Washington Insider-- Tuesday

China's Commodities Appetite

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

US-EU Trade Talks Show Progress, Challenges

Progress in negotiations over tariff reductions and regulatory cooperation was made during the latest round of Transatlantic Trade and Investment Partnership (TTIP) talks, even though sticking points on geographical indication (GI) and public procurement persisted.

Tariff reductions were discussed, with an eye on accelerating the timetable for their implementation. “We had agreed earlier to eliminate tariffs on 97% of tariff lines, and at this round, we worked to increase the number of those tariff lines that would be zeroed out upon entry into force of the agreement,” Chief US TTIP negotiator Dan Mullaney said.

Another 3% of product lines remain to be discussed, and consist of sensitive agricultural products. Talks are expected to address those tariff lines towards the end of TTIP negotiations.

Access to U.S. public procurement remains a top ask of the European Union (EU), and EU negotiators expressed disappointment at the first public procurement offer made by the U.S. earlier this year. Even with the challenges, both U.S. and EU negotiators rejected talk of a less comprehensive bill, often referred to as “TTIP lite”.

Negotiators said the UK’s June 23 referendum on leaving the EU, known as Brexit, is not having an impact on TTIP talks. President Barack Obama warned during a recent UK visit that if the UK votes to exit the EU, a separate US-UK trade agreement would come only after TTIP negotiations and could take years.

Disagreement over language to protect GIs continued to divide U.S. and EU negotiators, and the U.S. also continued to reject inclusion of financial regulatory cooperation in the TTIP deal, calling instead for a separate vehicle. Discussions also continued on an EU proposal to replace the investor-state dispute settlement system favored by the U.S. with an investment court.

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Brady Voices Support for TPP Consideration in 2016

Congress should consider the Trans-Pacific Partnership (TPP) deal for ratification this year, especially given the economic benefits it would bring, House Ways and Means Committee Chairman Kevin Brady, R-Texas, told a Bloomberg Government event.

“I still think 2016 is the year to address that trade agreement,” Brady said. He acknowledged that concerns raised by lawmakers over TPP provisions on biologics, intellectual property rights and investor protections for US tobacco companies do need to be addressed. But, Brady said he is confident that the Obama administration will follow through on them.

Trade group also believes outstanding issues can be resolved. Issues could be addressed via side letters, clarifying parts of the agreement, and the administration’s statement of administrative action that will accompany the TPP implementing legislation. according to Vice President for Regional Trade Initiatives at the National Foreign Trade Council, Charles Dittrich.

The TPP should be allowed to come into force among the current member states for a “few years of consolidation” said Singapore’s Ambassador to the US, Ashok Kumar Mirpuri at the same briefing. Sri Lanka, Indonesia, the Philippines, South Korea, Thailand and Taiwan have expressed interest in eventually joining TPP.

However, Senate Majority Leader Mitch McConnell, R-Ky., has repeatedly said he will not have his chamber vote on the TPP accord until after the Nov. elections and the prospect the matter could even be pushed into 2017 remains a real possibility at this stage, particularly should Democrats regain control of the U.S. Senate after the November balloting.


Washington Insider: China's Commodities Appetite

China's interest in commodities on the global stage is well known. Their role as a prominent buyer of a host of materials is evident in several markets. The Wall Street Journal reports that while they have a big interest in commodities like iron ore, they've also been heavily into several other markets, including wheat, cotton, eggs and asphalt.

What is coming to light now, however, is that not all this interest is just from physical users of the commodity. Speculative investors have apparently turned to the commodity markets as rules have tightened on their stock markets.

"Chinese speculators didn’t want to buy into the equity market with all the curbs, so they jumped into the commodity markets and it seems they’ve done so in massive style," said Michael Coleman, managing director at RCMA Asset Management Pte.

That's leading to the contention that China's futures markets are not reflecting economic or industry fundamentals. Ironically, those same accusations get levied at the US futures markets from time to time, enhanced by the big role that gets played at times by investment funds who have come into the agriculture markets, sometimes with little or no fundamental backing for the positions they take.

The WSJ notes that turnover of corn futures traded on the Dalian Commodity Exchange was up by nine times in April from a year earlier, at around $30 billion in value, according to data from the exchange. That rise came despite a 10% decline in corn prices following the Chinese government's announcement they will seek to have the market set prices instead of the government. Or at least the goal is to have the government play less of a role.

In wheat futures, the WSJ observed that trading volume on the Zhengzhou Commodity Exchange has grown by nine times in value to around $500 million over the past year even as wheat prices themselves have only risen 1.2%.

Imports of agricultural products are tightly controlled and pricing regulations remain​in place for some foodstuffs, such as rice and wheat, the WSJ points out.

This has prompted more actions on the part of Chinese regulators to address the rise in speculative trading, such as higher transaction fees to try and limit the activity.

China's efforts on the regulatory front echo in part the start of the futures industry in the US. But it has the added layer now of technology being added into the mix. Indeed, the trading of commodities has evolved into a situation where there are electronic trading platforms, computers, and more that have made the situation one where the face-to-face, or open-outcry trading a thing of the past.

That is a normal progression in markets. U.S. regulators are continuing to grapple with the rise in electronic trading and the high-speed trading platforms that execute hundreds of traders in a matter of seconds. But China's own situation comes with sort of a double-edged sword. Their appetite for commodities around the globe is not just speculative, but due to physical need. They're not able to provide for all of the demand they have with their population.

Speculative commodities trading continues to be a factor around the globe. But the electronic trading age is enhancing the ability of those who try to "game" the system. China is no different as they seek to evolve their economic and market situation. This will present major challenges for Chinese regulators, just as it has for years with US futures regulators. China is still the main player in a number of commodities globally, something that will not change. But along with that appetite comes some unintended consequences. And those consequences will continue to keep a major challenge ahead for China – not just in feeding itself but in policing those that participate in commodities trading, the Washington Insider believes.


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(GH/CZ)