Virus, War Tip China Businesses into Contractionary Phase

Much of China's economy tipped into a contractionary phase this month due to virus outbreaks and geopolitical instability, according to the country's National Bureau of Statistics. 

The Bureau's purchasing managers index (PMI) declined to 49.5 in March 2022, down from 50.2 the previous month. The nonmanufacturing business index fell to 48.4 (down 3.2 points)--indicating shrinking services industry activity. An index below 50 indicates business is contracting, while above 50 indicates expansion. 

The March PMI indicates renewed contractionary pressure similar to numbers posted last September-October. The month's sub-50 index is a reversal of weak expansionary numbers posted from November to February. March has often been a strong month for the Chinese economy. The index hit 51.9 a year ago in March 2021. The index was 52.0 in March 2020 as the economy emerged from a February 2020 deep-freeze lock-down.

Compiled from National Bureau of Statistics reports.

One of the Bureau's senior statisticians attributed the low March 2022 PMI to clusters of virus outbreaks in many places and international geopolitical instability. The statistician said the virus had affected both supply and demand for goods, as some companies cut back or idled production. Some companies lost export orders due to recent "international geopolitical pressure." The index of new orders was 48.8. 

Industries with indexes at 45 or lower included textiles, apparel, communications equipment. On the other hand, industries with indexes still above 50 included agricultural processing, food and beverage manufacturing, electrical machinery and equipment. High-tech manufacturing is still in expansion mode, although its index was down from the previous month.

Economic pressure is a force for consolidation. Large companies have a PMI of 51.3, indicating they are still expanding. However, medium-sized companies have a PMI of 48.5 (down 2.9 points) and small companies have a PMI of just 46.6. 

The supplier delivery time index is 46.5, down 1.7 percentage points, indicating slower deliveries. The statistician explained that insufficient personnel on duty and poor logistics and transportation due to the virus is delaying transportation, affecting the stability of manufacturing supply chains. 

The March index of nonmanufacturing business activity was 48.4, down 3.2 percentage points from the previous month. Service businesses hit hardest by the virus include those in rail and air transport, hospitality, food service and other industries where interpersonal contact is common. Consumers not only fear catching the virus--patronizing a service establishment increases their risk of being snagged in a quarantine lockdown if China's surveillance system determines they were in the same location as an infected person. 

Other service industries are doing well with indexes over 60: telecommunications, broadcasting, satellite transmission services, and financial services. Construction has rebounded as warmer weather encourages resumption of building projects. 

ASF, cash flow, pricey corn, red tape hold back Chinese hog farm giants

Chinese pig farming tycoons moaned about problems with African swine fever, cash flow, regulatory thickets, and access to imported corn in their comments on the sidelines of last week's National Peoples Congress. 

Liu Hanyuan, chairman of Tongwei Group, fretted about a recent resurgence of African swine fever. Liu said that 7 percent of trucks had tested positive for the virus at the end of 2021--a ten-fold increase from the beginning of the year. He added that 4 percent of markets near pig-farming areas tested positive, a six-fold increase. While it is often presumed that biosecurity on big pig farms protects them from the virus, Liu revealed that incidence of African swine fever is as high as 25 percent in the biggest pig farming companies. 

According to Liu, the cost of veterinary drugs has increased 50 yuan per head this year to combat the ASF threat. Liu warned that half of the pigs entering slaughterhouses in some regions are underweight pigs (under 85 kg) that are mostly infected with ASF. Infected pigs going into the market are worsening the spread of the ASF virus, Liu said. Some crooks are introducing the ASF virus into farms, then buying up the infected pigs at a discount to illegally profiteer from the virus. 

In addition to cleaning up and disinfecting farms and trucks, the Tongwei chairman asked that authorities stop punishing local authorities for ASF outbreaks. Instead of demanding that central, provincial and local governments cost-share aid funds for ASF swine-culls, Liu called on the central government to provide the entire subsidy. He called for investigations of concealment and omitted reporting. 

China's Agriculture Ministry has not reported any African Swine Fever cases in the last 11 months.

Lin Yinsun, chairman of Zhengbang Group, complained about huge cash flow pressure facing hog-farming companies and pled for more credit support. Liu claimed that the companies support small farmers by providing them with piglets, feed and medication to fatten their hogs. It costs 2000 yuan per head to provide these materials, and costs are hard to cover with hog prices "falling off a cliff" and feed costs rising, according to Liu. He called for more credit, including mortgage loans secured by live hogs, land use rights, barns, and equipment in order to satisfy the companies' cash needs. Zhengbang Group reported incurring losses of nearly $2 billion in 2021, but Liu insisted the loans are critical to poverty alleviation and rural revitalization efforts. 

In another news article Lin Yinsun echoed Tongwei chairman Liu Hanyuan's complaint about access to imported corn. The Zhengbang chairman complained that large livestock and feed companies cannot meet their needs for corn with the small import quotas they receive and they generally do not enjoy the "policy dividends" of the quota system. Private companies like Zhengbang have to buy imported corn from state-trading companies at a high price, Lin said. He recommended that the quota be allocated to companies based on their need for corn in order to help farming companies reduce their production cost and benefit the people. 

Lin Yinsun added a complaint about red tape companies encounter when trying to build multi-story pig barns. Lin cited benefits of high-rise pig farming facilities reducing the land footprint of farms and promoting use of automated feeding equipment, "smart" digital systems, and improved biosafety measures. Some local governments limit construction of such farms and require permitting by municipal construction regulators, causing some projects to be held up by red tape. Lin asked that China's agriculture and natural resource ministries issue standardized guidelines for buildings, including swine farms in the land use policy for other facilities like greenhouses, and simplify procedures. 

Feed Company Exec Pleads for Corn Quota Reform

A Chinese feed industry executive pleaded for more access to imported corn at this week's National Peoples Congress. Chinese industry's swelling need for feed grain is putting pressure on the 20-year-old tariff rate quota system that Chinese authorities view as a necessary "firewall" to protect their farmers from import competition. 

Liu Hanyuan, chairman of the board for feed manufacturer Tongwei Group, told reporters at the National Peoples Congress that he is making recommendations to ensure feed supplies to ensure the healthy, sustained development of China's livestock industry.

Mr. Liu recommended improving the tariff rate quota (TRQ) mechanism for importing feed grains by giving feed and livestock companies import quotas in proportion to their annual production. The quota for corn--established when China joined the World Trade Organization in 2001--allows up to 7.2 million metric tons to be imported at a low tariff of 1 percent each year. The tariff for imports without a share of the quota is a prohibitive 65 percent. The quota is doled out to companies that apply to government authorities each September for a share of the following year's quota. The process of dividing up the quota among the applicants is opaque. 

The 7.2-million-ton corn import quota has been unchanged since it was established, but demand for corn has been rising rapidly. Liu said feed use of grain is having a greater and greater impact on national grain supply and demand, and imports of corn were nearly four times the quota during 2021. No one has explained how corn imports exceeded the quota by such a wide margin.

According to the article, the quota amounts received by big feed and livestock company have not been adjusted, and there was not enough low-priced imported grain to satisfy their needs. The article commented that each company has a "huge gap" between use of corn and the actual amount available. Lack of access to corn limits the development of large companies and threatens the survival of small and medium companies, the article said.

Reporters from the communist party-owned Beijing News reporting Mr. Liu's comments said food use of grain is expected to shrink 2 percent by 2025 and there could be an 80-million-ton surplus of rice and wheat by then. The reporters commented further that the imbalances between feed and food grains needs to be addressed to avoid waste via degradation of old grain stocks held in warehouses for too long. 

A list posted on the National Development and Reform Commission's web site last November (it has now disappeared) showed that 1,165 companies applied for a share of the 2022 corn import quota. That was 143 more than the previous year and the largest number of applicants since the Commission started posting the lists in 2015. More companies applied for corn TRQ than for wheat, rice, or cotton TRQs. 

Compiled from lists of applicants posted by National Development and Reform Commission.

Mr. Liu's company, Tongwei Group, had 21 branches in 10 provinces that applied for this year's corn import quota (each branch of a company must apply separately). Twins (Shuangbao) Feed Group was the top applicant for corn TRQ, with over 70 of its branches applying. Other top feed companies like New Hope, Haid, Dabeinong, Thai company CP Group, and COFCO also had 20-30 applicants each. Poultry and hog conglomerate Wens Foodstuff had 52 applicants and hog-farming giant Muyuan had 35 applicants. 

Besides feed companies the applicants for corn import quota included dozens of companies that said their products were starch, corn sweeteners, ethanol, distillers grains, amino acids, monosodium glutamate, and citric acid.

Dividing the 7.2-million-ton corn quota equally among the 1,165 applicants would give each applicant 1,175 metric tons. That would amount to less than half a percent of the average corn processing capacity reported by applicants of 280,000 metric tons.

Last September, Economy Daily--another party-owned media outlet--called the tariff rate quotas a "firewall" necessary to protect Chinese grain producers from competitive pressure. Economy Daily acknowledged that Chinese grain prices are not internationally competitive and warned that a surge of imported grains would weaken production incentives, threatening "grain industry security." 

The Economy Daily author fretted that "a few countries hope our country will expand grain import quotas," and warned that "a few people inside the country" also have this view. That would probably include the 1,165 applicants for this year's corn import quota. Economy Daily insisted that China must maintain its strategic focus and keep the current grain import policy unchanged in order to keep domestic grain production stable. "Import quotas are global quotas" and "cannot be adjusted for a single country," the article intoned. Economy Daily insisted that China "continually improves the management methods for wheat, corn and rice import quotas" to fully utilize quotas. 

Economy Daily explained that the next step is to diversify import channels and to strengthen the capacity to manage global grain supply chains in order to ensure that China can buy and transport grain.

The Economy Daily author advocated use of trade remedy measures by assessing duties on "excessive imports" to ensure "reasonable room for profit" in the domestic grain sector. However, the author warned that trade remedies must be used with caution since they can attract accusations of trade protectionism. 

Worst-ever Wheat Seedlings Highlighted After Premier's Report

The condition of this spring's wheat seedlings is the worst ever, according to China's agriculture minister as he prioritized work on winter wheat field management this spring. 

Minister Tang Renjian made the remarks as he elaborated on the Premier's March 5 Government Work Report to the National Peoples Congress. Tang described the Premier's directive to maintain this year's grain production at 650 million metric tons or more as a "war order" and a mandatory task.  

Xi Jinping's endorsement of the importance of the priority on agriculture was made clear by propaganda authorities the following day, including a social media post calling for "raising comprehensive agricultural productivity." 

The poor condition of the wheat crop is based on an assessment given by experienced wheat producers and scientists during Minister Tang's recent tour of wheat-growing areas. Before winter, the proportion of seedlings in class one or two was down 20 percentage points from usual, which Tang Renjian described as "difficult." Tang explained that extensive flooding in five wheat-growing provinces last fall delayed the sowing of wheat by about half a month on average for one-third of the winter wheat area.

Minister Tang expressed confidence that a good wheat harvest can still be achieved. He noted that their efforts had prevented the area planted in wheat from decreasing last fall. Heavy snow and rain during the winter has improved the level of moisture in the soil, and farmers and officials will soon begin their annual campaign to spray a combination of growth promoters, herbicides and anti-fungal goop on the wheat crop this spring. 

In his speech, Premier Li Keqiang recited a litany of measures aimed at stabilizing agricultural output this year. Farmers will receive another "one-time" subsidy to compensate them for soaring input prices. Minimum prices for wheat and rice will be increased (wheat prices are already far above the minimum announced last fall.) Local officials in grain-producing areas will get transfer payments to fund agricultural schemes. A long-promised program of income insurance and full-production-cost insurance is supposed to be implemented in all grain-producing regions this year.

Local party and government officials will be held responsible for keeping production stable, especially officials in urbanized areas that do not produce enough grain for their own people. Local officials have to keep agricultural land from falling below the "red line" of 120 million hectares. Farmland must not be converted to nonagricultural uses nor shifted to non-grain crops. There are targets to build 100 million mu (6.67 million hectares) of "high standard fields" each year, to designate permanent farmland, establish large and medium irrigation districts. A new national census of soils will begin this year. A directive to "fully utilize black soil and salinized land" is code for curbing erosion of the country's most productive soil and degradation of land through over-use of chemical fertilizer. The seed industry and agricultural R&D were also among the priorities. 

Supply problems are wider than grains. The Premier ordered an adjustment of hog production capacity and attention to production of livestock and poultry, aquaculture and vegetables. 

Crisis Signs in China Soybean Industry

A meeting of Chinese soybean scientists in 2019 concluded that the country's soybean industry's output was small, yields were low, and the processing sector was weak. 

Despite the ideas offered by the scientists for boosting domestic production, China's imports of soybeans during 2021 cost RMB345.9 billion ($53.6 bil), up 26.1% from the previous year, according to the National Bureau of Statistics communique on 2021 economic data. China's imports of edible oils cost an additional RMB 70.6 billion yuan ($10.9 bil), up 24%. Soybeans were one of the top-valued import commodities, exceeded only by petroleum, iron ore, electronic components, plastic, and natural gas. 

The increase in import cost reflected a boost in prices. The volume of soybean imports was down 3.8 percent and the volume of edible oil imports was down 3.7 percent in 2021. With the value increasing 25 percent or more and volume shrinking less than 4 percent, China's demand seems relatively insensitive to price increases. 

Imports of oilseeds in January-February 2022 totaled 13.9 million metric tons, up 4.1 percent from a year earlier. 

The growing cost of grease-related imports got the attention of Chinese leaders. Another of a series of soybean revitalization programs was announced last year. An initiative to replace imported corn and soybean meal in animal feed was announced in April 2021. The central leadership's "Document Number One" on rural policy released in February 2022 featured a project to increase soybean and oilseed production capacity that included "rotation subsidies" for soybeans, transfer payments to oilseed-producing counties, conversion of rice paddies to soybeans in parts of Heilongjiang where groundwater is depleted, a plan to intercrop soybeans with corn in alternating rows, and plans to plant rapeseed on fallow land in the Yangtze River valley and a pilot to plant soybeans on saline soil. 

A 16-percent decline in China's soybean production last year set off alarm bells in Beijing. Agricultural officials had already set targets for reviving soybean acreage, and the latest 5-year plan called for a modest increase in soybean planting to 10.67 million hectares by 2025. The plan had apparently been drawn up before statistics revealed that area planted in soybeans plunged to 8.4 million hectares in 2021. The plan also called for corn acreage to be at least 42 million hectares in 2025--also before statistics revealed a surge in corn area to 43.5 million hectares last year. Corn and soybean planting data tend to be mirror images of each other since the two crops are planted in similar geographic regions, so increasing production of both crops is not realistic.

The fundamental problem is that soybean yields are low and falling behind yields of fertilizer-juiced crops like corn. China's corn yield is more than three times the average soybean yield. With soybean yields mostly stagnant while corn yields grow, soybean prices have to go up in order to keep soybeans profitable for farmers. 

Official yields from China's National Bureau of Statistics;
cost of production yields from China National Development and Reform Commission.

The latest plan for alternating rows of corn and soybeans in fields does not seem like a realistic solution. Farmers would still have to sacrifice rows of corn for low-yielding soybeans. Seems like the taller corn stalks would reduce sunlight available to soybean plants. The deal-breaker is surely the crimping of machinery use in fields with alternating rows of beans and corn. This strategy seems to require specialized machinery and agronomic attention that is beyond the capability of most farmers. The idea was rejected out of hand by colleagues when a scientist in Sichuan first suggested it. 

Another Chinese strategy of segmenting the soybean industry appears to have collapsed. Officials devised a strategy of importing GMO soybeans for crushing to make cheap cooking oil and animal feed while turning China into a reservoir of domestically-produced non-GMO soybeans for tofu and soymilk food products. China would use the non-GMO soybeans for food products and become a dominant exporter of non-GMO beans to the rest of the world. 

The strategy worked for a while. China's exports of soybeans peaked at over 450,000 metric tons in 2008. (Interestingly, this peak in exports coincided with the spike in use of melamine to mask the absence of protein in feed and milk during the global food price spike in 2007-08.) Since then, China's use of domestic soybeans for crushing became vanishingly small, China's exports of soybeans atrophied, and the country began to import non-GMO soybeans from Russia. The long-term collapse in China's soybean exports to under 80,000 metric tons in 2020 and 2021 signals growing demand at home and perhaps tighter supplies of domestic soybeans than China's statisticians have acknowledged. 

China's customs data.

The scarcity of China's non-GMO soybeans was exacerbated in 2019-20 after storms hit Heilongjiang Province--China's largest soybean-producing area--during the fall 2019 harvest, cutting production by 25-30 percent. A shortage of domestic non-GMO soybeans drove domestic bean prices sharply higher during 2020. Prices rose a bit further after the 2020 harvest and are up again after the fall 2021 harvest. The premium for domestic Chinese soybean prices over imported soybeans remains wide by historical standards--indicating tight supplies of non-GMO soybeans. 

Domestic and imported prices reported by China National Grain and Oils Information Center;
purchases by enterprises reported by National Bureau of Statistics.

Another indicator of tightening supplies is China's rising imports of non-GMO soybeans from Russia. Imports peaked at 823,000 metric tons in 2018. Industry sources say that 25-30 percent of the soybeans produced in Russia's Far East are grown by Chinese companies and farmers. Most of these beans are brought into China by truck. As supplies became tight, some food companies in Shanghai and Jiangsu began importing Russian soybeans by ocean-going vessels. 

Beginning in 2020, covid restrictions disrupted the Russia-China soybean trade. Then Russia imposed an export tax on soybeans in 2021 that further curtailed the trade. China's soybean imports from Russia during October-December 2021 were less than 100,000 metric tons, down from 250,000 metric tons during those months two years earlier in 2019. China has been trying to diversify its soybean suppliers by importing from Ukraine, Africa and Kazakhstan, but Benin is the only one supplying significant volumes. Tanzania was approved last year.

Chinese customs data; calendar year data.

Meanwhile, after much discussion of import diversification, Brazil supplied 60 percent of China's overall soybean imports in 2021.