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Authors: Elizabeth Economy Michael Levi

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Growth in Chinese demand for raw agricultural commodities has been relatively small in the global context. Between 2001 and 2007, China accounted for considerably more than half of global growth in base metals demand and for roughly a fifth of global oil demand growth. In contrast, it contributed barely 10 percent of growth in demand for raw agricultural commodities (corn, rice, soybeans, and wheat).
Looking ahead, mainstream projections foresee China continuing to play a relatively modest role in growth of global agricultural demand. A 2012 joint study from the United Nations Food and Agriculture Organization (FAO) and the Organization for Economic Cooperation and Development (OECD), for example, foresees China accounting for 4 percent of global growth in rice demand through 2021 (its final projection year) and for slightly more than 10 percent of global growth in wheat consumption. Indeed, mainstream projections foresee the relative role of China in many agricultural commodities markets declining in the coming years (with soybeans the most notable exception) as demand from other countries rises.

Pressures on global food prices are also moderated by the powerful Chinese desire to be self-sufficient in most raw agricultural materials. This creates an incentive for the Chinese government to take steps that help domestic supplies rise in order to match growth in domestic demand. Such efforts stretch back centuries. More recently, in 1996, in the wake of the controversy following Lester Brown's “Who Will Feed China?” Beijing published a White Paper on the issue of grain. “[T]‌he small quantity of grain imported by China will not imperil the stability of the international grain market, ” it asserted. “There is no basis to the international clamor about a ‘China threat in food supply.'” But it also observed delicately that “the balance between the supply of and demand for grain in the country will have to be further enhanced, and the tense situation
between supply and demand will continue to exist for a long time to come, ” an oblique way of saying that China would pull out all the stops to avoid becoming dependent on imported grain.
Not until the end of the document did Beijing acknowledge the role of international trade, noting that “China will not refuse to use international resources as a necessary complement, ” but reinforcing that this would “only play the role of regulation in varieties, in case of crop failures and to support poor regions.”

Little changed over the decade that followed. In 2007, Premier Wen Jiabao noted that when it comes to food, “even a one yuan increase in prices will affect people's lives.”
Still today, Chinese officials reinforce the importance of grain independence for China's security. Minister of Agriculture Han Changfu proclaimed in 2011, “To ensure national grain security, it is important that China adheres to the principle of self-sufficiency. The livelihood of the Chinese people cannot end up in the hands of others. Depending on international trade to ensure food security is unreliable.”
Or as he put it more succinctly the following year, “Chinese people's rice bowl should only be filled by themselves.”

But grain is a special case even among agricultural commodities. China's economic reform and opening up increased agricultural efficiency and output, yet the combination of a paucity of arable land and the breakneck pace of industrialization strained the system. Today China has less arable land per person than it did a decade ago. Beijing once declared 120 million hectares of arable land—an area about the size of South Africa—to be its minimum for food security, but by the end of 2011 it reportedly had only about 121.9 million hectares of arable land.
Direct impediments to efficient farming are exacerbated by the fact that the price of food continues to be politically charged, and hence subjected to controls that weaken producers' incentives. Consumption of food today accounts for more than a third of household expenditures, compared to less than 15 percent in most developed nations and less than 10 percent in the United States.
This tension is compounded by the trade-offs in making land available to agriculture, industry, and continuing urbanization, as well as by domestic environmental degradation.

Were Chinese demand not growing, the government would likely steer increasingly scarce land to uses other than agriculture. The result would be lower total world food supply. This Chinese tendency to seek self-sufficiency in food—greater Chinese consumption and production go hand in hand—ultimately means that the impact of increased food demand on world markets is lower than it would be otherwise.

Even with Chinese efforts to expand domestic supplies, though, the country has become dependent on food imports in important areas. Faced with limits to the ability to expand domestic farming, and a desire to produce its own grain, China has been forced to depend heavily on imports for its soybean supply.
The world should not expect, however, considerably larger gains in soybean prices than in the prices of other raw agricultural commodities as a result, since prices of many agricultural commodities tend to move together over the long haul.

To be certain, as world food demand grows, it is possible that prices will rise strongly, particularly if productivity gains do not remove pressure on the availability of land.
But high prices would not primarily be a product of Chinese food demand; the source would be growth in global food demand far more broadly.

Looking Forward

The future impact of Chinese resource demand on world resource prices depends on three big factors: the ability and willingness of suppliers around the world (including those in China itself) to respond to higher resource demand through greater resource production, the composition of economic growth, and the efficiency with which the country uses resources in the future. We have already taken a look at the first factor. But the other two are significant unknowns.

Perhaps the biggest question mark looming over the future is the course that the Chinese economy will take. Economic activity can be broken down into investment, consumption, and exports. The typical large country gets the bulk of its economic activity from consumption, with smaller fractions coming from investment and
exports. For example, almost 70 percent of the U.S. economy is personal consumption, and an even higher fraction is attributable to consumption once consumption by government is factored in.
Private investment makes up another 15 percent of the economy. Net exports for the United States have, for many years, been negative.

Chinese economic activity looks very different. It has long been heavily weighted toward investment, a trend that has only intensified in recent years. Between 2001 and 2010, roughly half of the economy was directed toward investment, with that figure spiking even higher in 2009 on the back of a massive stimulus effort.
Fixed investment requires a lot of energy and minerals. Factories, buildings, trains, and automobiles require steel and aluminum; power plants need coal, oil, and gas to run; all of these use electrical wiring that depends on copper. Exports also occupy an unusually large role in the Chinese economy, ranging between 10 and 20 percent of the economy in the decade ending in 2012.
Much of what China exports is both energy- and minerals-intensive; steel, for example, draws on coal for energy and iron for materials, and aluminum uses energy as well as bauxite.
High investment and exports have been accompanied by low personal consumption, which remains stuck at around 35 percent of the economy.

China's leadership has long expressed determination to rebalance the country's economy away from investment and exports and toward consumption. If it succeeds, the patterns of resource demand will change too. In particular, personal consumption is far less minerals-intensive than industrial activity. Its impact on energy is more ambiguous; industry uses energy intensely, but so do consumers, whether to power their cars or heat and light their homes.

But China has struggled to effect a decisive shift. In 2006, reflecting on the previous five years, a senior official warned: “During the 10th Five-Year Plan period, the [investment] rate increased from 36 percent to 44.8 percent….If such kind of growth continues, though successful in short-term fast expansion, it will lead to a more extensive growth mode and instability of the economy.”
The country's Eleventh Five-Year Plan, which covered the years 2006–2010, thus aimed to “adjust the relationship between investment and consumption.” It
also set a series of goals for economic rebalancing, with a particular focus on the resource-light services sector, aiming to increase that sector's share of the economy. In addition, it aimed to make more use of people (and less of machines) in service activities, a step designed to boost individual income and hence spur personal consumption.

Yet by the end of the Eleventh Five-Year Plan, China failed to meet its major goals. Investment had actually increased as a share of the economy.
Chinese leaders thus declared with the Twelfth Five-Year Plan (2011–2015) that they would finally begin to steer the economy in a new direction, boosting the role of personal consumption in economic growth through a larger service sector, higher wages, and a stronger social safety net.

But the challenges in accomplishing this are daunting: Beijing will have to rein in powerful industrial and local interests whose political and personal economic fortunes have been made on the back of the investment-led growth of the past two decades. The process of urbanizing an additional 300 million people by 2030, as the government has outlined, will also encourage investment-led growth. Moving China from a manufacturing economy to a service and technology-driven economy, moreover, requires diminishing the power of the central government by reducing capital controls to enable the private sector to flourish, something leaders have resisted for fear of losing their ability to direct financial flows to meet economic policy goals. And although building up the social welfare net to help boost consumer spending has nominally been a top priority for a decade, the imperative of continued rapid economic development continues to crowd out initiatives to improve the country's health, education, and social security systems.

If China fails to shift its economic priorities, one of two things will happen: the economy will continue to grow apace, driving energy and minerals demand upward in a similar way to the past decade; or, at the opposite extreme and perhaps more likely over time, the economy will falter, gutting demand across the board, including for minerals and energy imports.

What if China succeeds in rebalancing the economy? There is broad agreement that greater consumption-led growth would have
limited impact, one way or the other, on food demand, particularly within the context of much broader growth in global food demand. There is less agreement for minerals and energy. Some experts argue that China is on the verge of a significant rebalancing, with large consequences for energy and particularly minerals markets. A team at the U.S. bank Citigroup, for example, has estimated that annual growth in global copper demand will be 14 percent lower in the coming years if China shifts to a consumption-driven model; it also projects slower growth for aluminum and iron ore demand—roughly 6 and 4 percent lower, respectively.

Other experts argue that any rebalancing will be slow, if only for political reasons, since attempting to effect a rapid shift would risk a sharp slowdown in economic growth.
They also warn that even if investment decreases as a share of Chinese economic growth, it will remain substantial, and with it so will growth in minerals demand, at least for the next several years. Much of the country, particularly away from China's coastal region, remains only poorly developed; moreover, with roughly half of Chinese people still living outside cities, considerably more urban infrastructure remains to be developed.
But even analysts who are skeptical of a large near-term shift foresee a major turn over time: as one analyst who is skeptical of an immediate shift wrote in 2011, “After 2015, China's demand for major mining commodities will begin to fall gradually with the expected slowdown in investment and infrastructure activities.”
On the energy front, a shift from investment to consumption is likely to be neutral, with industrial energy demand replaced by individual use of electricity (ultimately coal or gas) for homes and oil products for cars. The upshot will be still-growing demand for energy and minerals.

The second big factor that will shape future resource demand is the efficiency with which China uses resources. A team at the consultancy McKinsey and Company has analyzed global opportunities to reduce resource demand cost-effectively.
They find opportunities to reduce Chinese energy demand through 2030 by an amount equivalent to nearly half of present U.S. energy consumption. Moreover, they find opportunities to cut steel consumption by
120 million tons—roughly 10 percent of current global demand—through such steps as more efficient building construction. Other studies show similar opportunities in these and other mineral and energy areas.

The barriers to realizing these opportunities, though, are often substantial. Greater efficiency, for example, typically requires larger up-front investment in return for savings later, an opportunity that may not be pursued if capital is scarce, or if long-term ownership is not clear. Similarly, because the Chinese economy still contains many nonmarket features, it may not be possible for those who invest up front to reap the rewards from increased resource productivity down the road. All of this makes it unwise to assume that China will become radically more efficient in its resource use in the coming years, in the process removing pressure from world prices.

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