China Stopped all deliveries on its trade deal — here’s why

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China Stopped all deliveries on its trade deal — here’s why

News that Beijing has commanded state firms to stop purchases of farm products could well be an opportunistic political tactic stemming from fundamental weakness on the demand side in China.

On Monday, China had asked leading state firms to suspend large-scale purchases of major U.S. farm commodities like soybeans and pork. That came in acknowledgment to President Donald Trump, who said last week he would strip Hong Kong of its unique standing with the U.S.

But soybean demand has not been strong in China anyway.

“Partly, it’s because of the virus outbreak (that) impaired the logistic arrangements between China and the U.S., and also after the virus outbreak, what we see is that the domestic demand in China is collapsing,” said Hao Hong, head of research and chief strategist at the Bank of Communications.

Even though the economy is gradually recovering in China, people are just not spending and dining out as much as before, which helps account for the lower need for soybeans — typically used in animal feed.

“With logistic concerns and also with collapsing domestic demand, it’s not difficult to see how China would require less of the soybean input,” Hong told CNBC on Tuesday.

In April, China’s imports of U.S. goods slumped 11.1% in dollar terms from a year ago.

According to Reuters, Chinese importers have also canceled shipments of American pork and suspended state purchases of bulk volumes of U.S. corn and cotton as well. China is the world’s largest pork consumer and importer.

Just last week, China reported an African swine fever outbreak in a northwestern province. The swine fever outbreak has decimated China’s hog herds and hit demand for soybean feed even before the coronavirus outbreak.

Arlan Suderman, the chief commodities economist for INTL FCStone, said in a tweet on Monday that the suspensions could be temporary.

“Supplies are adequate near-term due to current shipments, giving China freedom to threaten,” said Suderman.

Bocom’s Hong said he wouldn’t be surprised to see Chinese demand for U.S. soybeans returning should the economy post a V-shaped recovery in the second half of the year.

After all, the U.S. is a significant exporter and a tremendous source of China’s soybean imports, and China is the world’s largest importer of soybeans.

Under the phase one trade deal, the U.S. and China signed in January, and China had pledged to buy an additional $32 billion worth of U.S. agriculture products relative to the 2017 level over the next two years.

Rural constituents make up an essential part of Trump’s voter base.

Already, Chinese state-owned firms bought at least three cargoes of U.S. soybeans on Monday, Reuters reported.

According to the U.S. Department of Agriculture in its World Agricultural Supply and Demand Estimates report released in May, soybean exports in the 2019 to 2020 marketing year are forecast to be 1.675 billion bushels — a 4.2% drop from the previous year.

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