In this file:
· China Inflation Goes 'Hog Wild' Thanks To Revenge Tariffs
· Pig disease exposes weakness in system
China Inflation Goes 'Hog Wild' Thanks To Revenge Tariffs
· Pork price inflation rose 14.4% year-over-year in April after rising 5.1% in March.
· China’s ammo against tariffs is not limitless. A weaker yuan is bad for inflation, too.
Kenneth Rapoza, Senior Contributor, Forbes
May 13, 2019
China is set to increase its inflation rate now that it is certain that retaliatory tariffs on numerous food items are going from 5% to 25%.
China’s core inflation rose to 2.5% annualized in April from 2.3% in March. Inflation remains low, despite tariffs, similar to the tariff war’s impact on U.S. inflation. In the first quarter, China’s inflation was just 1.8%, which is similar to the 2.1% in all of 2018. Most of the hike is due to higher imported food costs. Food prices were up 6.1% year over year in April, up again from March’s inflation rate of 4.1% annualized.
Monday’s announcement of higher tariffs on U.S. food will give rise to inflation concerns in China, turning investors bearish short-term. China markets are now becoming more beholden to the whims of government stimulus.
Extra tariffs were expected today. They go into effect June 1. Equity indexes fell worldwide. The China A-shares CSI-300 Index is down nearly 10% from its April 5 high. It would have been a pleasant upside surprise had China’s A-shares gone up at this point.
Beijing’s revenge move comes after the U.S. hiked tariffs to 25% from 10% on $200 billion worth of goods, a move that was supposed to occur on March 1 but was deferred on good faith that trade negotiations were going somewhere. Apparently they are going nowhere as President Trump ordered his trade representative to prepare for tariffs on everything China sells to the U.S.
Perhaps the most readily available evidence that tariffs are impacting inflation in China is the whopping 62% tariff on U.S. pork. While China also has an animal health crisis on its hands, adding to higher pork costs, new food tariff schedules are not helping.
African Swine Fever outbreaks in China have been reported less frequently by the Ministry of Agriculture & Rural Affairs (MARA) in 2019, but the damage has increased as some big farms have reportedly lost thousands of animals.
According to MARA, China’s pig stock fell 18.8% in March after a 16.6% fall in February and a 5% drop last year. Health issues have also cut into new piglet births in China, boding poorly for hog and pork supply in coming years. Nomura Securities analysts say they expect pork prices in China to go up by 30% this year.
MARA press officer Wang Junxun said there was a risk of a more severe shortage in hog supply in coming quarters. In an ideal world, this would be a bonanza for the U.S.
As of Monday, it is unclear if China is going to impose other restrictions on U.S. pork. It is hard to imagine tariffs going up further. They were 12% before tariffs began last year.
Smithfield Foods, one of the largest U.S. pork producers and owned by WH Group, the largest pork producer in the world, did not want to comment on pork exports to China. According to the National Pork Producers Council (NPPC), all U.S. companies were seeing declines from the tariffs. No companies were getting special treatment from Beijing, the pork industry group said.
NPPC estimates the industry lost around $1 billion last year. The industry supports roughly 110,000 jobs.
China Inflation Goes Hog Wild
China’s inflation is hog wild, but only insofar as pork meat is a huge headwind to headline CPI there. The 2.5% inflation rate of April was still in line with consensus forecasts.
What’s gone up is pork meat, a staple of the Chinese diet. Pork price inflation rose 14.4% year-over-year in April after rising 5.1% in March. In monthly terms, pork price inflation rose 1.6% after rising 1.2% in March. That’s a monthly rate, not a rolling 12-month rate.
Then there vegetable prices. China is set to hike prices on U.S. vegetables, though this requires a deeper dive as China may have easily available sources elsewhere.
For pork, China also has other avenues for supply, even tough the U.S. is the world’s leading exporter. Tariffs make the U.S. less competitive to rival exporters like Brazil and Canada.
Vegetable price inflation rose to 17.4% annualized in April after rising 16.2% annualized in March. The first quarter saw prices up nearly 7% for China veggies, a little less than the 7.1% last year. Monthly prices for vegetables are in decline, however.
What is amazing about this trade war is that so far neither country has seen overall increases in core CPI. Certain products, including major ones like pork meat, have surely been impacted by tariffs. The same is likely to happen in the U.S., especially if Trump makes good on his promise to tariff all Chinese goods at American ports of entry. But to date, no one can say that tariffs have caused a marked increase in inflation.
U.S. companies pay the tariffs when they receive their orders at a port. Companies can either convince their Chinese suppliers to lower the price to make up for the tariff increase or they’ll have to look to cheaper markets. When that option is not readily available, companies may have to start transfering these higher tariff charges to end-users.
Inflation hikes will test the patience of the Federal Reserve and the People’s Bank of China, both in relative easing mode.
China’s exchange rate could be manipulated to take the heat off tariffs. The yuan has gone from 6.77 to the dollar to 6.87 in the last three trading sessions. Last year, Beijing allowed the yuan to depreciate against the dollar right after the first shot of the trade war.
But in the past six months, in order to appease Washington and to stabilize domestic financial markets, Beijing pretty much pegged the yuan to around 6.70.
Ting Lu, a China analyst for Nomura, says he expects the yuan to weaken further. It nearly 4% against the dollar between November and April, helping convince Washington that China would not pump yuan into the market in order to weaken it and make tariff hikes moot.
China’s ammo against tariffs is not limitless...
Pig disease exposes weakness in system
· Despite mainland provinces reporting cases of African swine fever for months, Hong Kong appears to have been ill-prepared for its first case
Editorial by SCMP Editorial
South China Morning Post (SCMP) - 14 May, 2019
With 90 per cent of Hong Kong’s food imported, there needs to be effective safety surveillance to ensure only products suitable for consumption make it to the dining table. Unfortunately, it does not appear to be the case with pork. By the time the first African swine fever case in the city was confirmed on Friday, an unknown number of pigs from the same imported batch of animals had already been sold. The ensuing action by the government to kill those pigs in stock also leaves much to be desired.
Given dozens of mainland provinces had been affected since last summer, it seemed only a matter of time before the disease spread across the border. But the government appears to have been ill-prepared. The infected pig arrived from a Guangdong farm on May 2, but it took more than a week for officials to confirm the virus and alert the public. Although swine fever poses no risk to humans and thoroughly cooked pork is generally safe to eat, the delay in alerting the public has inevitably caused unease.
In line with arrangements in place should another outbreak of bird flu occur, the culling of some 6,000 pigs at an abattoir in Sheung Shui was necessary to prevent further infection. The government has over the past two decades had experience in killing millions of chickens, but this time the cull did not go so smoothly. Angry traders initially blocked the move, saying there were no grounds to kill those animals that arrived days after the case was discovered. However, they backed down once officials offered to compensate them. The drama has exposed a breakdown in communication between the government and the industry...