SOUTHERN CHINA HAS been seeing its heaviest summer rains for 60 years, bringing floods, widespread destruction of crops and more disruption to supply chains.
Hundreds of thousands of Guangdong and Guangxi residents living around the Pearl River delta have been evacuated after a week of persistently high rains. State media have aired footage of people being rescued with ropes and rubber dinghies, and cars floating down streets. Several cities in Guangdong have raised their flood alerts to the highest level.
The rain has disrupted manufacturing and shipping, already suffering under strict anti-Covid measures. Particularly in the more mountainous north of the province, where the flooding is most severe and landslides have happened, businesses were ordered to close temporarily, and public transport was suspended as rising waters approached dangerous levels. The direct economic loss so far is estimated at more than 1.7 billion yuan ($250 million).
To the north of Guangdong, Jiangxi province has also raised its flood warnings. Officials report direct economic losses already reaching 470 million yuan, with 43,300 hectares of crops inundated.
In neighbouring Hunan province, 21,607 hectares have been damaged, and there are reports of landslides and building collapses.
China’s National Meteorological Center warned that downpours could continue for another week, although the heaviest rains are expected to move northwards across central China from mid-week.
In recent years, climate change has made the south wetter and the north hotter and drier.
US LEGISLATION BANNING the import of products made in Xinjiang unless the importer can prove the product was not created with forced labour went into effect today.
The Uyghur Forced Labour Prevention Act was passed last December and presumes that goods from Xinjiang are made with forced labour. That flips on its head the burden of proof required under existing US bans on importing products made with forced labour.
The act has been roundly condemned by Beijing.
Given the near impossibility of US importers verifying their Xinjiang supply chains on the ground as independent auditors are being denied access, the law will become as good as a blanket ban. How it is implemented, particularly the rigour with which US authorities pursue the diffusion of Xinjiang products throughout supply chains in the rest of China and the region, will determine how dampening the blanket is on trade.
Xinjiang produces more than 90% of China’s cotton, which is used by the textile and apparel industries across the country. Thus the impact of the law will be widespread in those sectors.
According to the South China Morning Post, stocks of unsold cotton are piling up at Xinjiang mills as US importers get their supply chains into compliance. With the next harvest less than three months away, half the cotton harvested last autumn has yet to be sold.
Xinjiang is also a grower of tomatoes for export and a producer of solar-grade polysilicon and electronics components.
The act will further harm China-US relations, regardless of any cosmetic changes the Biden administration may make to Trump-era tariffs on Chinese imports of consumer goods, semi-manufactures and raw materials.
CHINA WILL NOT be immune from the global economic impacts of the Ukraine crisis.
Higher prices for energy and food and metals commodities — Russia and Ukraine are significant producers of all three — will raise inflation, providing a drag on real GDP growth. Almost certain recessions in Ukraine and Russia due to the fighting and sanctions, respectively, and an intensification of existing bottlenecks in global supply chains for raw and intermediate goods will exacerbate the impact.
It is too early to know the severity of these shocks, given their dependency on the outcome of the crisis. However, some scenario-based estimates are being made.
One set that crosses this Bystander’s desk comes from The Conference Board, a US business research organisation, which produced the chart above. Assuming an oil price averaging $125 a barrel in the second quarter of this year, The Conference Board estimates that China’s GDP growth for this year will be reduced by between point two and point five of a percentage point and by the same amount in 2023.
By comparison, the comparative numbers for the world economy are reductions of 0.4-0.9 percentage points and 0.1-0.3 percentage points, respectively.
Long-term energy contracts and the likelihood of buying more discounted Russian energy and agricultural commodities such as wheat that Moscow will not be able to sell into sanctioning markets will somewhat mitigate the impact on China. Nonetheless, the Conference Board is forecasting a 0.5-1.5 percentage points increase in year-on-year consumer price inflation in China for this year and a 0.1-0.8 percentage points increase in 2023.
Those will be unwelcome numbers for authorities already struggling to tame politically sensitive energy and food price rises.
The Ukraine crisis will add to the challenge of meeting the newly announced target of 5.5% GDP growth for this year. That was already looking ambitious. Headwinds from the real estate slump, the cost of the zero-Covid tolerance policy and the measures imposed by the United States to limit Chinese access to US capital, technology and intellectual property are already slowing the economy’s momentum.
THE TIMING OF the announcement by China’s customs authorities that they would approve all Russian wheat and barley imports — just hours after Russia launched its invasion of Ukraine — seems barely coincidental.
It also underlines how China is acting in its national interest as much as supporting its neighbour.
Presidents Xi Jinping and Vladimir Putin agreed to the end of the import ban when the latter attended the Beijing Winter Olympic Games earlier this month.
State media is suggesting that shows there is no connection between lifting the import ban and the invasion of Ukraine. However, that line raises more questions than it answers about how much Xi and Putin discussed Russia’s plans in advance.
Russia is the world’s largest wheat exporter, with around an 18% global market share. It has been excluded from the Chinese market because of concerns about introducing dwarf bunt fungus (seen in the photograph above) — a disease that can stunt wheat and other crops, reducing yields by up to three-quarters.
China often cites phytosanitary reasons to justify non-tariff barriers to trade, but the fungus is a serious threat; hitherto, China had zero tolerance for dwarf bunt spores in imported grain. Putin agreed that Russia would suspend wheat shipments to China if the contaminants were found.
For Russia, the agreement offered the reassurance of a secure buyer to mitigate possible Western sanctions. For China, it will mean a supply of cheap wheat to offset the looming shortages caused by flooding that disrupted last year’s sowing season across one-third of the country’s wheat acreage. Food security is a priority concern for Xi.
With 1.4 billion mouths to feed and rising use of wheat for animal feed, China is already the world’s largest wheat market, accounting for shy of one-fifth of the world’s consumption. It has somewhat opaque import quotas established when it first joined the World Trade Organization in 2001 that were intended to open up the market. Imports are running at well below allowable volumes. There is headroom to expand imports from Russia.
Some reports suggest that this new trade will be settled in yuan, not the dollars customary in commodities trading. That will be easier as some of the imported wheat will come from Chinese-owned farms in Russia’s Far East that up until now could only sell their produce in the domestic Russian market.
The two countries’ central banks agreed a three-year $24 billion currency swap in 2014 to facilitate trade financing in yuan. This has been renewed twice since. One effect has been to reduce the dollar’s share of financing of Russia’s exports to China from almost all of it in 2013 to around 40%.
In January, Russia’s state-owned Gazprom signed a 30-year contract to supply natural gas to China’s northeast from the Russian Far East. This will be priced in euros to avoid using dollars. Beijing insisted on favourable terms given Moscow’s desire to diversify its export markets for its energy since the sanctions imposed for Russia’s annexation of Crimea in 2014, which also produced a cut-price supply contract.
Russia has been building up its reserves of euros and yuan at the expense of the dollar since the imposition of the sanctions for annexing Crimea. Since 2017, the yuan’s share of Russia’s foreign-currency reserves has risen to 13% from 3% and the euro’s share to 32% from 22%, while the dollar’s share has fallen to 16% in 2021 from 46% in 2017.
The two countries’ central banks agreed a three-year $24 billion currency swap in 2014 to facilitate trade financing in yuan. This has been renewed twice since. One effect has been to reduce the dollar’s share of financing of Russia’s exports to China to around 40%, against almost all of it in 2013.
When they met earlier this month, Xi and Putin said they aimed to raise their countries’ bilateral trade to $250 billion from $140 billion last year. China will dictate the terms with a hard head more than a friendly heart.
RECORD RAINFALL IN Henan province has caused extensive flooding and left at least 12 people dead.
The twelve who died were trapped by rising waters in the metro system in Zhengzhou, the provincial capital which lies on the southern bank of the Yellow River. More than 500 others were rescued from flooded trains and platforms underground.
The city experienced two-thirds of its annual rainfall in 24 hours spanning Monday and Tuesday. The silt-rich Yellow River often floods during the rainy season from July to October.
Some 100,000 residents have also been evacuated from the city, known for being a centre for iPhone assembly at a Foxconn plant, though the company says that the flooding has not affected operations.
More than a dozen cities in the province have been deluged. Property damage is extensive. Henan accounts for a quarter of the country’s annual wheat harvest.
Concern is mounting that a breached dam in Luoyang city could collapse. Several reservoirs whose water levels are above safety levels also pose a risk of further disasters, as do landslides.
Forty-five years ago 125,000 people lost their lives in flooding in Henan, many in incidents that occurred after the initial flooding.
Thousands of rescuers including soldiers are being deployed in a huge rescue effort. State media is actively countering social media grumbling about the lack of warnings of flood risk ahead of the heavy rains.
Local officials have been told to act pre-emptively where they see danger and not wait for instructions from central authorities. This would suggest that lessons have been learned from the slow initial response to the Covid-19 outbreak in Wuhan, where municipal officials were accused on not acting swiftly enough to contain the outbreak.
The flooding in Henan is the latest example of extreme weather around the world.
IN THE 1950s and early 1960s, there was serious concern that Asia could not feed itself, particularly China, afflicted by the famine induced by Mao’s Great Leap Forward.
That is a distant memory thanks largely to the agronomist Yuan Longping, ‘the Father of Hybrid Rice’, seen above in a 1981 photograph. Yuan died in hospital on May 21 following a fall in March. He was 91.
Yuan was a pioneer in developing the higher-yield hybrid rice varieties that fed China and the region’s growing population. An estimated one-fifth of all rice now comes from hybrid species resulting from his breakthrough discoveries.
He started work on these while teaching at Hunan Agricultural University in Anjiang in Hunan province in the 1950s, publishing his first research paper in 1964. His first cross-breeding successes came in the early 1970s; he developed his breakthrough hybrid, Nan-you No. 2, which yielded 20% more than existing rice varieties, in 1973, by when he had become a research professor at the Hunan Academy of Agricultural Sciences.
Yuan and his colleagues had refined their seed production technologies by 1975, allowing the large-scale production of hybrid rice to begin. Nan-you No. 2 was put into commercial production the following year.
According to obituaries in state media, the difference in yield was sufficiently great to feed an additional 70 million people a year. With higher yields, farmers could grow more rice and switch hectarage to other crops to provide greater food security.
Yuan presented his work to the International Rice Research Institute in the Philippines (IRRI) in 1979, setting off an avalanche of regional hybrid rice research. Our man wet to the calves from standing in paddy says he recalls the stir that Yuan’s presentation caused.
In 1984, Yuan was appointed the inaugural director-general of the China National Hybrid Rice Research and Development Center in Changsha and took on a growing national profile in advancing agricultural research inside China and promoting hybrid rice and China’s scientific standing internationally. He received the highest state honour, the Medal of the Republic, in 2019.
Yuan continued to develop hybrid rice strains that could adapt to different growing environments, working most recently on rice that could grow in saline-alkali water, until shortly before his death.
Recognised internationally for his work, if not the household name outside his field that he was in China, Yuan shared the prestigious World Food Prize in 2004. His citation said he had ‘discovered a genetic phenomenon in rice and then developed the technologies essential for breeding the first hybrid rice variety ever created’.
It also said that Yuan had ‘helped create a more abundant food supply and more stable world’. A finer epitaph no man could hope for.
WORD ARRIVES FROM our man in fruit and veg that Taipei is not taking the rough end of the pineapple, as the Australians say, when it comes to Beijing’s ban on Taiwanese exports of the large juicy tropical fruit to the mainland.
At the start of this month, the General Administration of Customs started refusing entry to Taiwanese pineapples, citing pests. Taiwanese pineapples are susceptible to some forms of mealybugs and thrips. However, Taipei’s view is that the incidence is minimal and that China is indulging in fake biosafety by banning all pineapples, and that the action is political.
Zhu Fenglian, a spokesperson for the Taiwan Affairs Office of the State Council, counters that calling the move political smears the mainland, which does not get either side anywhere.
Taiwan consumes around 90% of the pineapples it grows, exporting the remaining 10%, overwhelmingly to the mainland. Our man tells us that Taiwan is the world’s sixth-largest exporter of pineapples with a 3% share of the global market, a trade worth some $65 million in 2019 and growing fast. China buys around four-fifths of Taiwan’s fresh and frozen fruit exports in normal times.
Taiwanese have responded to the pineapple ban by clearing grocery shelves and market stalls of local pineapples, while restauranteurs are doing their bit by adding pineapple to their recipes. Japanese and Canadian diplomats have been photographed next to pineapples in support. It was a Canadian who first thought of putting pineapple on pizza, apparently. Who knew?
The hashtag #FreedomPineapples has appeared on social media, echoing the #FreedomWine hashtag that emerged in Australia during that country’s recent contretemps with China. It is also a more distant echo of Freedom fries, as some Americans re-branded French fries in the wake of some perceived slight by Paris after 9/11.
China’s main fruit exports to Taiwan are apples, but it was a small trade worth barely $6m in 2019, so tit for tat retaliation seems unlikely. After pineapples, sugar apples are next largest fruit export to the mainland from Taiwan, which has developed a pineapple-flavoured hybrid as if the knobby, custard-flavoured fruit is not sweet enough in the first place.
If Beijing chooses to escalate from prickly to knobby, this could get very sticky indeed.
DESPITE HEFTY PURCHASES that could lead to a record year for US food, produce and seafood exporters, China is still behind the pace necessary to meet its ambitious agricultural commitments under the Phase One US-China trade agreement signed in January.
As of October, China had bought $23 billion of US agricultural products this year, according to a status report on the agreement released jointly by the Office of the US Trade Representative (USTR) and the US Department of Agriculture (USDA).
As part of the trade deal, China promised to increase its purchases of US agricultural products by $32 billion over two years from a 2017 baseline of $24 billion. That implies an annual run-rate of $40 billion.
The $23 billion figure includes purchase contracts that have not yet been completed. Actual imports in the first nine months were worth $12.9 billion. They would have needed to have been around $25 billion-27 billion at that point to be on track (although as this Bystander has noted before, Beijing has the full two years to make good on its commitment, so there is time to catch up.)
Intriguingly, the US report puts a favourable spin of China’s performance, by calculating China is at the more creditable level of 71% of target for 2020, a number it has arrived at by taking into account that the agreement did not come into force until mid-February. For the Trump administration, that approach also puts a gloss of success on a deal that has been a political headliner for the president.
The US report also notes, probably more importantly, that Beijing has implemented 50 of the 57 commitments with deadlines that it made to reduce and eliminate structural, non-tariff barriers to US agriculture in China’s market.
A lot of the market-opening measures are the quotidian work of trade negotiators down in the weeds of the six-digit level of trade classifications, such as lifting restrictions on US almond meal pellets and cubes and expanding the list of ports through which processed meat may enter China. Some of it is, frankly, cosmetic, such as the ending of the four-year ban on poultry imports because of avian ‘flu concerns that was wrapped into the agreement but would probably have happened regardless.
Nonetheless, the latter has given US poultry farmers $436 million in sales in the first eight months of this year, and the cumulative impact of the changes to import rules and regulations will most likely have longer-lasting benefits for US farmers than the headline-grabbing target of two years of additional exports.
Sales of US corn, sorghum, soybeans, beef and pork have been strong, pointing to record years for several of those categories. That is in part because of the market opening measures of the agreement, and in part for reasons of domestic Chinese demand. Swine ‘flu decimated domestic herds, creating a massive shortage of pork. Food crops, especially cereals, have been hit by a bad year for flooding, drought and insect infestation. This year China needs larger than usual imports of corn and soy for animal feed, as well as more beef to satisfy the appetite of a growing middle-class that can afford and wants to eat more meat.
China’s diminishing ability to feed itself has been a long-standing concern. Urbanisation and desertification have reduced its arable hectarage to close to levels at which the country cannot grow all the food it needs to sustain itself. For many years, China has been securing foreign feedstocks, produce and farmland.
President Xi Jinping recently warned that China must maintain what he called a sense of crisis about food security, which may be overegging the pudding. It is a concern, not a crisis. The country has made steady gains in raising yields from shrinking hectarage and maintains a high degree of food self-sufficiency.
However, the number of mouths to be fed is not getting smaller. Nor are expectations of richer and more varied diets diminishing, requiring ever more animal feed for Chinese farmers to produce the meat and dairy products to satisfy growing demand in the affluent cities.
Higher agricultural productivity as well as crop yields will be critical. Last week’s Plenum communique notably highlighted developing agribusiness and reforming the rural economy as objectives of the next five-year plan and the longer-term goals to 2035. For now, foreign imports will be need in some volume. US farmers can be relieved that creating a US-free food supply chain is not yet at least the national priority that it is with technology.
IN ANOTHER YEAR, the worst flood season in more than two decades would be a significant crisis to test authorities. The damage to crops and livestock from June and July’s torrential rains, precipitation that was far heavier than usual, is substantial, and a reported 3.7 million people have been displaced. But the economic loss — put by state media at 145 billion yuan ($21 billion) as of the end of July — is not as severe as that caused by the Covid-19 pandemic.
The Yangtze and its tributaries in Hubei, Jiangxi and Anhui in central and eastern China are the areas worst affected by the flooding, with the response in Jiangxi said to be on ‘a war footing’. Thanks to improved flood control and emergency management, however, the death toll has been relatively light for the scale of the disaster: 158 people dead or missing, according to the latest available figures.
Early in June, a 1960s-era dam in Guangxi collapsed under the pressure of building floodwaters, raising concerns about the safety of hundreds of other similarly aged dams, and for the massive and iconic Three Gorges Dam (seen above) on the Yangtze (which is of later vintage, having not been completed until 2003).
Those concerns were amplified by state media reports of non-critical parts of the dam becoming slightly deformed’, although the main structure was said to be intact. Its collapse would be a disaster not only in human terms for the millions of people who live downstream, but also the Party. Its flood gates have had to be raised repeatedly to ease the pressure — and again three times this week ahead of a renewed surge in floodwaters expected on Friday — but so far, so good.
None the less, the impact on agriculture is being reflected in the pick-up in inflation in July as food prices rise. More than two-thirds of China’s rice is grown in the Yangtze basin, and this year’s crop would have been near to harvest when it was flooded.
Authorities have been releasing crops from strategic reserves both to ensure adequate supply and to keep a lid on inflation. This includes more than 60 million tons of rice, 50 million tons of corn and more than 760,000 tons of soybeans, surpassing the volumes released during the whole of 2019.
WE ARE DUE to get a reading on China’s economic recovery on Thursday with the publication of the second-quarter GDP figures.
The consensus forecast of economists is 2.5% year-on-year growth, turning around the 6.8% decline in the first quarter, which was slammed by the onset of Covid-19. Stimulus measures, including more fiscal spending, tax relief and cuts in lending rates and banks’ reserve requirements, should be starting to take effect.
Today’s trade figures provide some support for that outlook. Both exports and imports rose in June, reversing year-on-year falls the previous month. Exports rose by 0.5% year-on-year in June after falling by 3.3% in May, and merchandise imports rose by 2.5% year-on-year having fallen by 14.2% and 16.7% in April and May, the General Administration of Customs reported.
The numbers require some careful unpicking, however,
First, although increased exports reflect demand beginning to recover in the rest of the world as countries reopen, within China supply is recovering faster than demand, suggesting a drag on growth.
Second, imports from the United States rose by 11.3% year-on-year after three months of double-digit declines. A clue to why lies in China’s total imports of agricultural products, up 17.8% in June year-on-year after a 29.0% gain in May; imports of soya beans rose by around one-third for a second month.
Separately, the US Department of Agriculture reported that China has made to of its three biggest single-day purchases of corn within four days of each other in July, a total of 3.12 million tonnes of the grain.
This suggests efforts on Beijing’s part to implement the Phase One US-China Trade Agreement signed in January, despite the frayed relations between the two countries over a range of geopolitical issues from the Covid-19 pandemic to renewed contestation over the South China Sea.
Nonetheless, China’s US purchases are behind pace to meet the ambitious goals of an additional $200 billion of additional US imports, $80 billion of which are to be agricultural produce. However, China has until the end of the stipulated two years to meet the targets. In contrast, US Donald Trump needs demonstrable evidence his trade deal is working ahead of November’s US presidential elections.