Garlic or Gold: What Drives the Chinese Market?

"Speculators' targeting of garlic, ginger and mung bean is unique to China."

Speculators' targeting of garlic, ginger and mung bean by is a situation that is unique to China and not seen in the rest of the world, said Yao Jingyuan, chief economist of the National Statistics Bureau of China, although gold is certainly another opportunity for investors thanks to soaring gold prices in China in 2010.

But is agricultural speculation overshadowing gold in China?

Zhao Xijun, deputy director of School of Finance, Beijing-based Renmin University, gave a few reasons why agricultural products, like garlic, ginger and chilies, can be so vulnerable to speculation in China.

The small scale of agricultural supply and demand makes it easier for small speculative capital to control. And because consumers are very reliant on those products in their daily life, they are more affected by fluctuations in price.

Lv Suiqi, deputy chairperson of the Department of Finance of Peking University, said that speculation is increasingly more active in China due to the development of the market and growing demand for more investment opportunities.

China's yet-to-be-developed stock market, which boasted the second largest capitalization but recorded one of the worst performances in major world capital markets in 2010, is another incentive for investors to shift to other better, easier opportunities, according to Lv.

Gold and real estate are traditionally thought to be good shelters for investors seeking to retain and raise the value of their wealth. However, they are reserved "for a smaller group of affluent players," Zhao said.

Even for that small group, the risks of those products should not be played down. Lv warned that gold prices are largely subject to the U.S. dollar. Although the demand for gold is still high, in the long term gold prices could be hit hard by U.S. recovery.

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