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Increase in commodity prices brings challenges to China

22 Jul 2011


London Business School’s ‘China and the Challenge of Commodities’ forum, which was held in Shanghai on 20 July, drew the participation of more than 150 business leaders and enterprise representatives.

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Andrew Scott, Professor of Economics and Deputy Dean of London Business School, described China as one of the major emerging markets in the world, which is now influenced by the increase in commodity prices.  This effect would be a challenge as prices of manufacturing input increase, but could also be seen as an opportunity to stabilise the over-heated economy.
 
Professor Scott began the forum by introducing the connection between the emerging market, China and its commodity prices.  After the 2008 financial crisis, which slowed the economic growth in Western countries, it has in fact accelerated this economic development shift to the East.  In contrast, these emerging markets are growing strongly and starting to drive different global variables, including commodity, inflation, GDP and exchange rates.

From his speculation, China is developing rapidly and is currently at a stage of growth where manufacturing is its fastest growing sector with sturdy comparative advantages, including relatively low cost in raw materials and labour wages.  The current demographic structure in China, however, leads to commodity-intensive growth, as large amount of consumption demands of the younger generation are mostly cars, televisions, and phones. 

Together with global imbalances and trade surpluses of China, this trend increases the dollar inflow into global capital markets and leads to investment funds gushing into commodities; all the above factors contribute to a rise in commodity prices and inflationary pressure in China.

With increasing investments in commodity goods, Professor Scott believe that supply constraints of commodities will definitely be eased, and thus, if without a sharp global downturn or appropriate measures, commodity prices in China will continue to remain strong in the short run.
 
He then suggested three ways for China to make use of the increase in commodity prices:
• buy commodity firms so that investors can incorporate margin and absorb value-added profits, while avoiding value-added in output shrinkage as prices of input rises
• shift into other higher value-added  manufacturing industries or services; this would definitely be the next stage growth of Shanghai and Eastern China as predicted
• invest in technology that reduces reliance on commodities.  Professor Scott cited an example of US inventing ICT, which works very well with skilled and flexible labour force. He recommended that China should focus on directing technological change, which would boost its industries in the long run.

The rise in commodity prices, in fact, could be treated as an opportunity to the economy of China, as it plays a stabilising role for commodity goods, slows the overheating of the economy, while at the same time helps boost the economy during recession.  Furthermore, overseas acquisitions in raw materials help develop Chinese multinational enterprises and enrich the experiences of overseas supply chains as well.  As a result, China may shift up the value-added chain in the future.

A thorough discussion followed with Professor Scott’s remarks and both received positive feedback from attendees, including Sloan students, alumni and guests.  Panellists of the forum shared views of their own experiences on a corporate and national level, and these panellists included Mr Weizhong Zhang, Division Chief of the Policy and Legal Department of Shanghai Municipal Development and Reform Commission; Mr Oliver Ramsbottom, Partner of McKinsey and Company; and Ms Xia Wang, Deputy Director of International Trade Division of Shandong Steel Group.

The forum coincides with 50 Sloan students from the School being in Shanghai on a one-week field trip where they will meet with senior corporate executives.