China began pumping huge amounts of cash into its financial economy at the beginning of January. This pumping was a measure to avoid a money crunch. Just how much was asserted into the financial system? In one day, the government released 440 billion yuan. That’s the equivalence of 67 billion US dollars. According to Bloomberg, that is the most published in a single day within the past three years.
The stimulated cash is also a way to help relieve commercial banks without resorting to other tactics. One such tactic would be to allow commercial banks to put more out on lending or to cut benchmark interest rates.
Critical areas are reaping the benefits of this extra government support. Roads and bridges are being updated or built new. This support, in turn, is creating more jobs and helping keep the economy at a more stable level. We’ve seen a huge increase in Chinese commodity market.
An unexpected location the money has landed is eggs. Investors have begun placing bets on expected productivities on hens within the Dalian financial market. Dalian Commodity Exchange (DCE) is a non-profit Chinese futures exchange.
The investment bubble is not new for China’s economy. When the government stepped in to help using spending and lending before, stock markets and real estate were affected in a similar manner. Both markets saw an unexpected rise due to money funneled towards them.
While most bubbles have a rational beginning, they require sustenance to stay volatile. Investment banks often offer an initial public offering. Brokers and Analysts see the bubble as an opportunity to sell assets. As more purchase, the price increases due to supply and demand.
Media is another key component.
Media such as news, books and magazines publish articles directly linked to the economic bubble, creating more of a desire to become a part of the movement.
Investment bubbles typically see a drastic drop due to over inflated prices. The sectors are then negatively affected. Economic hardships are known to follow after an economic bubble bursts. A few examples are the South Sea bubble of 1720 in England and the Dutch tulip bubble of the 1630s.
The sudden one – the third surge in egg futures would not be surprising if chicken flocks were in a dangerous predicament. However, there seems to be no such case. According to the government, egg prices have seen a drop in price within the last year. Flocks are healthy.
Difficulties were with the fluctuations
These variations make it difficult to tell the reality of futures. (Futures are short for the futures contracts. These are agreements in exchange to buy or sell assets.) Companies such as Hubei Shendan Healthy foods heavily rely on these local markets to predict future fluctuations in prices. Depending on the amount of time this surge lasts, the price of eggs may see no effect. It typically takes months for the affected prices to make their way into the retail pricing.
Markets also noticed unexpected rises in other commodities as well
Eggs are not the only bolstering markets. Steel is seeing a much-needed increase after a prolonged slump. The steel markets have doubled or tripled since their lows last year. Steel rebar is expected to surpass two major oil futures in trading volumes. Iron, garlic, and cotton are amongst other commodities that are taking a foothold in this unexpected increase.
Experts say there is no rationality for this sudden increase. The blame is on “irrational exuberance”.
Trafigura (one of the largest metal and oil traders in the world) chief economist Saad Rahim estimates new liquidity for the first quarter of this year alone reaches figures of $ 1 trillion in China. This liquidity is about the same as the entire quarterly financial period for Germany given the same time restraints.
What does that mean exactly? If it works, the government lending could result in positive results worldwide. China saw a 6.7 percent increase for said quarter. While there had been some signs of strained growth, economist expected an increase.
Is it too good to be true?
China’s seems to be falling back into its same economy crushing habits, though. Corporations have been reaping the benefits of cheap credit since the financial crisis that struck the globe. International Monetary Fund released a report showing 60 companies alone held most of the $ 400 billion debt at risk. Those 600 companies own roughly 14 % of all of the corporation borrowings.
The same financial crisis in 2008 resulted in a property market bubble in China. With multiple constructions left for the China government and t Stock market still recovering led China to put restraints on the money, its citizens could invest overseas.
The efforts for a credit-fueled economy gives light to the fact that China, for now, can focus on other issues than its debt. The entire world is watching China’s economy. The next steps will be crucial in the global market.