(This report, about a bubble in an unlikely commodity in China, was published in DNA edition dated December 3, 2009.)
The whiff of big money wafts across China today, but perhaps nowhere is the fragrance more overpowering than among China’s newest millionaires: garlic traders!
A touch of medical mumbo-jumbo, a sharp fall in area under garlic cultivation and a flood of bank loans have spawned a frothy speculative boom in the unlikely commodity, driving up prices 40-fold since March. Traditional investment vehicles – like property, stocks, copper and gold – have offered only a fraction of those returns, and according to official Chinese media, garlic traders are raking in the money.
To some experts, the frenzied speculation in China resembles the Dutch tulip-mania of the 17th century, but others point to three strong economic factors that are spicing up the garlic market.
For one, the area under garlic cultivation dropped dramatically from over 673,700 hectares in 2007 to about 370,500 hectares in 2008, according to the Chinese-language garlic traders’ website dasuan.cn. That happened because garlic prices plunged last year, at the height of the economic crisis, and garlic farmers responded to that economic reality by cultivating far less.
The resultant squeeze on supplies was compounded by a bit of Chinese medical superstition that claimed that garlic was a good antidote for the H1N1 swine flu infection, which has triggered a public health panic around the world. Medical experts in China have acknowledged that although garlic has medicinal properties and can kill bacteria, it is no antidote for the H1N1 virus; yet, the superstition persists. Nie Binghua, director of the Shandong Economic Management Institute, told the media that the “reduction in garlic production and a public panic over the H1N1 flu caused garlic prices to shoot up.”
The garlic market was further energised by a surge in state-directed bank lending as part of efforts to stimulate the Chinese economy, which economists fear may be spawning bubbles in the property sector and the stock market as well. In a research report, Morgan Stanley’s China strategist Jerry Lou took note of the garlic price boom, and traced it excessive liquidity in the system. “Too much liquidity in any market can lead to speculation,” he said. And since the garlic market lacks depth, it was easy to manipulate prices with even a minor shortfall in supplies.
Betting on a further rise in prices, speculators are flocking to the garlic market and taking up positions, according to media reports. Real estate speculators are moving money from that overheated market into garlic, and even wealthy coal barons are diversifying into this newest fad, the reports claim.