[Analytics] China coronavirus could hit Beijing’s ability to meet US trade war deal import demands

The outbreak has driven down commodity prices and placed huge swathes of Chinese territory on lockdown, potentially disrupting purchasing demands in the US-China trade deal. Photo: AP. Sketched by the Pan Pacific Agency.

Coronavirus originating in Wuhan has sent agriculture commodity prices tumbling and led to extended shutdown of Chinese factories and markets. Many analysts, already sceptical about China’s ability to buy US$200 billion of US goods in next two years, say impact of virus could cause further problems. Finbarr Bermingham specially for the South China Morning Post.

The rapid spread of the deadly coronavirus through China could sharply curtail Beijing’s ability to meet the purchasing agreement elements of the trade deal struck with the United States earlier this month, analysts said.

As part of the phase one deal signed on January 15, China is obliged to buy US$200 billion in additional US imports over two years on top of pre-trade war purchase levels.

However, with the outbreak driving down commodity prices and placing huge swathes of Chinese territory on lockdown, analysts are warning that import targets that already seemed aspirational have become even tougher to reach. The longer the crisis lasts, the worse the damage to China’s ability to meet the purchase target.

The virus, which has drawn comparison with the severe acute respiratory syndrome (Sars) outbreak that left severe economic and psychological scars on parts of China, is also expected to make a serious dent in the industrial engine of the world’s second largest economy.

Fear over a drop in Chinese demand for key commodities has pushed down the prices of many products that form a large part of the purchase commitment in the trade agreement. For example, the price of soybeans traded on US markets on Tuesday fell to the lowest level since last May, while corn, wheat, oil and vegetable oils prices also plunged.

Analysts were already sceptical about the lofty purchase targets, since they would require a significant reshuffling of China’s trading practices and the stockpiling of commodities for which it may not have domestic demand. Beijing has maintained repeatedly in its statements on the trade deal that it would only buy US goods according to its domestic demand.

Now, if China is to meet its target of importing an extra US$32 billion in agricultural goods and US$52.4 billion in energy products over two years, it will have to buy even larger volumes of commodities, despite already filling short and medium-term demand with early purchases from nations like Brazil, increased domestic cultivation, and an African swine fever crisis that severely cut demand for pig feed.

“There are some cities and villages essentially in lockdown and this will completely hamper the movements of not only people, but also agricultural goods. So hogs that are supposed to be going to the slaughterhouse, will just not be transported,” said Andrei Agapi, associate pricing director for agriculture at S&P Global Platts in Singapore.

Meanwhile, markets in China will remain closed until at least next Monday, in an extended shutdown ordered by the State Council, China’s central government cabinet. They were already closed through Thursday for the annual Lunar New Year holiday, but with an area covering some 57 million people in 15 cities on effective lockdown, and other parts of China implementing travel bans, the government is concerned that allowing workers to return prematurely would help spread the virus.

Industries such as retail and travel will clearly be hit, but with markets and factories remaining shut after the holiday, consumption is also tipped to sag and industrial production will be severely affected.

With officials so absorbed by the spread of the coronavirus, there are expected to be fewer state directives to make the US purchases, slowing the process. There were no major purchases made before the holiday period, with China hoovering up increasing numbers of cheaper Brazilian soybeans, for example, and with purchases in other sectors yet to get moving.

“The viral outbreak definitely throws a wrench into those [purchasing] plans, not just in terms of logistics – as major ports and transport links are closed or disrupted – but also in [terms of] policymaker attention,” said Nick Marro, global trade lead at The Economist Intelligence Unit in Hong Kong. “The country will be mobilising most of its resources to handle the outbreak, which is now the top item on the policy agenda. The trade war with the US inevitably has to come second.”

Even if they wished to make purchases, private buyers could not hedge their imports, with exchanges shut since January 23 and now not set to reopen until February 3.

“Anybody that wants to buy soybeans will not be able to hedge their crush margins on the futures exchange, and that will be an additional reason why people will just hold off on their buying,” Agapi said. “Some people are also not going to be able to come to work depending on the restrictions on travel. So in practical terms, I think that is going to lower the buying base.”

China has also agreed to buy US$77 billion of additional manufactured goods from the US, a figure which may also be more challenging to meet given the likely negative impact on consumption and industry in China.

“In terms of trade, I think the impact will be largest for companies with supply chain exposures to Wuhan and other cities that are locked down. As no merchandise will be leaving soon, we anticipate some degree of disruption and payment delays,” said Carlos Casanova, Asia-Pacific economist at Coface. “A few manufacturers are based out of there, so it certainly will have an impact.”

On Tuesday, Nikkei Asian Review reported that Apple’s suppliers in China had warned that its demands to increase iPhone production by 10 per cent this year may be difficult, since their manufacturing facilities are located in Henan and Guangdong provinces, both of which have been hit by the coronavirus.

The coastal city of Shantou in Guangdong, 1,000km from the epicentre of Wuhan, was the first city outside Hubei province to go on lockdown on Sunday – a significant economic development, given that it is a hub for China’s toy manufacturing industry.

Some supply chain industry experts have suggested that the travel bans may lead to some factories idling for an extended period – creating further problems for China’s trade economy, which showed some signs of recovery in December, but which limped through much of 2019 under pressure from US tariffs.
“There is a special case – the migrant workers from Hubei province and more particularly those from the Wuhan area. Some may be infected – maybe without knowing it,” wrote Renaud Anjoran, CEO of China-focused trade and manufacturing advisory firm Sofeast, in a blog post. “They may be unable to leave their city. If you have been working with a factory where the management and/or the operators come mostly from that area, that factory might not reopen.”

The US, meanwhile, has five confirmed cases of its own, with dozens awaiting test results. The Whitehouse on Wednesday said it had not requested a blanket ban on flights from China, despite earlier reports. Such a move would represent a serious escalation and place further restrictions on US-China commerce.

Finbarr Bermingham has been reporting on Asian trade since 2014. Prior to this, he covered global trade and economics in London. He joined the Post in 2018, before which he was Asia Editor at Global Trade Review and Trade Correspondent for the International Business Times.

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