The most lucrative investment strategy in China? Go long vegetables – just be sure to pick the right one.

After the prices of garlic, mung beans and corn spiked at different times over the past few years, the humble onion is now getting its day in the sun. Chinese green onions, which resemble leeks and are a stir-fry staple, cost about Rmb7 ($1.10) per kilogram these days, five times more than a year earlier.

That price appreciation is not quite as heady as garlic’s ten-fold jump in 2009, but it would still make green onions the best-performing asset class in China in recent months.

What makes the green onion price spike even more intriguing is its unusual nature – both the timing and the cause merit further investigation.

In terms of timing, the green onion has been decidedly counter-cyclical. The other veggie bubbles came amid more general inflation in late 2009.

But in recent months, inflation has been falling. CPI slowed to 3.2 per cent year on year in February, its lowest since June 2010. Food inflation was 6.2 per cent last month, well below July’s 14.8 per cent peak.

That green onions should be so counter-cyclical suggests that broader inflation, after steadily receding, could be nearing the end of its slowdown. The jump in green onion prices could be a harbinger of stickier inflation ahead, dashing investors’ hopes for a more aggressive easing of monetary policy by Beijing.

As for the cause of the green onion bubble, it appears to be about much more than just agriculture. Dysfunctions in the Chinese financial sector could be the real culprit. Zhang Jie, a China Economic Daily commentator, laid the blame on the high-interest loans that smaller enterprises have faced over the past year.

Looked at simplistically, the increase in green onion prices appears to be a basic question of supply and demand: the age-old boom-bust problem in agriculture. Green onion prices collapsed last year, so farmers planted fewer crops and demand now far outstrips supply.

It is, however, more complex than that, Zhang said. Because green onions have a long shelf life if kept in a dry, cool environment, farmers normally put excess supplies in cold storage. But farmers, who have difficulty obtaining bank loans, rely on money lenders to cover a large portion of their cold storage costs. So when the lenders’ interest rates shot up last year to as much as 60 per cent, farmers cut their losses and let their green onions rot.

Premier Wen Jiabao vowed last week to take action to legalise non-bank lending institutions, a move that could help bring down money lenders’ rates. Perhaps he had green onions on his mind.

Related reading:
Rising food prices hard to stomach
, FT
Inflation hedge: China scrambles for egg futures
, beyondbrics

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