What El Niño, pork supply and steel production have in common – they all point to China needing a stronger yuan

All at once, the markets for pork, other agricultural products and iron ore face distortions, and China might be prepared to accept yuan appreciation to protect against the resulting commodity-related inflationary pressures

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A pig on a farm in Changtu county, Liaoning province, on January 17. China is the world’s largest consumer of pork, and thanks to the mass culling of pigs to stop the spread of African swine fever, domestic production is expected to fall at least 4 million tonnes below demand. Photo: Reuters

Published: 11:30am, 16 Apr 2019Updated: 10:25pm, 16 Apr 2019

African swine fever, El Niño and iron ore may not be at the forefront of currency market thinking but policymakers, including in China, always have an eye on commodity prices of all kinds. Beijing may currently be prepared to tolerate a stronger yuan, as that will provide some protection against potential imported commodity-related inflation.

A rebound in Chinese exports and increased credit creation supported investor risk appetite at the end of last week. The more that green economic shoots emerge, the likelier it is that overseas capital will be tempted again towards China, giving support to the yuan along the way.

Yuan strength might prove useful. China’s consumer price index (CPI) rose 2.3 per cent in March on an annualised basis, a five-month high. Higher pork prices helped drive that CPI number, as Chinese farmers culled their herds in an attempt to stem the spread of African swine fever.

Domestic pork supply in China this year may fall at least 4 million tonnes below demand, Ma Chuang, deputy secretary general with Chinese Association of Animal Science and Veterinary Medicine, told Bloomberg last week. Ma estimates China’s total pig population may drop by as much as 30 per cent, equating to around 128 million hogs.

“The global market won’t have enough pork to supply China,” Ma said. “The deficit won’t be filled even with poultry or other meats.”

The United Nations’ Food & Agriculture Organisation (FAO) has already noted that, globally ,“in March, price quotations for pig, bovine and poultry meats received some support from a surge in import demand, especially from China, notwithstanding increased export availabilities from major suppliers”.