Question

Crashing Commodities Are Saving China $460 Billion a Year (Links to an external site.)

Bloomberg News

January 24, 2016 — 10:01 AM CST

The pain from the rout in global commodity prices is sweeping through nations from Brazil to South Africa. The biggest beneficiary? Arguably it’s China, the nation often blamed for driving prices lower due to its slowing economic growth.

China’s annual savings from the commodities rout amount to $460 billion, according to calculations by Kenneth Courtis, former Asia vice chairman at Goldman Sachs Group Inc. About $320 billion of that is from cheaper oil, with the rest from other energy, metals, coal and agricultural commodities.

Benefits are rippling through the economy, pushing down or steadying prices of everything from home heating and petrol prices to the cost of raw materials at factories. That’s also boosting China’s efforts to recalibrate its economic growth model away from a reliance on heavy industries and investment toward consumption and services.

"It’s shown up in low consumer-price inflation and more stuff that households have been able to buy," said Louis Kuijs, the head of Asia economics at Oxford Economics Ltd. in Hong Kong and a former World Bank economist in Beijing. "Manufacturing companies would have had even worse profit developments if it had not been for those low commodity prices."

China saved $188 billion in import costs last year on a basket of 10 commodities ranging from oil to soybeans and natural gas, the Ministry of Commerce said in a statement this month. "That significantly cut the costs of domestic companies and improved efficiency," the ministry’s spokesman said.

By helping damp inflation, the commodities price slump also has given China’s policy makers more room to ease monetary policy to support economic growth, which slowed to a 25-year low in 2015. A lower import bill also helped the nation’s trade surplus surge to $594.5 billion last year, helping mitigate capital outflows that have pressured the yuan.

China is capitalizing on the lower prices, importing a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners. The country had record (Links to an external site.) imports of iron ore, soybeans and copper concentrate last year.

China is the great winner from the crash of commodity prices," said Courtis, now chairman of Starfort Holdings. "A significant portion of that windfall gain is being transferred to the domestic population."

Questions:

1. What is the major point made in this article?

2. You have learned at least 4 parity relationships in class. This article talks about at least one parity relationship. Can you identify this relationship? Briefly explain and support your answer with references from this article.

3. What does the quote from the chairman of Starfort Holdings mean, “A significant portion of that windfall gain is being transferred to the domestic population..”?

Answer 1

1) Due to fall in prices of global commodities, how it is affecting different nations. The coutries that rely on import of such commodities are benefitting the most as they tend to pay much less as compared to what they were paying earlier.

2) In this article, they are taking about Purchasing Power parity

3) Cheaper imports of certain goods resulting in cheaper cost of domestic production(where these imports are used as raw material) there by keeping consumer price low hence increase in domestic demand.