What The 'Garlic Bubble' Means For China's Economy

Never thought a centuries-old root could finance your new car? Think again. These days, garlic is a better investment than gold in China. One of our producers, Zoe Chace, fills in Guy Raz on what the garlic bubble means for the Chinese economy.

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GUY RAZ, Host:

But what does that have to do with the price of garlic in China? Well, it turns out over the past few months, garlic prices in one Chinese province have shot up as much as 40 times the going rate.

M: Something really odd is going on. You know, price increases like that in a product that really has a history going back, what, 5,000, 10,000 years.

RAZ: That's Thomas Easton. He's the Asia business editor for The Economist magazine. And one of our producers, Zoe Chace, has been looking into this garlic mystery. And Zoe's in the studio here with me.

Hi, Zoe.

ZOE CHACE: Hi.

RAZ: So, what's the story? It sounds like a garlic bubble to me.

CHACE: It is. It actually is. Here's the first thing you need to know about China and garlic: China produces more garlic than any country in the world. It's the biggest producer of garlic.

Last year, when the global economy collapsed, the garlic market collapsed. Nobody's buying. So this year, garlic farmers in China planted about 50 percent less garlic. And think about that in terms of China, that's a lot less garlic.

RAZ: Okay. But I mean, that makes sense. If you're a farmer and the markets down, you're gonna hedge your bets and plant less garlic.

CHACE: Yes. It should balance out.

RAZ: Right.

CHACE: But in 2009, two unexpected things happened. The first is swine flu, which we like to blame for everything.

RAZ: I thought that was El Niño.

CHACE: No, it's swine flu. People in China are very, very worried about swine flu. It's a big deal. You know how some people think that garlic can keep you from getting sick?

RAZ: Yeah.

CHACE: Okay. In China, some schools have started ordering garlic by the truckload.

RAZ: Okay, but that still doesn't account for a price increase of 40 times for garlic.

CHACE: True. But remember, a second thing happened.

RAZ: Right.

CHACE: The global economy crashed and the Chinese government pumped its banks full of money, and they wanted to make sure that lending would still be going on and people could still borrow.

RAZ: Uh-huh.

CHACE: But that sort of thing started to go wrong.

Here's Thomas Easton from The Economist again.

M: The government would like it to go into infrastructure projects and a productive economy. But the problem with money is you're never quite sure where it ends up once you put them into the system.

RAZ: I'm sorry. He's saying the extra money that the Chinese government put into the banks went into garlic?

CHACE: Exactly. And to be fair, it went into other things. I mean, the price of rice is shooting up and real estate is going up in some places. But there's nothing like the garlic bubble. It's basically out of sight.

RAZ: So, how'd it happen?

CHACE: So some smart people saw where this garlic thing was headed. Remember the banks are flush with cash. People go and they get a loan and they buy up as much garlic as they possibly can. Then they rent these warehouses and just stash garlic in it, and then they sit on it. They just sit and they wait for the price to rise, and garlic, you know, keeps basically.

RAZ: It doesn't spoil easily.

CHACE: Right. And then they flip it. Price rises, they sell high. These aren't just buttoned up investors or something. I actually talked to this one reporter from the China Daily. And she told me about this kid. He's in his early 20s. He has a middle school education. He has no job. He flipped his stash of garlic and bought a Toyota.

RAZ: He made a killing.

CHACE: Yeah. He's in the main area of garlic production in China, which is Jinxiang, and that's where the garlic frenzy is turning into some kind of gold rush.

RAZ: A garlic rush.

CHACE: Yeah. People are trying to jump on this train before it leaves the station. And some banks in Jinxiang are actually running out of money. They can't keep up.

RAZ: So people better move on this, right, because bubbles obviously burst.

CHACE: That's right, and you don't want to be the one holding the bag or a garage full of garlic. And even when this bubble pops, because it will, you know, there's going to be other bubbles just like this in China for a while.

Here's Thomas Easton from The Economist again.

M: I think the government is really at a quandary because I think it's worried that if it actually clamps down, the economy will sputter. After all, there isn't a lot of economic demand for exports from places like the United States and Western Europe. So they need to stimulate their own economy. But on the other hand, if they keep stimulating, a lot of money is going to go into these kinds of silly things and a lot of damage is going to be done.

(SOUNDBITE OF BREAD CRUNCHING)

RAZ: Well, Zoe, thanks for bringing this $40 garlic bread for me.

CHACE: It's like a giant edible gold brick from here on out.

RAZ: That's our producer Zoe Chace.

Zoe, thanks so much.

CHACE: Thank you.

(SOUNDBITE OF BREAD CRUNCHING)

(SOUNDBITE OF MUSIC)

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