Why China faces rising inflation risks

Live pig auction price in Hong Kong surged to HK$1,303 per 100 catties on Tuesday, up over 30 percent from April, according to data released by the city's health department. More than 90 percent of Hong Kong's live pig supply comes from mainland China. China's live pig price also spiked 33 percent to 13.7 yuan per half kilo from April, which is in line with the price increase in Hong Kong.

The pig price rally was due to three factors: swine fever, bad weather, and US-China trade war. The question is whether the price uptrend will sustain or it is just a short-term phenomenon.

Chinese officials have vowed to hit back at Trump with tariffs on US soybeans, automobiles and commercial aircraft. Beijing, as a matter of fact, has imposed 25 percent tariff on US soybean imports since July. Last year, the US exported US$14 billion worth of soybeans to China.

Soybean farmers have been among Trump's supporters during his presidential election campaign. By imposing tariffs on their produce, China will hurt Iowa and other farm states, landing a blow to Trump.

But the move is a double-edged sword. China, the world’s largest soybean importer, brought in 95.53 million metric tons of soybean last year, representing 87 percent of its total soybean consumption.

Brazil is China’s biggest soybean supplier, shipping 50.93 million metric ton last year. US is the second largest source, exporting 32.86 million metric tons of the produce to China last year.

The tariffs on US soybean have pushed up the cost of US soybean imports, and also prompted other nations to raise their prices.

Soybean is a main ingredient for animal feed in China, and animal feed accounts for 75 percent of the total costs of raising a hog. Therefore, rising soybean import costs would definitely be priced into pork prices.

Meanwhile, China reported an outbreak of the deadly African swine fever in Liaoning province on August 1. It's estimated that the nation has culled over 14,000 hogs and rushed to control the highly contagious disease.

A genetic analysis indicates that the virus found in China is closely related to a strain circulating in Russia last year. Imported Pork from Russia might be the culprit.

To make things worse, heavy rains hit eastern and southern China this month, which has hampered transport of agricultural products.

Meanwhile, housing rental costs in major Chinese cities have shown rapid growth in recent months. Combined with more expensive food, that might be a prelude to a wave of vicious inflation in China.

This article appeared in the Hong Kong Economic Journal on Aug 24

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC