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Floods and the corona virus trigger extra uncertainty in China as meals costs rise

People wearing face masks move vegetable packs to a wholesale agricultural products market as the country is affected by an outbreak of the novel corona virus on February 19, 2020 in Beijing, China.

Tingshu Wang | Reuters

Raised food prices are just one of many new challenges that China faces after the outbreak of the corona virus.

According to the National Bureau of Statistics, food prices in June rose 11.1% year over year. Weekly data from the Department of Commerce showed that agricultural food prices rose 1.2% in the week of July 5th compared to the previous week. According to the Ministry of Commerce, which was released on Tuesday, prices rose another 0.8% during the week to Sunday.

The authorities have closely monitored food prices as they are an important element in maintaining social stability.

From a business perspective, Covid-19 has hit the food and beverage industry in particular because efforts to limit the spread of the virus have kept people from eating. Many people have also switched from ordering food online to cooking at home.

In the first half of the year, 105,800 food and beverage companies ceased or ceased operations, with Qichacha, which maintains a Chinese business information database, saying that more than 70% of closings occurred in the second quarter. Over 70% of the 990,500 new registrations in the industry also occurred in the second quarter, but the percentage increase in closed deals in the second quarter was greater than that of new registrations, according to CNBC data analysis.

Gao Huan, a senior director of retail and manufacturing at Alvarez & Marsal in Beijing, estimates that the rise in food prices in China will reduce restaurant revenue by about 2 percentage points.

"The price hike is actually pretty real and is mainly caused by the drop on the supply side and the increase on the demand side," she said in a telephone interview Monday. "In fact, this trend will most likely continue as we see many other natural disasters like the flooding in southern China, which has a major impact on the raw material. This will (very soon) hit the market."

Floods increase uncertainty

Severe floods, which some have described as the worst since at least 1998, have claimed at least 141 dead or missing, according to state media. Direct economic losses have exceeded 86 billion yuan ($ 12.3 billion), with around 29,000 homes destroyed and more than 2.24 million emergencies relocated, the report said.

At the weekend, Chinese President Xi Jinping described the flood situation as "bleak" and that the response has entered a "critical" phase, according to a CNBC translation of his statements, as reported by Chinese state media.

"We expect CPI inflation to rise to 2.7% year-on-year in July as the supply shock from recent floods in southern China could more than offset the high base in July 2019," said Nomura chief economist Tura Lu in China, in a July 9 report. "However, we believe that the downward trend in CPI inflation will remain intact year-on-year compared to the second half of the year (to around 1% at the end of the year), mainly due to the higher basis due to rising pork prices in the second half of 2019.

Analysts from Hangzhou-based broker Nanhua Futures said last week that food price effects will only be short-term, while the floods will have a greater impact on live pork production.

More concerns about pork prices

Pork prices have more than doubled in the past 18 months as African swine fever led to a shortage of Chinese meat. Pork prices remained 81.6% higher in June than a year ago.

Prices remained high despite increased Chinese purchases of foreign food. In the first half of the year, China's pork imports rose 140% year over year, while beef imports increased 42.9% and soybeans 17.9%, according to Tuesday's customs administration data.

The reappearance of the corona virus in an important product market in Beijing has further increased the pressure on food prices. According to the city government, fresh produce prices in the capital rose 9% in June.

The overall rise in pork and food prices increased China's consumer price index, a key measure of inflation, slightly higher in June to 2.5% from 2.4% in May. However, this was lower than 5% and 4% in the first months of the year.

Short-term effects on prices, not necessarily on companies

Zong Liang, chief researcher at the Bank of China, said in a phone interview Monday that he expected the CPI of 2.5% to be below 3% for the full year, which is a relatively stable number. Zong was generally optimistic that food price increases would be short-lived.

For the overall economy, however, developments such as the temporary reappearance of the corona virus are likely to mean a gradual growth in returns.

"The recovery of this market will be fairly stable, not very quickly," said Zong, according to a CNBC translation of his Mandarin-language comments.

It remains a difficult journey for restaurants as they control changes in food prices and consumer behavior.

"We have already observed that many of the small and medium-sized players are out of the game … The restructuring of the industry continues," said Gao. "The overall demand from the restaurant business is not fully met, no matter how much people want to see it. Only 80%, 90% will return to normal. Many disadvantaged players will be out of the game."

As a result, Gao said that restaurants need to be more innovative to survive the post-coronavirus economy by adopting strategies such as: using online sales channels and frozen foods, improving supply chain efficiency, and ensuring quality and safety for consumers adequately to eat.

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