In this issue: Economic and Trade Impacts of China’s Lockdowns, Experts Weigh in on China’s Food Security, Belt and Road and Five-Year Plan Monitor
Economic and Trade Impacts of China’s Lockdowns
China’s economy is showing signs of strain as lockdown-affected cities contribute about 40 per cent of China’s GDP, Reuters reports. Premier Li Keqiang has pushed for government measures to help bolster the economy and guard against “unexpected [domestic and international] changes,” the Reuters report continues. Japanese financial holding company Nomura estimates Chinese import growth will be 0.0 per cent year over year in April and import demand will fall to -3.0 per cent “as a result of the severe disruptions in factory operations, road transport and port congestion as a result of the worst COVID-19 wave and the most severe lockdowns since spring 2020.” The Global Times reports that global demand for Chinese exports is currently sluggish but that the situation will likely improve in May and June as the Chinese government strives to secure supply chains and export orders are expected to surge.
Other reports challenge the Global Times narrative which makes it difficult to understand what impact the lockdowns will have on global supply chain issues and western Canadian importers and exporters specifically. The answer seems to be that it depends how long it takes for measures to ease. In the short term, lower demand and delays may help clear up backlogs at North American ports. The longer measures take to ease, the more likely it is that we will see what IMA Asia’s Richard Martin calls “a logistics snarl that’ll dwarf anything in 2020 or 2021.” Recent reports trend towards a longer-term scenario. While the Chinese government recently banned pandemic roadblocks affecting overland shipments, the Globe and Mail cites Tommy Wu, from Oxford Economists, who says “even if highway controls are lifted in the coming weeks, the disruption will take some time to clear and will affect industrial production and exports in April and May – if not longer” Chinese ports are also impacted with Shanghai, home of the world’s busiest container port, expected to see restrictions until June at the earliest. Backlogs of trucks that can neither offload nor pick up from the port are starting to delay ships as well. In early April, the port had a “five-fold increase” in waiting ships compared to a few weeks prior. American Shipper’s Freight Waves reports that as carriers divert to other ports, port backlogs are starting to spread through the country.
Pork, beef and pea exports to China in 2022
The USDA Foreign Agricultural Service’s recently released report Livestock and Poultry: World Markets and Trade estimates that China’s pork demand will fall 20 per cent in 2022. The report estimates that Canada will see an approximately one per cent decline in its pork exports over the year because the United States will provide an alternative market for exporters due to supply tightness in the U.S. Interestingly, Brazil could see slight growth (less than one per cent) due to increased sales of pork to China as Brazil is more affordable. Canada’s beef production is predicted to drop three per cent because of drought impacts on feed while Brazil should see the Chinese market pickup.
Chuck Penner, analyst with LeftField Commodity Research, told the Western Producer that there could be some opportunity for yellow peas in China to offset reductions in Chinese stockpiles and the need for feed. Penner estimates $12 per bushel for yellow and $11-11.50 for green. He also notes that the China-Russia agreement on peas may go through. In this scenario, exporters would have to find an alternative market which would be challenging. In the long term, construction has started on a pea-processing facility in Bowden, Alberta, which will be partially operational by end of the year and fully operational in 2024 or 2025. The plant will process up to 83,000 tonnes of yellow peas and other pulses. A recent report projects China’s pea protein market will see a Compound Annual Growth Rate (CAGR) of 9.5 per cent to reach US $322.5 million by the end of 2026. Canada’s CAGR will be 7.4 per cent and Japan’s will be 7.1 per cent. The total global market will see a CAGR of eight per cent to US$4.4 billion.
Federal budget includes critical minerals strategy
The Canadian government’s latest budget includes $3.8 billion over eight years to build Canada’s critical minerals strategy. This strategy, which was explored in a previous brief, follows similar moves by the United States and Europe to counter Chinese critical resource dominance. Canada’s critical resource deposits are estimated to be worth $340 billion according to the Financial Post, and present an opportunity to expand investment in Canada’s North where most of these deposits are found. From the same Financial Post article, the budget contains $25 million specifically for Indigenous consultation on the development of projects.
Quarterly Spotlight Feature
“China re-emphasized the need for food security at the recently concluded Two Sessions. Rural revitalization to ensure agricultural supply, winter wheat support and development of a food security law were announced as priorities. How do you see this push playing out over the next few years? What opportunities and challenges should Canadian exporters watch for?”
Trevor Kloeck, Senior Manager Agriculture and Food, Edmonton Global
The strategic importance China is placing on food security makes sense in a global context considering the numerous factors the global food supply chain will see in the coming years. China has a large population to feed, and hungry populations are an enormous humanitarian and political risk. Food demand will increase substantially in coming years and coupled with geopolitical instability and the growing impacts of climate change, food availability can no longer be assumed.
On a domestic level, China has the potential to produce large quantities of food, but producing food in the short term and balancing long term environmental impacts will be challenging. This is also an opportunity for China as it will lead to the development of new technologies and if done well can actually be an environmental positive. Ecologically healthy ecosystems also have greater food productivity.
China’s push for food security will have several major impacts on Canadian agriculture in that it will create markets for Canadian ag tech and increase demand for Canadian feedstocks. The challenge will be to develop more predictive purchasing patterns so Canadian producers feel secure there is a market for what they grow. I am less concerned that increased emphasis on Chinese food security will be a threat because over the coming decades new markets will be shifting constantly.
Sharon Sun, Trade Policy Economist at the Canada West Foundation and Distinguished Fellow at the Asia Pacific Foundation
Following the Two Sessions, China’s latest Agricultural Five-Year Plan stressed instability in China’s “agricultural foundation:” the pattern of tight balance between food supply and demand and the “coexistence of structural contradictions and total shortages.” Consequently, the plan focuses specifically on science and technological innovations as a way to increase crop yield and variety, reduce waste and ensure agricultural biosecurity, reduce carbon emissions, facilitate rural development, and increase global competitiveness. This drive to achieve high-quality development in agriculture and rural areas through science and tech aligns with China’s shift from a high-speed growth stage to one focused on high-quality growth.
While achieving self-sufficiency in high-level agricultural science and tech has become a strategic choice for China, the government also recognizes the importance of reliable suppliers and international cooperation to meet growing domestic demand. Emphasis was placed on deepening international exchange and research cooperation. On reliable suppliers, the Belt and Road initiative was highlighted. Increasing regional integration through the Belt and Road and the Regional Comprehensive Economic Partnership trade agreement may threaten Canadian exporters because they compete against countries such as Australia or New Zealand who are well-integrated in the region’s supply chains.
Nevertheless, the plan explicitly focuses several areas that may be opportune for Canadian businesses. These include seed industry, soil protection and remediation, efficient cultivation technology, agricultural machinery, food processing equipment, rural domestic waste and sewage treatment, efficient utilization of agricultural waste, and food manufacturing of the future (such as functional recombinant protein, cell cultured meat, synthetic egg cream, etc.) The government indicated an increase in investment in these areas with a new list of “unveiling” projects for both domestic and international businesses operating in China to bid. This provides opportunities and first mover advantage for existing on-the-ground Canadian businesses, in accessing funds and shaping regulations in ag-tech areas new to China.
The Agricultural Five-Year Plan also contains unilateral liberalizing elements that will be important for Canadian businesses. There is an emphasis to better combine efficient market with policy coordination, “giving full play to the decisive role of the market in the allocation of innovation resources,” and working with enterprises to help shape R&D directions and regulations. The plan also explores systems such as “credit incentives” and a push to establish independent research institutions separate from government and affairs.
Finally, and most importantly, the plan calls to deepen intellectual property rights reforms for agricultural scientific and technological achievements. This unilateral reform improves the protection mechanism for businesses with agricultural IPRs and will have significant long-term benefits for Canadian businesses concerned with IP related issues in the Chinese market. Overall, these changes increase stability and credibility of the Chinese market in the longer term.
Even Pay, Associate Director at Trivium China
China’s leadership has put food security firmly back at the top of the priority list this year. At the recently concluded Two Sessions, China’s annual legislative meetings, the importance of maintaining stable food supply and prices was repeatedly emphasized. This message comes from the highest levels. In one of his rare speeches during the sessions, President Xi Jinping admonished representatives that “We cannot believe that industrialization has made… food security optional,” adding that “We cannot rely solely on the international market to solve [food security].”
China’s imports of agricultural products have grown fast over the past few decades, driven by rising incomes, which have afforded consumers more ample and diverse diets, and by policy efforts to prioritize profitability in China’s farming sector instead of self-sufficiency in crops that farmers were poorly positioned to produce. But a series of crises – the outbreak of African swine fever that decimated China’s pig herd in 2018 and 2019; diplomatic tensions with major ag exporters, including Canada; ongoing supply disruptions associated with the COVID-19 pandemic; and turbulence in international ag markets following Russia’s invasion of Ukraine – have reminded Beijing that China’s food security remains a national security concern.
China’s renewed focus on food security will bring both opportunities and challenges for Canadian agribusiness. In the short term, efforts to guarantee stable food supply at home may lead to additional buying of staple grains and oilseeds by large, state-owned companies looking to fill commodities reserves. In the longer term, China’s demand for imported food – particularly meat, dairy, seafood, fruit, organic and specialty grains and oil crops – is expected to continue growing for at least the next decade driven by the rapidly expanding middle class. Canadian exporters that can supply this market will stand to benefit, provided the diplomatic relationship can be kept on an even keel. Further, Beijing’s efforts to shore up the domestic Chinese farming sector may create opportunities for Canadian fertilizer producers and suppliers of farm equipment or agricultural technology appropriate to China’s context. However, it should be noted that along with these opportunities, Canadian suppliers will face growing competition – both from competitors worldwide, and from China’s own agribusinesses, where capacity and quality are improving fast.
That is especially true as Beijing is increasingly keen to diversify its sources of grains, oil crops, and other key products like the dairy used to produce infant formula. Policymakers are understandably jittery about relying on any single trade partner for a substantial share of key commodities. This means exporters of products where Canada has traditionally held a dominant market share due to price and quality advantages may face a rising tide of trade disruptions. Beijing has proved willing to take advantage of a range of circumstances – from diplomatic frictions to minor paperwork problems – to disrupt trade and force importers to build alternate supply relationships. Canada’s canola growers are already well aware of how impactful such trade disruptions can be.
Broadly speaking, China’s rising focus on food security suggests Canadian agribusiness should hope for the best, but prepare for the worst. A large and growing market opportunity continues to await Canadian exporters to China – but understanding Beijing’s concerns, and keeping a diverse rolodex of customers, will be critical to predicting trade disruptions and averting their impacts should they arise.
Trivium China is a strategic advisory firm that provides insights to companies, investors, governments, and trade associations on China’s policy and markets. She heads Trivium’s agriculture practice which is among the world’s only sources of regular English-language coverage of China’s agri-food sector. Trivium’s team tracks the policy drivers shaping China’s demand for agricultural inputs, equipment, and commodities. Sign up for a free trial of one of Trivium’s daily briefings at https://triviumchina.com/ or get in touch directly for more info on Trivium’s agribusiness offer at .
CWF’s Belt and Road and Five-Year Plan Monitor
China’s multibillion dollar Belt and Road Initiative (BRI), the state-backed global infrastructure development strategy, has the potential to enormously shift global trade through new levels of infrastructure and supply chain integration, in the Asia-Pacific region as well as globally. China’s most recent Five-Year plan (FYP) sets the country’s priorities for 2021 to 2025 as well as the vision for 2035. These shifts have the potential to alter both the Chinese and global markets for Western Canadian-produced commodities. The China Brief now includes a section with relevant BRI and FYP developments. We welcome feedback as we continue to develop this new feature.
Energy Security and the new Five-Year Plan for the energy sector
China’s central government recently announced its 14th Five-Year Plan for the energy sector (Chinese version). S&P’s IHS Markit provide an English summary here. The document calls for accelerated energy sector development along with plans to modernize and grow their energy system. While carbon neutrality by 2060 and other climate goals remain key, energy security and self-reliance are now the top priorities. According to the Asia Society Policy Institute, this “doubling down” on energy security is a reaction to recent geopolitical shocks. Bloomberg notes that the new plan outlines an intended 800 GW increase in China’s power generating capacity during the five-year period, twice the amount of energy generated in all of India.
The Fuqing Power Unit 6 nuclear power plant launched on March 25, marking another domestically-developed, third-generation nuclear power plant in the country. A new energy storage facility in the South-Western China region, which will “lay the ground for a more integrated industrial chain,” was also recently announced.
The role of Coal in China’s Energy Security Plan
China produces and consumes more than half of the coal on earth, and it looks like that isn’t changing anytime soon. To increase energy generation capacity at this rapid rate, coal production will continue to be a key player in China’s energy plans —at least until their goal is reached. Right now, 260 GW of coal power plants are planned or under development in China. According to BNN Bloomberg, these projects make up more than all of the G20’s coal power combined.
Ramping up aquaculture
Recent seafood trade and aquaculture developments in China will be of interest to B.C.’s seafood exporters as close to 20% of the total value, $1.31 billion, of Canada’s seafood and fish exports went to China in 2019 and dropped to $1.04 billion in 2020. Expansion of fishery partnerships between China, East Africa, Latin America, and the South Pacific are in the works as China plans to grow its annual output amount via distant-water-catch in accordance with the Five-Year Plan.
Within China, annual seafood output is expected to increase from 2020’s 65.47 million tonnes to 69 million tonnes by 2025. Environmental limitations outlined in the 14th Five-Year Plan for Fishery Development related to wild catches and vessel numbers have led to a greater reliance on aquaculture. In the past decade, Chinese aquaculture output has surpassed wild-catch fisheries by four-fold.
- China National Offshore Oil Corp (CNOOC) Ltd. “is preparing to exit its operations in Britain, Canada, and the United States” according to a Reuters exclusive. The move would include Nexen assets in Long Lake and Hangingstone, Alberta, amidst sanctions concerns and regulatory and cost frustrations. But the Global Times reports that CNOOC Ltd. operations are proceeding as normal and there are no plans to sell off assets.
- Donna Kennedy Glans, former Assistant Minister of Electricity and Renewable Energy and Former Vice-President with Nexen Energy, laid out the challenges and opportunities for CNOOC Ltd. in its Nexen deal in an oped for the Financial Post. When signed in 2013, the deal represented the largest Chinese foreign takeover but “lessons learned strained relationships and were often expensive.”
- A federal court has determined that Canadian Border Services cannot issue a blanket ban on imports from Xinjiang over forced labour concerns. CBS can take measures against producers and importers on “a case-by-case basis” according to the CTV report on the decision.
- The Business Standard reports that China’s Ministry of Agricultural and Rural Affairs has urged farmers to ensure a summer wheat harvest and expand soybean production in any way possible. Farmers will receive one-time subsidies to offset costs they incur through their efforts.
- According to CBC, Canada and China both moved up in the results for the men’s 4×100-metre relay in last summer’s Tokyo Olympics due to the disqualification of the U.K. team. Canada moved up to take silver and China moved to the podium with bronze.
– Stephany Laverty and Taylor Blaisdell, policy analysts
The China Brief is a compilation of stories and links related to China and its relationship with Canada’s West. The opinions expressed in the links are those of the articles’ authors and don’t necessarily reflect the views of the Canada West Foundation and our affiliates.