Slower Growth In China

The Chinese government is continuing to take steps to fight against a slowing economy – with an announcement to stimulate growth, by cutting the reserve requirement ratio for banks. This it hopes will boost lending by adding more liquidity into economy. The latest IMF economic outlook figures (April 2015) forecast that GDP growth in China is expected to slow to 6.8% in 2015, compared with 7.4% in 2014, and well over 10% for the last decade.

Chinese agricultural imports have grown rapidly over the last twenty years, especially since 2001 when China joined the WTO, so will this economic slow down have an impact on China’s demand for agricultural goods?

Urbanization has led to an increased reliance on food imports, as workers shift from the countryside into new and expanded cities on China’s Eastern seaboard. This means a potential labour shortage within the Chinese agricultural sector. This may slow as a consequence of lower economic growth, but is a process which is highly unlikely to reverse, and will tend to increase the country’s reliance on imports. The growing number of middle class and urban consumers are expected to be the key drivers in China’s global demand for food and agricultural  products.

Only 13.5% of China’s land mass is cultivated, and this is mostly in the East and Central regions, with the West of the country dominated by grassland and desert. Lack of arable land, and soil degradation are important constraints on crop production. The bulk of Chinese farm imports are of land intensive commodities such as soyabeans, which are used for animal feed, to meet the growing demand for animal protein due to rising incomes, and changing consumer tastes. Not traditionally part of the diet, Chinese milk consumption per head has tripled since 2001. Pork is a staple part of Chinese diet, and China is the worlds biggest producer and consumer of pork.

Drought hit China in 2010-2011, and again in 2014, drought affected key crop producing regions in the North East of the country.  Animal disease events such as Avian influenza have increased the uncertainty of domestic Chinese food supplies.

Foreign investment has boosted domestic production, particularly within the daictor. Fonterra the worlds largest dairy processor has recently bought a 20% stake in Beingmate the thirds biggest dairy producer in China.  It will be interesting to see if slower growth leads to slower foreign investment,  and perhaps more political uncertainty within China itself.

Chinese companies have made significant investments in farmland in a new ‘scramble for Africa’, and as this production comes on stream this will potentially displace other exporters.  China is effectively outsourcing food production to regions where land, labour and other resources are more available.

It is clear that despite slower growth, and some inevitable re-adjustment, growth will continue, and there will still be opportunities in China.  Chinese consumers will continue to consume more meat and dairy products, along with better quality foods. This will drive not just demand for meat and dairy imports, but also significant quantities of animal feed, and also animal genetics, to boost domestic production.