The Visible Hand: What U.S. Exporters Can Expect from China’s New Regulations

by Michael Pareles, trade manager, USMEF-Beijing

The decisions may have been made last month, but traders and analysts are still reading the tea leaves as the Chinese government slowly releases information about its latest policies. Following the Chinese Communist Party’s once-in-a-decade strategy session in November and annual bilateral talks between the United States and China the following month, analysts are now examining what these sessions did, what they failed to achieve and what the results may mean for U.S. exporters in the coming year.

U.S. beef access to China

China was the fastest-growing beef market in the world over the past year, though the market has cooled in recent weeks due to very high inventories. At the Dec. 20 close of the annual Joint Commission on Commerce and Trade (JCCT), U.S. Secretary of Agriculture Tom Vilsack and Chinese Vice-Minister of Agriculture Niu Dun announced that both sides would work to promote American beef exports to China, with the objective of restoring access by the middle of 2014. While these statements are encouraging, a political agreement will not preclude what will likely be arduous negotiations at the technical level to complete a protocol that will allow China’s imports of U.S. beef to resume. Domestic beef consumption in China has been rising at a rate of about 10 percent every year for the past decade, and USMEF estimates the market for U.S. beef could be as much as $500 million the year after access is granted.

Experimental free trade zones

One of the main themes of the Chinese Communist Party’s Third Plenum, the closed once-a-decade strategy conclave of top party leaders, was market liberalization. With massive municipal-level debt and an unknown number of bad loans on the books of state banks, the Chinese government is looking for ways to liberalize and modernize the Chinese financial system without shocking it. One of the most widely publicized steps in this measured liberalization is the creation of free-trade zones, starting with the establishment of the Shanghai Experimental Free Trade Zone (FTZ) by Premier Li Keqiang in September.

The “free trade” in these zones refers mostly to capital flows and the service sector as opposed to actual goods like meat. But the zones will provide certain benefits to foreign companies with operations or representative offices in China, including simplified registration processes for foreign companies registered in the zone and some tax-free policies. The experimental FTZ will be reassessed after three years. If deemed successful, similar zones may be established in other areas of the country, such as Guangzhou and Wuhan.

Exchange rate liberalization

The head of China’s central bank announced in November that the government would seek to gradually let the Chinese currency exchange rate “basically” be determined by market forces, instead of supported by government “foreign-exchange market interventions.” If this were implemented, U.S. exporters could expect the Chinese RMB to appreciate against the U.S. dollar, making U.S. goods relatively cheaper and more competitive for domestic Chinese consumers. The Chinese RMB is currently supported at an artificially high price through massive amounts of purchases of U.S. Treasury bills by the Chinese central bank, amounting to tens of billions of dollars a month. Nevertheless, the RMB closed 2013 at a record high against the U.S. dollar, and further appreciation is expected in 2014.

Lowering of national feed self-sufficiency targets

Following the CCP’s Third Plenum, the Chinese government announced its new national food security policy. It provides for more feedgrain importation and slightly relaxes self-sufficiency requirements for staple food grains, officially seeking to strictly maintain more than 95 percent self-sufficiency in rice and wheat only. USMEF expects China will continue to increase its import volumes of corn, meat and other feedgrains this year, but increased scrutiny of biotechnology and beta agonist use as well as specific sanitary and phytosanitary issues in U.S.-origin agro-imports create uncertainty as to how these policies will be implemented at the border for American exports.

Government intervention to support GDP growth target

In the first quarter of the year, the Chinese government will release its GDP growth target for the Chinese economy for the entire year of 2014. This target will most likely be north of 7 percent, and U.S. exporters can expect the Chinese government to take extraordinary measures to maintain that minimum level of economic growth. As in the past, this may include interventions to control the price of pork through mass purchases or distribution of pork and feedgrains, increased inspection and other obstacles for imported pork shipments or the sudden announcement of new requirements for imported pork products.

On balance, USMEF remains optimistic that 2014 will be another positive year for U.S. meat exports to China. Please do not hesitate to contact our Denver or Beijing offices for more information about this dynamic and exciting market for U.S. red meat products.