14 October 2011

China SignPost™ (洞察中国) #48: “Transparency is Not Just for the Military: Improved commodity data reporting from China good for Chinese and global consumers alike”

Gabe Collins and Andrew Erickson, Transparency is Not Just for the Military: Improved commodity data reporting from China good for Chinese and global consumers alike,” China SignPost™ (洞察中国), No. 48 (14 October 2011).

China SignPost 洞察中国–“Clear, high-impact China analysis.”©

Just last week, the China Non-Ferrous Metals Industry Association estimated the country’s copper reserves at year-end 2010 to have been 1.9 million tonnes—roughly as much as the U.S. used in 2010 and nearly 27% to 50% higher than the previous estimates of foreign analysts (Financial Times).

We have no reason to doubt the Chinese association’s high number, particularly in light of a number of credible reports in the Financial Times and Wall Street Journal over the past 18 months regarding collateral financing schemes that boosted China’s apparent demand and stockpiles of copper and zinc, among other materials, and off-exchange hoarding of cotton by farmers hoping for better prices.

Markets are not fond of surprises and a lack of reliable data on supply and demand and inventories in China injects unnecessary uncertainty into global markets and injures consumers worldwide. The negative impacts of global commodity price volatility, coupled with China’s rise as a top consumer of a range of energy, metal, and agricultural goods, have heightened the importance of obtaining timely and reliable inventory data from the large and dynamic Chinese market.

The U.S., the world’s other commodity superpower, already has a reasonably sophisticated and transparent reporting system in place for tracking flow and volume changes in its basic material use, especially in the energy and agriculture sectors. In particular, the U.S. Department of Energy (DOE) and Department of Agriculture (USDA) regularly provide a broad range of detailed data on supply, demand, and stockpiles for oil, oil products, natural gas, and agricultural goods and typically present them in a reasonably user friendly way.

China would help all market participants, including itself, by building similar systems to bolster inventory and supply/demand transparency. To be certain, better inventory tracking and reporting will not change the reality that demand and supply can diverge drastically from expectations, but they will provide additional clarity in a timely way that can give brokers and traders a more accurate picture of what the state of the world really is, thereby permitting more rapid adjustments, and reducing the risk of destructive commodity price shocks.

It is, of course, fair to ask “why is it in China’s interest to help build more comprehensive commodity stock and flow tracking infrastructure?” The answer is straightforward: price volatility exacerbated by unexpected and irregular disclosures or leakage of information into the market harms Chinese consumers. In essence, it is better to make inventory and demand changes a routine, and perhaps even boring weekly report than to trigger destructive market turmoil as numbers fluctuate and are disclosed on an irregular and/or incomplete basis. …