The China-ASEAN Comprehensive Strategic Partnership

It is official: the China-ASEAN Comprehensive Strategic Partnership has been established. The announcement was made by Chinese President Xi Jinping in his speech on Monday, signifying a milestone in dialogue relations within the Asia Pacific region first established in 1991. According to President Xi, China is “ready to import up to 150 billion USD worth of agricultural products from ASEAN in the next five years”—almost double of its current ASEAN farm imports—and expressed hope for ASEAN’s cooperation in the Belt and Road Initiative.

A joint statement by China and ASEAN members states was also released, reaffirming cooperation several commitments, including the entry into force of the Regional Comprehensive Economic Partnership Agreement (RCEP) on 1 January 2022 as well as continued implementation of the ASEAN-China Free Trade Agreement (ACFTA).

Analysts have also noted that the announcement signified expanding China-ASEAN ties, with China calling for cooperation in new sectors including the digital economy. Deepening ties with China is expected to grant further trade benefits for certain ASEAN members as well, e.g. the tropical food trade for the Philippines.

Editor’s comment: In recent years, China has been a key importer of ASEAN fruits, vegetable oil and more. China summits have often pulled in ASEAN leaders who have touted their farm products, including pineapples, durians and more. As many countries produce similar product, the question intra-ASEAN competition arises; but rising demand in China could make the pie bigger for everyone.

Greenhouse Farming Booming in China Amidst Age of Pandemic

The coronavirus outbreak brought to light another unexpected practice: greenhouse farming. Disruptions to farming caused by the pandemic has spurred several areas in China to turn to more modern farming practices in effort to strengthen its food security whilst ensuring safety and quality. Chongming Island is one such example, where glass greenhouses equipped with high-end technology have been set up by professional greenhouse operators FoodVentures to produce sustainable vegetable crops.

Greenhouses are not new in the Chinese agricultural scene—Shouguang, a city in northern China, are pioneers of greenhouse farming and have seen the use of greenhouses since the late 1980s as a way to guarantee a continuous supply of fresh vegetable throughout winter, while Jiuquan has greenhouses covering 1,666 hectares of land in 2019 to combat its cold desert climate. What the pandemic appears to have done is further accelerate the development in the modern agricultural technology; this, coupled with a growing middle class willing to pay more for better quality produce, has reportedly led to a 28% increase in glass greenhouse use in 2020.

Rising Soybean Demand in China Threatens Oil Palm

We are currently attending the 3rd Agricultural Supply Chain Asia 2021, a three-day conference organised by the US Soybean Export Council and US Grains Council, aiming to provide the latest updates on corn and soybean sectors.

Source: Bloomberg, 2021

The conference is timely, given the recent market development in the soybean industry. China’s palm oil imports are expected to dip following large amounts of soybean purchases recently made. As palm oil’s top contender, and the primary source of animal feed, the major Chinese importers are, according to Bloomberg, “scooping up unprecedented quantities of soybeans and corn on world markets to feed domestic hog herds that are rebounding after being devastated by the African swine fever.” Interestingly, there have been a resurgence of the African swine fever (as well as a new strain of the virus), expectations are that a possible outbreak would not be as deadly as that in 2019.

Accordingly, soy stocks in the US and other key origins, are forecasted at lows. But traders point out that world stocks have shifted to South America in the last few years (and the US operates on tighter stocks due to higher logistics costs and seasonal factors), so the world stock-to-use ratio may not be so bad (see DTn graph at the bottom ). The question now is how this would affect the palm oil trade, especially in light of the improving weather conditions in Brazil and Argentina over the past two weeks.

By Nadirah SHARIF, 26 Nov 2021

Editor: This reminds of our chat with some traders about the Malaysia palm oil stocks situation. While these were reported at multi-year lows, some pointed out that tanks were surprisingly full. Are well monitored stocks figures getting less reliable and/or representative? Commodity reporters have in recent years noted that the Malaysia MPOB (official count) stocks are perceived as less reliable. For Malaysia it is worth asking if more tank farms ended up in customs free zones. For palm oil, there is also attention on (mostly unofficial) estimates of stocks for Indonesia, China and India.

RCEP: What's the Big Deal?

As Trans-Pacific View author Mercy A. Kuo writes, “RCEP is literally a big deal… RCEP consists of diverse countries—rich and poor, vast and tiny, highly advanced and those just beginning to industrialize”. The signing of the Regional Comprehensive Economic Partnership (RCEP) by the 10 ASEAN nations, China, Japan, South Korea, New Zealand, and Australia on 15th November 2020 does mark a historical moment. One cannot emphasize enough the geopolitical and economic impact this free trade agreement (FTA) would have towards the global economy.

To get started, here are some RCEP facts at the time this was written:  

• While China has existing bilateral trade agreement, RCEP represents their first regional multilateral trade deal.

• RCEP was eight years in the making.

• The trade deal covers 15 countries with a population of 2.2 billion people with a combined GDP of $26.2 trillion or 30% of global GDP.

• An analysis by the Peterson Institute suggests RCEP would boost global trade by $500 billion in the next ten years (a 1% boost to trade flow?) 

• World income is promised to increase $209 billion annually (or $27 for each of the 7.8 billion people)

• India opted out but are still welcome to join should the South Asian country change its mind.

• Regional Comprehensive Economic Partnership is not as comprehensive as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). 

Source: Heijmans and Nguyen (2020)

Economic significance

RCEP covers 30% of the world’s economic output (GDP), making it the largest free trade area. The signing of RCEP amid a Covid-19 pandemic is not a coincidence or a stroke of luck—the deal was concluded after eight long years of negotiations, a feat considering that the coronavirus has laid waste to economies both local and global.

While the pandemic is expected to result in nations become more inward-looking in their policies, the fruition of RCEP is testament to the contrary. Cross-border investment, intellectual property, goods and services, government procurement, financial services, and e-commerce are just some of the areas that the FTA covers. Specifically, according to Bloomberg, RCEP is meant to eliminate tariffs on imported goods, strengthen the value supply chain with common rules of origin and codify new e-commerce rules (but tariffs are already low).

Furthermore, the US-China trade war has made RCEP indispensable. The tit-for-tat tariff banter between the two superpowers have threatened to upend the value supply chain in the international economy. RCEP is thus a means for East Asian economies to be interdependent among one another without relying on a developed economy like the US, signifying a world order where the US plays a less significant role.

The withdrawal of the US from TPP further suggests that the country at that time had no intentions of forming an FTA with East Asian economies, with the Trump administration adopting a protectionist approach when it comes to foreign economic policies. It is worth noting, however, that the overall sentiment of the US towards China has always been underlined with suspicion, even before Donald Trump became President; this suspicion towards Beijing was merely heightened under the Trump administration and is unlikely to disappear anytime soon. The question now is: will President-elect Joe Biden come to the same decision regarding the RCEP and reconsider joining CPTPP, or will he remain on the fence? 

A JP Morgan report identifies sectors that would benefit from RCEP:

• manufacturing

• electronics

• industrial machinery

• autos

China’s Dual Circulation Strategy

Interestingly, RCEP complements China’s overall economic strategy. As the name suggests, the country’s dual circulation strategy is a two-part plan in effort to become self-sufficient in a time full of economic uncertainty. The strategy is part of China’s 14th five-year plan (2021-2025), with an emphasis on the internal circulation, i.e. stimulating the domestic market, without abandoning the external circulation, i.e. export-oriented development strategy.

It is in the external circulation bit that RCEP complements China’s economic strategy. While developing its domestic market to boost self-sufficiency, China would open the country to more trade relations with other nations. The signing of RCEP laid the foundation as China’s first multilateral FTA. It would simply a matter of time before China would consider joining other more advanced FTAs, such as CPTPP.  

Why is there RCEP when CPTPP exists?

Source: Loh (2020)

TPP was signed under the Obama administration in early February 2016 with a particular goal in mind: to foster economic and geopolitical cooperation among the nations that house the Asia-Pacific region (but it was announced by Hilary Clinton in the Department of State, so that is seen as geopolitical). TPP member countries consisted of the 11 Asia-Pacific nations of CPTPP with the inclusion of the US. However, the following year saw the Trump administration withdrawing the US from the FTA. Following this, TPP reformed itself into CPTPP, with most of the free trade terms still intact.

To reiterate, CPTPP is one of the largest free trade agreements, comprising 13.5% of global GDP centered on Asia-Pacific economic cooperation. Then there is the RCEP, which is arguably the largest FTA, covering 2.2 billion people with a combined GDP of $26.2 trillion.

Concurrently, there are two FTAs that are centered around the economies in the Asia-Pacific region. The questions that arise are: (1) why are there two FTAs; and (2) what separates them apart? To answer the latter, one includes China and the other does not, although that may soon change. However, a more notable contrast between the two agreements is simply that RCEP is not as comprehensive as the CPTPP when it comes to the terms of trade. CPTPP outlines provisions regarding sustainable practices of the environment, labour, human rights, and the need for transparency and freedom of information, which are missing from RCEP.

The fact that there are two FTAs centered around the same region insinuates geopolitics in play by means of who stands to benefit from a multilateral economic expansion and who stands to lose. This would explain some of countries stance on RCEP, particularly the US and India, who may be of the opinion that signing the FTA is not entirely favourable to them. 

Geopolitical significance

The narrative spun by western news outlets would have us believe that RCEP is a China-led initiative, with the sensational headlines such as “Why is China Creating a New Asia-Pacific Trade Pact” circulating the media, creating a misunderstanding especially if the rest of the write-up goes unread. It is worth reiterating here that RCEP is an ASEAN-led initiative and, had it been spearheaded by China, the likeliness of RCEP coming to fruition would be slim.

Nevertheless, China does stand to be the biggest beneficiary of the RCEP, allowing the Asian giant to expand its economic influence over Asia-Pacific. The FTA provides China with the opportunity to create new value supply chains amongst REP member countries, establishing itself as a possible hegemon in a time where US influence is diminishing (although suggesting that the US is no longer the global economic hegemon is a highly contested argument itself).

Interestingly, while RCEP was presented as a step towards multilateralism, sceptics believe otherwise. There is underlying pattern of countries being more confrontational towards China, stemming from the US-China trade war—trade tensions between Australia and China is a notable example. The worry amongst political and economic stakeholders is that countries will become more vocal in expressing their dissatisfaction against China in matters of world affairs, creating tension among RCEP member countries and potentially compromising the FTA. 

The future of RCEP?

Now that RCEP is signed, the implementation of the FTA shall only take place once it is ratified by each participating country, a process that may take years. There are still uncertainties regarding the agreement and the effect it will have in the Asia-Pacific region and its Western allies. The uncertainties stem from the future of trade amidst the backdrop of an ongoing pandemic and how RCEP will evolve to cater to unforeseeable changes, including the likelihood of India re-joining, the US position in this new global economic order, and future of trade multilateralism as a whole. 

As with any multilateral trade agreement, there will be winners and losers, so the real question here is: are the countries ready to shoulder the burden of the losers? Only with the unravelling of time would we see these questions being answered.

By Cyrene PERERA, Segi Enam intern, 14 Jan 2021 | LinkedIn

Edited by KHOR Yu Leng and Nadirah SHARIF

SCMP: The Wrangling in Raub Struck a Stark Contrast to the Thai Durian Export Juggernaut

A legal battle is underway between Raub durian farmers and a state-backed conglomerate. The dispute involved allegations that the farmers were encroaching and converting state government land into illegal durian plantations, as well as accusations that the Royal Pahang Durian Resources (RPDR) was exploiting the small-scale farmers by demanding unreasonable yield targets in a deal to legalise them.

The conundrum now involves an enquiry by the Malaysian Anti-Corruption Commission (MACC), who are questioning the farmers over the aforementioned land encroachment.

A recent SCMP article by Tashny Sukumaran covered the story in more detail, in which our principal Khor Yu Leng was quoted.

The wrangling in Raub struck a stark contrast to the Thai durian export juggernaut, said economist Khor Yu Leng, noting that Thailand had recorded almost US$1 billion in sales to China from March to June.

“Trade is just getting its footing and it would be unwise for people to try and muscle in,” she said.

While Malaysia has pinned great hopes on its new channel of frozen durian exports, the word from some eyeing volume to China is for volume to be flattish against 2019. Last year, China approved Malaysian imports, although this appeared to be delayed; durian insiders said there were some wrangling on the Malaysia-side over who would be allowed to export under the then-Pakatan Harapan administration.

This came as surprise as Malaysia is coming up from almost zero-base; tackling the China market seemed to offer enough room for all enterprising exporters. More recently, wrangles have appeared in the Raub area, which also supplies the famed Musang king (mao shan wang/MSW) durian. The previously described legal saga has unlicensed farmers fearing lopsided terms with a joint venture durian concessionaire-cum-marketing wannabe. In the meantime, the Thai durian export juggernaut has powered ahead with almost USD1 billion in sales to China in March-June, a record sales volume with unit prices doubling in the last two years.

I Believe I Can Fly: AirAsia Mulls Flying Durians in Farm-to-Table Food Line-Up

An interesting bit of news amid the coronavirus outbreak: AirAsia Group Bhd is considering flying durians into East Malaysia and Singapore as part of its plan to send fresh produce directly from farms to restaurants. Outfarm, the budget airline’s agriculture e-commerce arm, has been preparing its trucks and planes to transport food in the next three to four months, an operation which the company claims could reduce procurement costs by as much as 25%. According to Lalitah Sivanaser, the Chief Executive Officer of Outfarm:

“It’s the durian season now and we’re working very hard to get them on board… The Singaporeans, the Thais, as well Indonesians have reached out for durian exports using our platform.”

This talk of durians brings us back to our previous piece on the durian economy. In it, we discussed durians in China, as well as provided consolidated data on fruit farms and key indicators across Malaysia. Check it out here: Durians for China: A Preliminary View and Dashboard.

IVPA: Is COVID a Bull or a Bear for Veg Oils?

On 29th May 2020, Segi Enam Advisors attended a global webinar organised by the Indian Vegetable Producers’ Association. The webinar sought to address the effects of the Covid-19 pandemic on the supply chain of vegetable oils around the world, as well as other relevant trade and policy issues.

There were several interesting takeaways from the session:

1. In India, the demand for palm oil from the hotel, restaurant, and catering industry (HoReCa) has collapsed due to the lock-down. The pandemic has also called India’s food security into question, with suggestions for the government to enact policies to ensure smooth movement of the vegetable oil supply chain, particularly with regard to interstate logistics.

2. Total Indonesian and Malaysian palm oil exports to China and India has fallen sharply in the first quarter of 2020, although it was pointed out that sales to China are known to have recovered by April 2020. Globally, while the output of vegetable oils was not as badly affected as initially expected, demand has dipped much more significantly due to the lock-downs enforced across the globe.

3. In Argentina, there are transportation problems within the agriculture industry. The main cause is the low water levels of the Parana River, which transports approximately 96% of agriculture products, a situation further aggravated by Covid-19 (although it should be noted that these logistical issues preceded the outbreak). Experts project an improvement by Aug-Sep 2020.

4. The bilateral agreement signed by China and the US is now uncertain, especially in light of the coronavirus outbreak and recent developments in Hong Kong. It was also suggested that globalisation will not roll back but will have fewer Chinese characteristics, as supply chains are restructured and governments consider protectionist measures.

Click here to watch the video recording of the webinar.

Online Public Interest: #Covid19 and #MilkTeaAlliance

Another #KhorReports infographic on #Covid19, this time on the #MilkTeaAlliance, a hashtag born out of an ongoing geopolitical virus blame game within Asia. With talks of a second wave of the virus, this event maybe be worth keeping an eye on.

Online Public Interest: Coronavirus and #Masks4All

Here are a couple of #KhorReports infographic on the #coronavirus. The first one is on the #Masks4All campaign (check out #Masks4All.org and #Masks4All.co) following the positive shift in public attitude towards masks despite initial ambivalence on the subject from public authorities. Also, there is a surge in public interest #self-help tips and tricks, such as consuming #vitamin C and #turmeric as well as DIY masks, as well as the emergence of face mask fraud cases in Malaysia.

The second infographic focuses on public interest in mask-wearing in three cities—Hong Kong, New York, and Singapore—and a throwback on mask usage during the Great Influenza of 1918. Also included is a brief update on #China as it gradually eases its #Coronavirus #lockdown.

A Thorny Conundrum: A Case of the Coronovirus and the Durian Economy

The coronavirus outbreak has stymied the durian economy. Demand for the king of fruits has dipped dramatically amidst widespread city lock-downs and logistics disruptions in China, resulting in durian prices falling by as much as 50%—traders in Raub reported that prices for the Musang King has reduced from RM60 to RM30 per kg. The durian tourism industry has also been hit hard, especially following Malaysia’s temporary travel ban on Chinese nationals from all provinces currently under lock-down.

Unsurprisingly, farmers are becoming wary about processing their durian crops to China, and are beginning to look for alternatives locally and in Singapore. Their hesitance is justifiable—as explained in our previous post on the durian economy (see image below), China is expected to import from Malaysia USD120 million worth of durians annually, with approximately 23% of Malaysia premium-grade output exported, amounting to 75,000 tonnes to China in 2018. Overall, Malaysia reports RM173.3 million (about USD41.9 million) worth of durians in 3Q2019 exported around the globe, the highest quarter of recorded since 2015.

The drastic slowdown in durian imports from China would mean a lot of unwanted durians left in the traders’ storage. Overall trade with China in containers is down 20% or more in recent weeks and some may be affected by about 50% of airfreight volume supply cancelled (and expectations of elevated air freight rising significantly*).

There is some sliver of hope, however. CNA pointed out that the decreased demand in China was due to the outbreak itself—interest in the prickly fruit is still there, albeit just not the right time for a hearty durian meal. The Pahang Fruit Farmers’ Association has expressed optimism that the outbreak could be contained by the time the durian peak season (April to August 2020) comes around.

Until then, the Malaysian durian farmers (together with other fruits farmers in Myanmar, Thailand and Vietnam and beyond) will have to continue to keep calm and carry on, at least until the storm of the coronavirus blows over.

Check out Khor Reports’ Durians for China: A Preliminary View and Dashboard.

*Loadstar.com in its article ”The calm before the 'supply chain storm' when China's air freight rates soar,” points to 300-400% rise in airfreight rates once production is back on full and “before belly traffic returns to the country.”

Screenshot from Khor Reports’ Durian Economy map