In 1973, Alain Peyrefitte, many times minister in French governments, published a book entitled Quand la Chine séveillera le Monde Tremblera (When China Awakes the World Will Tremble) after a quote attributed to Napoleon. It is now widely believed that China has awaken, and that its economy took off about 10 or 20 years ago. Chinese growth is often blamed for the increase in commodities in world markets. A wire from Agence France-Presse repeated the mantra last week: mineral prices are bid up by chinese consumers.
There are indications that Chinese demand is pushing up prices of commodities. Since 1989 (the median year when Chinese runaway growth is supposed to have started), copper and lead prices are up about one-third, nickel by 13%, and steel prices have shot up (until a few months ago). Yet, there is no reason to worry about the arrival of the fifth of mankind on world markets.
First of all, it is only over the last couple of years that commodity and raw material prices have been on a binge, and the longer trend remains downward. As the top chart shows, real prices (in constant July, 2005, U.S. dollars, deflated with the U.S. consumer price index) of all the metals traded on the London Metal Exchange have dropped dramatically over the past 15 years: copper by 15%, lead by 16%, nickel by 29%, aluminum by 40%, zinc by 51%.
If there has been a bullish Chinese impact on commodity and raw material prices, it must have occurred only recently. Consider copper, which is emblematic of the supposed Chinese impact. In real (constant dollar) prices, it started increasing only in 2003, after generally falling since the late 80s. Oil started dropping nearly one decade before. It is of course possible that resource prices would have decreased even more without the added demand from the Middle Empire. An influence from Chinese demand is not to be discarded, but it must not be exaggerated.
Could Chinese growth have started much more recently than previous claims of the Chinese government suggest? Only when the theoretical and statistical methodology of data is known, criticized and debated can we lend some credence to government numbers. Arent we a bit naive with what the Chinese government tells its subjects and us? Yet, data about China having become the fourth-largest exporter and the third-largest importer are verifiable, and consistent with an economic takeoff.
Chinese growth, furthermore, is not guaranteed to continue. It is partly artificial and thus fragile. Relative prices are manipulated by the state and are far from representing Chinese consumers preferences and real economic scarcities. If the Chinese state does not release its controls on information (the Internet, for example), does not abolish restrictions on individual liberty and labour mobility (like its interior residence permits), does not reduce the large number of state corporations, does not liberalize the banking system and does not let entrepreneurship loose, economic growth will rapidly hit a Chinese wall.
If Chinese growth does continue at high rates, domestic production of some raw materials will increase, putting downward pressure on some prices. In fact, Chinas production is already as large as, or larger than, its consumption in aluminum (where fears of dumping have been heard), steel products and coal. As Priscila Kalevar of TD Economics suggests, the influence of Chinese demand has to be considered commodity by commodity, raw material by raw material, and each base metal has to be examined individually.
In any event, an increase of resource prices is not an economic problem per se. It just means that, relatively to them, prices of other goods and services are going down (even if general inflation can hide this phenomenon behind the veil of money). It is through the change of relative prices that markets adapt to changing circumstances, convey useful information and transmit incentive signals.
This being said, if the past is indicative of the future, resources will become less, not more, scarce and their real prices will continue to fall. Consider aluminum, which is now US$0.84/lb; in dollars of 2004, it was US$1.74 in 1980, US$4.50 in 1913 and many times that price in the 19th century. More generally, The Economists index (the lower chart) indicates that commodity prices (excluding oil and precious metals, but including foodstuffs) dropped 70% between 1845 and early 2005.
If we forget about relative prices and consider instead the general standard of living, the advent of new producers on the market can only fuel general prosperity (although we must admit that there will be some losers among those who wont adapt). Broad benefits are generated by exchange and the division of labour. Currency exchange rates adjust to absolute advantages, and relative prices govern trade according to comparative advantages. This reminds us of Says Law: Supply creates its own demand.
An alternative way to exorcise Malthusian fears is to realize that the relative price of labour (that is, relative to consumer goods and services) increases as growth proceeds, so that more goods made from resources can be purchased. For example, the price of oil or copper in terms of salaries has dropped by 90% since the 1860s.
Thus, there is no reason to fear Chinese demand pushing up resource prices. Even if the relative prices of some resources do increase, it may very well be a transitory phenomenon. If it is not, the reversal of the secular downward trend would simply signal that, despite a higher standard of living, some resources have become scarcer and should be consumed more sparingly.