, while has said it would invest in agricultural and livestock projects abroad to ensure food security and control commodity prices. Saudi Arabia
is losing its ability to be self-sufficient in food as its rising wealth triggers a shift away from diet staples such as rice towards meat, which requires large amounts of imported feed. China has about 40 per cent of the world’s farmers but just 9 per cent of the world’s arable land. Some Chinese scholars argue that domestic agricultural companies must expand overseas if China is to guarantee its food security and reduce its exposure to global market fluctuations. China
Chinamust ‘go out’ because our land resources are limited,” said Jiang Wenlai, of the Agricultural Science Institute. “It will be a win-win solution that will benefit both parties by making the maximum use of the advantages of both sides.” China
In the first quarter of this year, food prices in China rose 25 per cent from a year earlier, the highest level of farm inflation since the early 1990s, said UBS.
is still a net exporter of agricultural commodities but is increasingly reliant on soybean imports and is about to become a net buyer of corn. It imported up to 60 per cent of the soybean it consumed last year and the crop would be a focus of policy support for companies acquiring land overseas, along with bananas, vegetables and edible oil crops, said an official familiar with the ministry’s proposal. The ministry is already talking to China about the possible acquisition of land for soybean, according to this official. Brazil
Some countries would find it particularly problematic if
supported Chinese firms to use Chinese labour on land bought or rented abroad – common practice for most companies operating overseas. Beijing