A true float of the renminbi, colloquially referred to as the yuan, would be a major step toward true liberalization for China. Many, including President Donald Trump, have complained of China’s strict control over capital flows along with allegations of currency manipulation. However, President Xi Jinping has supported policies that would lead to the liberalization of the country’s economy.
Even a somewhat liberalized Chinese economy can quickly alter global markets. Since China joined the World Trade Organization in 2001, the country has become the world’s top exporter and second-largest importer. China’s middle class rapidly expanded during that time as did its protein demand. Brazil was able to meet those needs and has become an agricultural powerhouse. It’s unclear if another country could step in to meet Chinese demand if a similar situation plays out in the near future.
Corn producers are currently waiting for any hint of how China plans to fulfill its recently announced mandate for nationwide fuel ethanol use by 2020. China has the largest corn reserve in the world. These aging stocks would go a long way toward meeting that demand, but the country would still need approximately 6 to 13 million tonnes of ethanol annually to meet demand. So far, China’s actions indicate the country will try to meet demand domestically by using corn stocks and building more plants to boost production. China could choose to meet the mandate through corn or ethanol imports. Regardless of what route China decides to take, we expect supplies to shrink and global prices to rise.
We can see the effects of a liberalized Chinese economy through the country’s consumers. Nearly 30 years after Western businesses arrived in China, consumer demands are shifting and markets are eager to meet their needs.
The first KFC in mainland China helped usher in a new era of Chinese consumption. The fast food chain served as an introduction to Western culture. McDonald’s would soon follow as would European luxury brands catering to a burgeoning middle class. Chinese cities grew along with all the benefits that came from an urban lifestyle. In 2017, the daily habits of Chinese consumers closely resemble that of their Western counterparts.
Global conglomerates should no longer expect to waltz into China and be embraced by consumers. Maturing tastes have led to more selective and adventurous palates. China is already the “next big wine market” and consumption will only continue to increase. While the country still prefers baijiu, a clear spirit made from grain, each successive generation will be surrounded by more and more wine drinkers. Domestic wine production will flourish over the next few decades. China already has the second-largest area of land under grape cultivation in the world and is projected to surpass Spain in just a few years. Exporters can also expect a windfall as increased domestic wine consumption paves the way for newly-minted wine connoisseurs to try new styles.
Whereas the leap to wine consumption in a country with a firmly established alcoholic beverage tradition is a logical next step, the same can’t be said for China’s newfound appreciation for chocolate. Chinese desserts typically strike a balance between sweet and savory, with traditional favorites like red bean buns offering just a hint of sweetness. But the Asian chocolate demand growth rate is projected to exceed the global growth rate in 2017. Further, increased demand from Asia has producers expecting a much lower global surplus despite a record harvest from Ivory Coast last year. Chocolatiers looking to court consumers should adhere to traditional Chinese tastes and offer chocolates that are less sweet or incorporate somewhat savory ingredients such as matcha or green tea.
We can expect Chinese consumers to continue to explore new tastes as disposable income continues to grow. Further, if China truly floats the renminbi—a policy supported by Chinese President Xi Jinping—Chinese consumers might become richer, in terms of exchange rates, and global agriculture would change radically practically overnight.
Pork remains king in China, but consumption may have reached its peak. Pork consumption has flattened since 2014 and demand has likely settled when factoring in trailing population growth. Farm closures and healthier eating habits have also impacted domestic consumption. Even with pork in a state of flux, Chinese demand continues to drive global markets.
The United States and Brazil have eagerly supplied soybeans to feed China’s demand for pork. China is the largest overall export market for Brazil and the top importer of agricultural goods from the US. Soybeans were the highest valued agricultural export for the US ($22.3 billion) and the top export overall for Brazil ($19 billion).
Even as farms and slaughterhouses have been closed as China looks to modernize its agricultural sector and reduce pollution, domestic production has to be carefully monitored. Domestic prices have settled after hitting a record $3.18 per kg in 2016. Prices will also continue to decrease as more efficient farm systems begin operations over the next few years. Pork imports will suffer, but soybean exports will likely remain highly lucrative for the US and Brazil.
The possibility of China actually floating the renminbi will have a direct impact on soybean exports from the US and Brazil. Floating its currency could also make China’s exports more expensive. Consumers may also benefit from a liberalized currency as they could become instantly richer and have increased purchasing power. But, there’s still uncertainty that China will fully commit to this policy even as President Xi Jinping claims to support a true float of the renminbi.
Similar questions also surround China’s nationwide ethanol mandate. There are several avenues through which China could fulfill the demand by 2020, and it’s unclear just what the country will actually do. If China looks to imports, we can expect lower corn supply and higher prices.
At Gro Intelligence, we eagerly anticipate China’s next moves as the country continues its march toward liberalization. Although leaders have outlined a clear direction of reform, the country’s dominant position in several important markets means that the details of implementation matter greatly. Since those details remain uncertain or unknown, constant monitoring of developments can pay huge dividends for our subscribers.