China Economy

China's surging food prices won't weaken its hand in the trade war, economists say

Key Points
  • New data Friday showed China's July food prices jumped 9.1% from a year ago. A key contributor was the 27% rise in pork prices amid an outbreak of African swine fever, while fresh fruit prices also climbed 39.1%.
  • While economists suggest inflation could rise further in the short term, they believe Beijing has a series of options to mitigate the effects before it starts to impact politically.

The rising price of food — which may only get worse with a halt on U.S. agricultural imports — won't have major ramifications for Beijing as it continues its tit-for-tat trade war with Washington, according to experts.

New data Friday showed China's July food prices jumped 9.1% from a year ago. A key contributor was the 27% rise in pork prices amid an outbreak of African swine fever, while fresh fruit prices also climbed 39.1%.

The figures come as China announced this week that it would suspend imports of agricultural products from the U.S. This was in retaliation to President Donald Trump slapping a 10% tariff on an additional $300 billion in Chinese goods.

While economists suggest inflation could rise further in the short term, they believe Beijing has a series of options to mitigate the effects before it starts to impact politically.

"China has a price control mechanism on necessities to slow down food price increase, and there are government inventories that could soothe food price inflation," Iris Pang, Greater China economist at ING, told CNBC via email.

"The plan is to grow more agricultural products that are currently imported from the rest of the world," she added.

Turning away from US imports

U.S. total exports of agricultural products to China totaled $9.3 billion in 2018, and China has become increasingly reliant on imports to offset its domestic agricultural limitations.

If forced to seek new trading partners in order to shore up its food security, China could be looking at higher import prices as exporting nations look to leverage the increased urgency of its demand.

"There is certainly scope for exporters to leverage the trade war to increase their selling price. This will happen and is an additional tailwind to the more important domestic drivers mentioned above," Rory Green, China and North Asia economist at TS Lombard, told CNBC Friday.

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"However, as food commodities such as soybeans, fruit and pork are fungible, if individual suppliers raise prices too high China can go elsewhere."

The difficulty here, he added, would be the sheer volume of pork needed, meaning other protein sources such as chicken could be used to meet domestic demand.

The European Union is China's biggest trading partner, and China is planning to import more agricultural products from Europe in order to mitigate the loss of U.S. imports, along with ramping up its domestic sustainability.

No longer hostage

Green suggested the state's involvement in food purchases means the Chinese government can pay the extra cost for trading elsewhere without passing all of the price increases on to consumers.

What's more, sourcing from outside the U.S. will actually increase China's food security by reducing its dependence on the U.S. as a single provider, meaning it will no longer be "hostage to potential export restrictions" in future, Green said.

This would mean rising food prices are unlikely to force President Xi Jinping into a softer stance on Washington, since authorities would rather pay higher prices for European pork or South American soybeans than cave in to the U.S.

A soybean field near Salem, South Dakota.
Scott Olson/Getty Images

"For a number of years now China has sought to diversify away from the U.S. as key provider of agricultural products, the goal being to control all aspects of China's food supply," Green said.

"This is an ongoing policy which involves Chinese farms and cooperation; in Russia, Eastern Europe, Africa and South America."

In 2014, Beijing actively swapped U.S. corn for Ukrainian corn, cutting U.S. purchases by 90%, and Green projected that if the trade war does not end soon, the U.S. will suffer a permanent loss to its market share in China's soybean market.

Soybeans account for $3.1 billion of U.S. domestic exports to China, a third of its overall agricultural exports to the country.