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Trade war

Trade war begins to squeeze Chinese wallets

Tariffs on US products from cars to soybeans drive faster inflation

China's tariffs have resulted in higher prices for U.S. soybeans, which puts upward pressure on pork prices.
China's tariffs have resulted in higher prices for U.S. soybeans, which puts upward pressure on pork prices.   © Reuters

BEIJING -- The Sino-American trade war is fueling wide-ranging price increases in China, making authorities nervous as the impact starts to reach consumers.

China's consumer price index climbed 2.5% on the year in September, a 0.2 percentage point increase from August, the National Bureau of Statistics reported Tuesday. This was the fastest rise aside from the period around the weeklong Lunar New Year -- when outsize consumption tends to distort economic data -- since May 2014.

Though the increase owed in large part to food, with bad weather hitting supply, tariffs imposed by Beijing in response to U.S. duties on Chinese goods also played a role.

The government slapped an additional 25% tariff on American vehicles in July, bringing the rate to 40%, and automakers are passing on some of the extra cost to consumers. A basic Model S from electric carmaker Tesla now carries a roughly 850,000 yuan ($123,000) price tag, up from about 710,000 yuan. BMW and Daimler have raised prices for U.S.-made sport utility vehicles by 4% to 7%.

A Chinese unit of German consumer goods and chemicals maker Henkel raised prices this month by an undisclosed amount for adhesives and other products sold in China, according to local media. Its notice to customers cited the retaliatory duties on American goods as well as a weakening yuan, suggesting that the company imported adhesives or chemicals used in their production from the U.S.

The Henkel unit just increased prices by an average of 16% in July. Concerns have been raised that the latest hike may drive away customers.

A local subsidiary of American conglomerate 3M also raised Chinese product prices by around 3% to 5%, owing to rising materials and labor costs as well as currency fluctuations.

Given 3M's role as a supplier to smartphone manufacturers, some worry that the hike could make handset production more expensive. Escalation of the trade war would risk eroding the profitability of Chinese smartphone makers now taking global markets by storm, said an information technology analyst.

A tariff on American scrap paper, an important raw material for papermakers, spurred Lee & Man Paper Manufacturing and its peers to raise some prices in August. The hikes varied by product but often came to around 3%.

Companies that use U.S.-made chemicals in such products as paint and construction materials have reportedly warned customers of coming price increases as well.

Chinese authorities are racing to tamp down inflation to avoid public discontent, paying particular attention to soybeans. During a visit last month to an agricultural research facility in Heilongjiang Province, part of China's northeastern breadbasket, President Xi Jinping asked a researcher how the soybean crop is faring, taking note of the high yield.

Soybeans are processed to make cooking oil, and the soymeal left over from this process is used as pig feed. As both pork and soybean oil are staples of the Chinese diet, soybean prices have a significant impact on the CPI.

China imports nearly 90% of the soybeans it consumes, with a third of its foreign supply coming from the U.S. But the government imposed an additional 25% tariff on American soy in July -- a measure that, while intended to squeeze farmers who support U.S. President Donald Trump, also risks driving up prices in China.

Consumers are sensitive to changes in pork and cooking oil prices. Though pork prices are in line with levels a year ago, they have jumped 40% in the past six months.

The price of soymeal has climbed by 10% to 20% on the year, putting pressure on hog farming operations. Farmers now lose 200 yuan per pig, according to Chinese media. The government offers subsidies in an effort to support domestic farmers while also keeping pork prices from surging as costs rise.

Meanwhile, the price China pays for imported soybeans rose on the year for six straight months through September as buyers switched from formerly cheap U.S. beans to costlier South American soy.

Farmers are taking steps to reduce the country's dependence on imported soybeans, including decreasing the amount of soymeal mixed into hog feed or importing more rapeseed or sunflower meal instead. The government is boosting subsidies to farmers and pushing for more soybean planting in areas like Heilongjiang to lift domestic production.

Beijing aims to cut soybean imports by more than 10 million tons this year from 2017 levels through these measures. But imports fell just 1.4 million tons in January through September, far short of the target.

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