What Pigs and Cement Tell Us About China's Economic Strategy

BEIJING (TheStreet) -- Anyone who follows China's pork and cement markets knew well in advance of Friday's CPI report for April that the country's headline inflation rate would hit the skids.

Astute observers of pork and cement are also in a good position to predict how the government will respond to a decline in the consumer price index to 1.8% last month -- the lowest inflation rate since October 2012 -- and other signs of a decelerating economy.

Based on Beijing's moves in recent weeks to support falling pork and cement prices, more and perhaps more carefully targeted market intervention steps can be expected.

Prime Minister Li Keqiang has ruled out a major government stimulus, insisting Beijing wants market forces to fine-tune the economy, even if that means letting some areas of the manufacturing sector shrink. He's aware that debt from a 4 trillion-yuan stimulus launched after the global financial crisis in 2008 is still haunting China.

But Li is also keen to hit the government's 2014 GDP growth target of 7.5%. He stressed that goal again this week at a conference of African leaders in Nigeria's capital Abuja.

"We have the confidence and ability to meet these objectives, that is, a growth target of 7.5% for the whole year," Li said, according to China's state media. "This ensures a high level of growth that's good news for African countries, and good news for the world."

The government's ability apparently includes the capacity and will to intervene to support producers of pork, cement and other goods. If possible, Beijing does not want the slowdown in consumer demand reflected in the latest CPI figure to shutter farms and factories, thus dampening GDP growth.

The latest CPI figure, down sharply from 2.4% in March, reflected lower prices for meat, liquor, vegetables and transportation, according to the National Bureau of Statistics.

It also pointed to a deflationary trend that experts have been warning about since early April. Cai Jin, vice president of the China logistics federation, told a newspaper last month that "although there is no deflation now, this is the trend" and "a constant concern."

The government's targeted market support in areas such as pork has so far helped keep deflation at bay.

The National Development and Reform Commission, the government's chief economic planning agency, since March has been buying, freezing and stockpiling pork in a national reserve to counteract falling prices. The program recently ended a first round, but a second round is expected to begin soon.

Consumer prices for pork, China's most popular meat, declined 7.2% last month, the statistics bureau said. According to a report Friday in the Futures Daily newspaper, lower pork demand has pushed farm prices down and forced hog farmers out of business in recent months, which prompted the government's pork-buying program.

Thanks to stockpiling, "slaughtered pig prices did in fact rebound recently," a Henan Province farmer told the newspaper. Nevertheless, he said, most area farmers won't make money this year, and many have already cut production or quit breeding pigs. That's apparently why the next round of pork buying is about to begin.

"The state will soon start the second round of purchasing frozen pork for the central reserve to promote a rebound in hog prices that is reasonable and that safeguards the interests of farmers," the report said.

The government can't stockpile cement, of course, so it's adopted a more subtle approach to supporting the market by promoting regional construction projects. New projects helped cement prices rebound recently in the southern Pearl River Delta area around Hong Kong, for example, according to a Huarong Securities report.

But a slowdown for the residential property market in many parts of the country, such as Jiangsu Province near Shanghai as well as several central and western provinces, has pushed cement prices down 10% or more in recent weeks.

Propping up prices in the Beijing area, the report said, was a recent government decision to encourage development cooperation between Beijing, nearby Hebei Province and the city of Tianjin. The effort is expected to spur new construction of buildings and infrastructure as established companies and institutions relocate or open new offices in other regional cities.

"Coordinated development for Beijing, Tianjin and Hebei has been promoted as a national-level development strategy," the report said. "And regional transportation infrastructure (building) will boost demand for cement."

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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