Washington Insider - Wednesday

Cloudy Outlook for China

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

Spread of Bird Flu Usurped By Lengthy Closing of Key Export Markets

USDA's Economic Research Service (ERS) evaluated the outcome of the 2014-2015 outbreak of highly pathogenic avian influenza (bird flu) in the U.S., concluding the spread of the actual disease was bested by the effect of the closing of key export markets. “Trade restrictions during and after the outbreak affected all poultry commodities, but the overall market impact differed for each commodity, reflecting several factors,” the report noted. Producers who lost birds or entire flocks to the disease were negatively affected, but other producers gained from the increase in prices that followed the reduction in supply, ERS said.

But trade restrictions resulted in “serious” economic losses, with decreased overseas demand for broiler products, “which led to lower prices for broiler producers — highlighting the importance of policy responses to the total cost of the outbreak.” The market impact of the trade curtailments lasted longer than the direct effects of bird culls: “Prices for many poultry products remained at multiyear lows in 2016, partly due to lingering export weakness related to the outbreak and other factors,” according to the report.

USTR Announces 2018 Duty-Free US Sugar Market Access Determinations

Several countries will be permitted duty-free access to the US market for various quantities of sugar, syrup goods and sugar-containing product exports for calendar year 2018, according to a notice from the Office of the US Trade Representative (USTR) published in the December 28 Federal Register.

Duty-free access and the quantity of goods that qualify for such treatment is related to each countries trade balance with the US for those products. Preferential tariff treatment for sugar exports to the US is provided for under multiple trade agreements: The US-Chile Free Trade Agreement, the US-Morocco Free Trade Agreement, the Dominican Republic-Central America-US Free Trade Agreement (CAFTA-DR), the US-Peru Trade Promotion Agreement, the US-Colombia Trade Promotion Agreement and the US-Panama Trade Promotion Agreement.

USTR determined that certain sugar and syrup goods and sugar-containing products from Colombia, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua qualify for some level of duty-free access to the US market in calendar year 2018. However, Chile, the Dominican Republic, Morocco, Panama, and Peru do not qualify for any duty-free access in 2018 as they ran a trade deficit for sugar and syrup goods with the US in calendar year 2016, USTR said.

Washington Insider: Cloudy Outlook for China

In an indicator of how important China has become to the world economy, Bloomberg is reporting this that China’s economy begins 2018 facing what its own leaders call three years of “critical battles.”

Those fights to tackle domestic debt, poverty and pollution pose a hat trick of risks to the world’s No. 2 economy even before higher interest rates and trade war threats from the US are taken into account.

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While the nation is starting from a position of strength, with full-year growth in 2017 poised for its first acceleration since 2010, the expansion is seen slowing in 2018, Bloomberg says. As a result, the government of Xi Jinping is signaling that it’s sanguine about more modest economic performance, if progress on the top risk -- financial fragility -- can be made.

"Significant economic imbalances continue to create downside risk to the outlook for 2018," said Rajiv Biswas, chief Asia-Pacific economist at IHS Markit in Singapore. "Risks to the Chinese economy will remain among the key risks to the global growth outlook in 2018, with the Asia Pacific region particularly vulnerable to the shock waves from a slowdown."

Those waves haven’t materialized at this time, and in fact economic activity is holding up, Bloomberg says. The official manufacturing purchasing managers index was at 51.6 in December, signaling improving conditions. New export manufacturing orders also climbed to a six-month high, according to a sub-index.

The Caixin manufacturing purchasing managers index, which is more representative of smaller firms, also showed strong momentum with a reading of 51.5 in December, beating all estimates.

However, these figures "likely are overstating momentum, particularly in construction," according to a report by Freya Beamish, chief Asia economist at Pantheon Macroeconomics Ltd in Newcastle, UK "The profit story appears to be deteriorating, as input price rises continue to slow."

Forecasters see expansion slowing to 6.5% -- the slowest pace since 1990 -- this year. In its report, Bloomberg highlights several economic areas that have the potential to trip up economic growth or spur market turbulence.

Chief among these is the financial sector, recently the focus of the Communist Party which renewed its pledge to prevent and control financial risk calling it a pivotal challenge for the next three years. As the financial system opens further to foreign firms, a debt-to-GDP ratio that’s heading toward more than 320% by 2022 stands as the main danger.

"Even its own propaganda machine admits that this is such a serious problem that Beijing doesn’t expect there to be any solution in anything less than three years," said Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong. "Financial instability is the core problem. Solve that and you ease pressure on capital outflows, complications from deleveraging, weaknesses in smaller banks."

A second area of concern is whether tightening financial and environmental regulations to help curb debt may cause tremors in 2018 that slow housing and infrastructure construction, according to Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong.

"A sharper-than-expected slowdown in construction could thus weigh on broader activity with emerging sectors not yet vigorous enough to provide a sufficient cushion," said Neumann. "The biggest fault line running through the Chinese economy is the construction sector."

U.S. policy is another area of uncertainty, especially as president Trump pushes a turn toward protectionism, says David Loevinger, a former China specialist at the U.S. Treasury Department.

"On the menu for 2018: lots of red meat for the Republican base, and that means bashing imports," said Loevinger, now an analyst at TCW Group Inc. in Los Angeles. "Since nationalistic populism is as irresistible in China, Chinese politicians will feel compelled to retaliate."

Also, if the U.S. Federal Reserve raises interest rates more than markets expect and tax cuts build on underlying 3.2% growth, the dollar may get a second wind that puts the yuan and capital outflows under pressure again, according to George Magnus, an associate at Oxford University’s China Centre and former adviser at UBS Group AG.

"If the Fed starts hiking and the dollar goes on a bull run, that would cause big problems," says Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen.

Yet another factor is the degree of tension between North Korea and the United States. Should this escalate into a more significant confrontation, there will be profound and far-reaching consequences not just for China’s economy but that of the entire Asia-Pacific region, says Zhu Ning, deputy director of the National Institute of Financial Research at Tsinghua University in Beijing. In fact, there have been suggestions by the administration that the US is considering still tougher regional policies to increase pressure on North Korea.

So, the outlook for the Chinese economy seems to be headed for some potential choppiness for the coming year, in spite of current strength. Of course, this is a high stakes area producers should watch carefully, even as they follow the evolution of US trade policy toward North America and the building pressure for major shifts on NAFTA, Washington Insider believes.

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