Cheap Chinese Goods Are Becoming a Costly Problem. Exhibit A: Hong Kong. - Kanebridge News
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Cheap Chinese Goods Are Becoming a Costly Problem. Exhibit A: Hong Kong.

Shoppers are hopping across the border after a prolonged decline in prices

Thu, Feb 22, 2024 9:05amGrey Clock 3 min

Prices are falling in mainland China. That’s a boon for people living in Hong Kong, but a big problem for the city’s businesses.

Consumer prices in China fell 0.8% in January compared with a year earlier, the country’s biggest deflation reading in more than a decade. That is a sign of the tepid state of the world’s second-largest economy, where a sputtering recovery has knocked confidence and encouraged Beijing to censor some economic research .

Hong Kong residents are increasingly hopping across the border to the city of Shenzhen, where they load up on frozen food and cheap furniture at big-box stores such as Costco and Sam’s Club. Hong Kong business owners, unable to compete with their Chinese counterparts on price, are feeling the squeeze.

“Walking on the streets these days, you’ll feel that Hong Kong retailers are in big trouble,” said the city’s former financial secretary, John Tsang, in a recent social-media post.

The pain being felt by businesses in Hong Kong offers a partial answer to a question that has been debated by economists for much of the past year: How will deflation in China affect the rest of the world?

Chinese export prices have dropped steadily since late 2022 and were 8.4% lower in December than they were a year earlier, according to customs data. Economists think that’s probably a good thing for Europe and the U.S., where central banks have been forced to embark on an aggressive series of interest-rate increases to keep rising prices in check. But the impact on smaller countries could be more troublesome.

China is the biggest trading partner for many countries across the world, and is particularly influential for countries in Asia. The risk for them is that Chinese companies dump their goods overseas in response to weak demand at home. They can also undercut manufacturers in countries such as Vietnam and Malaysia, which have slowly been muscling in on China’s status as the world’s factory.

“This Hong Kong story is applicable to countries that are near the neighbourhood of China because the supply chain is much smaller,” said William Lee , chief economist at the Milken Institute, an economic think tank. The shorter supply chain for China’s trade with its neighbours means changes in price pass through more directly, rather than being swallowed up by the various companies that get involved in shipping goods over longer distances.

China’s neighbours in East Asia don’t have the option to impose protectionist policies against it, analysts at Citigroup wrote in a January note. China is simply too big a force in global trade for them to risk its ire.

But if it is hard for China’s neighbours to push back against falling prices, it is even tougher for Hong Kong—which is run by a pro-Beijing government that wants closer integration with the superpower next door.

Hong Kong residents are partly benefiting from the strength of the U.S. dollar. The Hong Kong dollar is pegged to the U.S. dollar, and the city’s de facto central bank has copied the Federal Reserve’s series of interest-rate increases over the past two years. China’s central bank has gone in the opposite direction, cutting rates in an attempt to boost the moribund economy.

Since the end of 2021, the Chinese yuan has lost more than 11% of its value against the Hong Kong dollar.

Counting the cost

Hong Kong’s economy grew 3.2% last year, clawing back some lost ground after a 3.7% contraction in 2022. But the numbers mask a host of difficult problems, including an exit of foreign businesses , a prolonged slump in the real-estate sector and the lowest fertility rate in the world .

The apparent embrace of what mainland China had to offer would have appeared unthinkable five years ago, when the city was swept up in antigovernment protests. Back then, shoppers and diners looked up color-coded maps to help them identify businesses that shared their political stance to patronize—and avoided those perceived as having links to mainland China.

But years spent  cooped up in Hong Kong  during the pandemic and penny-pinching by anxious residents have helped boost Shenzhen’s appeal.

“We’re seeing a readjustment of our way of life that suggests economic interdependency between Hong Kong and Shenzhen,” said Edmund Cheng, a political sociology professor at the City University of Hong Kong.

Last year, Hong Kong residents made more than 50 million trips up north following the lifting of all pandemic-related travel restrictions in February, according to Hong Kong Immigration Department data. That’s still below pre pandemic levels, but the Hong Kong residents’ spending power helped boost retail sales in Shenzhen, which rose by 7.8% in 2023, recording one of the biggest jumps at any mainland city last year.

In a survey by a business lobby last year, just 37% of Hong Kong businesses said they expected revenue to grow in 2024. Less than a third thought they were on track to beat pre pandemic levels.

Korsy Lee, 39 years old, is one of many Hong Kong residents who make a regular pilgrimage to Shenzhen—and earns a profit from it. He began shuttling goods back from Shenzhen last August as a side hustle, and now goes there four times a week, loading up his Toyota minivan with frozen hamburgers, fish maw soup, Panasonic dishwashing machines and even toilet-paper rolls. He takes orders from customers and charges a flat fee.

“Eighty percent of my customers are housewives who want to make every penny count,” he said.


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Some chocolatiers and coffee makers say they will have to pass on the extra cost to consumers

Sun, Apr 14, 2024 4 min

Global prices for cocoa and coffee are surging as severe weather events hamper production in key regions, raising questions from farm to table over the long-term damage climate change could have on soft commodities.

Cultivating cocoa and coffee requires very specific temperature, water and soil conditions. Now, more frequent heat waves, heavy rainfalls and droughts are damaging harvests and crippling supplies amid ever growing demand from customers worldwide.

“Adverse weather conditions, mostly in the Southern Hemisphere, have played an important role in sending several food commodities sharply higher,” said Ole Hansen , head of commodity strategy at Saxo Bank.

The spikes in prices are a threat to coffee and chocolate makers across the globe.

Swiss consumer-goods giant Nestlé was able to pass only a fraction of the cocoa price increase to customers last year, and it may need to adjust pricing in the future due to persistently high prices, a spokesperson said.

Italian coffee maker Lavazza reported revenue of more than $3 billion for last year, but said profitability was hit by soaring coffee bean prices, particularly for green and Robusta coffee, and its decision to limit price increases.

Likewise, chocolatier Chocoladefabriken Lindt & Spruengli said in its 2023 results that weather and climate conditions played a major role in the global shortage of cocoa beans that led to historically high prices. The company had to lift the sales prices of its products and said it would need to further raise them this year and next if cocoa prices remain at current levels.

Hershey ’s chief executive, Michele Buck , said in February that historic cocoa prices are expected to limit earnings growth this year, and that the company plans to use “every tool in its toolbox,” including price hikes, to manage the impact on business.

In West Africa, where about 70% of global cocoa is produced, powerhouses Ivory Coast and Ghana are facing catastrophic harvests this season as El Niño—the pattern of above-average sea surface temperatures—led to unseasonal heavy rainfalls followed by strong heat waves.

Extreme heat has weakened cocoa trees already damaged from heavy rainfall at the end of last year, according to Morningstar DBRS’s Aarti Magan and Moritz Steinbauer. The rain also worsened road conditions, disrupting cocoa bean deliveries to export ports.

The International Cocoa Organization—a global body composed of cocoa producing and consuming member countries—said in its latest monthly report that it expects the global supply deficit to widen to 374,000 metric tons in the 2023-24 season, from 74,000 tons last season. Global cocoa supply is anticipated to decline by almost 11% to 4.449 million tons when compared with 2022-23.

“Significant declines in production are expected from the top producing countries as they are envisaged to feel the detrimental effect of unfavourable weather conditions and diseases,” the organisation said.

While the effects of climate change are severe, other serious structural issues are also hitting West African cocoa production in the short- to medium-term. Illegal mining poses a significant threat to cocoa farms in Ghana, destroying arable land and poisoning water supplies, and the problem is becoming increasingly relevant in the Ivory Coast, according to BMI.

The issues are being magnified by deforestation carried out to increase cocoa production. Since 1950, Ivory Coast has lost around 90% of its forests, while Ghana has lost around 65% over the same period. This has driven farmers to areas less suited to cocoa cultivation like grasslands, increasing the amount of labor required and bringing further downside risks to the harvest, the research firm said.

The Ivory Coast’s cocoa mid-crop harvest—which officially starts in April and runs until September—is expected to fall to 400,000-500,000 tons from 600,000-620,000 tons last year, with weather expected to play a crucial role in shaping the market balance for the season, ING analysts said, citing estimates from the country’s cocoa regulator. Ghana’s cocoa board also forecasts a slump in the harvest for this season to as low as 422,500 tons, the poorest in more than 20 years, according to BMI.

Neither regulator responded to a request for comment.

Meanwhile, extreme droughts in Southeast Asia—particularly in Vietnam and Indonesia—are resulting in lower coffee bean harvests, hurting producers’ output and global exports. Coffee inventories have recovered somewhat in recent weeks but remain low in recent historical terms. Robusta coffee has seen a severe deterioration in export expectations, while Arabica coffee is expected to return to a relatively narrow surplus this year, said Charles Hart, senior commodities analyst at BMI.

The global coffee benchmark prices, London Robusta futures, are up by 15% on-month to $3,825 a ton. Arabica coffee prices have also surged 17% over the last month to $2.16 a pound in lockstep with Robusta—its highest level since October 2022. Cocoa prices have more than tripled on-year over these supply crunch fears, and risen 49% in the last month alone to $10,050 a ton.

“Cocoa trees are particularly sensitive to weather and require very specific conditions to grow, this means that cocoa prices are especially vulnerable to extreme weather events, such as drought and periods of intense heat, as well as the longer-term impact of climate change,” said Lucrezia Cogliati, associate commodities analyst at BMI.

Cogliati said global cocoa consumption is expected to outpace production for the third consecutive season, with intense seasonal West African winds and plant diseases contributing to significant declines.

Consumers hoping for a return to cheaper prices for life’s little luxuries in the midterm may also be in for a bitter surprise.

“There is no sugarcoating it—consumers will ultimately be faced with higher chocolate prices, products that contain less chocolate, and/or shrinking product sizes,” Morningstar’s Magan and Steinbauer said in a report.

“We anticipate consumers could respond by searching widely for promotional discounts, trading down to value-based chocolate and confectionary products from premium products, switching to private-label from branded products and/or reducing volumes altogether.”

The record-breaking rally for cocoa and coffee is likely more than just a flash in the pan, according to Citi analysts, as adverse weather conditions and strong demand trends are likely to support prices in the months ahead. The U.S. bank estimates Arabica coffee futures in a range of $1.88-$2.15 a pound for the current year, but said projections could be lifted if the outlook for 2024-25 tightens further.

At the heart of it all, climate change is set to play a major role, as the impact of extreme weather events could exacerbate the pressure on cocoa and coffee supplies, according to market watchers.

“I don’t expect prices to remain at these levels, but if we continue to see more unusual weather as a result of global warming then we certainly could see more volatility in terms of cocoa yields going forward, which could impact pricing,” said Paul Joules, commodities analyst at Rabobank.