Overview

  • An estimated 1 million to 2 million metric tons (MTs) of sugar is smuggled into southern China due in part to high domestic sugar prices, high outside tariff-rate quotas, and bureaucratically induced non-tariff barriers that restrict the inflow of legal sugar imports
  • From 2011 to 2015, China’s annual sugar imports skyrocketed from 3 million MTs to 5 million MTs, equating to 30% to 50% of the country’s total sugar output
  • From 2016 to 2017, Chinese production of high fructose corn syrup, a sugar substitute, is forecasted to increase from 3.8 million MTs to 4.15 million MTs thanks to a corn glut on the domestic market

History of Sugar in China

Sugar has evolved in China from a rare luxury commodity enjoyed by the Imperial Court to a ubiquitous food ingredient widely consumed by the general public. The first references of sugar in China were cursory mentions relating to its medicinal applications or its inclusion in a list of tribute payments from neighboring kingdoms. Domestic sugar cane cultivation likely began during the Han dynasty (206 B.C. to 220 A.D.) and was used to produce cane juice, fermented “sugar liquor”, and congealed sugar cakes. In 647 A.D, an Imperial delegation dispatched by the renowned Emperor Taizong of Tang returned from a Buddhist monastery in northeastern India with the newly learned secret of refining sugar. Refining sugar or transforming sugar cane into “sandy” or granulated sugar, was key to improving the sweetener’s shelf-life, storage, and transportation qualities. The process of refinement adopted by the Tang dynasty produced red or brown sugar, and it wouldn’t be until the Song dynasty (960 to 1279 A.D.) that white crystallized sugar appeared in the Middle Kingdom. It was also during this period that consumption began expanding into China’s urban areas. Shortly after the fall of the Song dynasty, the famed Venetian Marco Polo noted that “great quantities of sugar” were available in the city of Hangzhou in eastern China. Sugar would eventually emerge as a staple commodity for the Chinese population during the Ming dynasty (1368 to 1644), Sugar cane would remain the principal raw material used in Chinese sugar production until the early 1900s when sugar beets began being used. Sugar cane lost additional market share during the latter half of the 20th century when high fructose corn syrup was introduced by the USA as a sugar substitute in the manufacturing of soft drinks. Despite these latter introductions, sugar cane remains the dominant source of sugar and the most used sweetener in China today.



Sugar Cane vs. Sugar Beet

Sugar (sucrose) is produced by crystallizing sugar cane or sugar beet juice. Both crops share similar traits as water accounts for approximately 75% of their weight: While the sugar content of sugar cane ranges from 10% to 15%, the equivalent range in sugar beets is 13% to 18%. One key difference is that sugar cane can only be grown in tropical and subtropical regions near the equator, while sugar beet cultivation primarily occurs above the 35th parallel north. In China, this dividing line cuts across the provinces of Jiangsu, Henan, Shaanxi, and Shandong. In 2015, China cultivated sugar cane on nearly 1.6 million hectares of land, with Guangxi Region accounting for 61% of the country’s total sugar cane area. The provinces of Yunnan and Guangdong were the next largest cultivators, accounting for 19% and 10% of China’s total sugar cane area, respectively. During the same year, China cultivated sugar beets on 136,830 ha of land, with Xinjiang Region accounting for 45% of the country’s total sugar beet area. Inner Mongolia Region and Hebei Province were the next largest cultivators, accounting for 36% and 13% of China’s total sugar beet area, respectively. From 2014 to 2015, both crops recorded a decline in their respective cultivation area due in part to the influx of relatively cheap sugar imports from abroad. For instance, the area of Chinese sugar beet cultivation decreased by -1.4% while sugar cane cultivation decreased by -9.1%. Sugar cane suffered disproportionally greater than sugar beet farming owing to the illegal smuggling of sugar from Southeast Asia into the sugar cane cultivations areas of Yunnan and Guangxi.




China’s Sweet Tooth

Sugar smuggling into China continues to thrive thanks to the country’s annual sugar supply gap of approximately 2 million metric tons (MTs). It is estimated that China’s annual sugar consumption totals 16 million MTs, while production and imports typically reach only 14 million MTs. In 2016, China’s sugar production totaled roughly 9.5 million MTs while imports of raw and refined sugar reached 3.3 million MTs. As a consequence of the annual sugar shortfall, at least 1 million MTs of sugar illegally crosses the border into China from Southeast Asia on a yearly basis. Myanmar is arguably the largest illicit supplier. In August 2016, law enforcement officials in Anhui Province seized 1,200 MTs of illicit sugar that was smuggled in by gangs based in Yunnan Province and Myanmar. To combat this illicit trade, from March 2016 to December 2016, Chinese authorities carried out operation “Gateway Sword 2016” in order to combat the influx of smuggled sugar, grains, and frozen food at its southern border.

Despite counter-smuggling operations like Gateway Sword, smuggling may actually worsen in the coming years due to China’s May 2017 decision to increase its outside tariff-rate quota (TRQ) on sugar. Prior to this decision, China had a 15% basic duty rate for up to 1.94 million MTs of imported sugar and an outside TRQ of 50%. The TRQ was designed to balance out the price difference between domestic and internationally traded sugar. For instance, in January 2014, the price gap between Chinese sugar in Kunming, Yunnan Province, and US sugar (ICE futures, export prices) was approximately USD 391 per MT. Unfortunately, this price gap has since expanded to roughly USD 664 per MT (as of June 2017). Recognizing that foreign sugar was more than 50% cheaper than domestically produced sugar, the Chinese government increased its outside TRQ to 95% (progressively declining to 90% and 85% in the following years) in hopes of curbing import demand for foreign sugar. In spite of this, some importers will likely seek cheaper (i.e. illegal) alternatives in order to meet domestic demand and fill the supply gap.

Sugar Rush and Crash

China’s 2017 decision to increase its out-of-quota sugar import tariffs was the end result of a trade probe requested (in July 2016) by the Sugar Association of Guangxi Region and initiated (September 2016) by China’s Ministry of Commerce (MOFCOM). MOFCOM stated it would examine sugar imports going as far back as 2011, the year that Chinese sugar imports first exceeded the inauspicious 1.94 million MTs quota threshold. From 2010 to 2015, Chinese imports of raw sugar increased from 1.56 million MTs to 4.13 million MTs, while imports of refined sugar increased from 356,000 MTs to 880,000 MTs. In 2015, Chinese sugar imports spiked owing to the rapidly expanding price gap between domestic and international sugar. Impressive as the volume of 2015 sugar imports was, a large of amount of these shipments was prevented from entering the mainland in a timely manner. Instead, they were held in bonded warehouses for the importers’ failure to register their cargo and pay duties. The registration system in particular was a newly minted non-tariff barrier (NTB) launched in the previous year and designed to throttle back sugar imports. In essence, the new system required sugar importers who did not qualify for the 15% basic tariff rate (i.e. above the import quota) to secure special permits before their sugar clears customs. As a result of this new NTB measure, by the end of 2015, China reportedly had 500,000 MTs to 800,000 MTs of sugar in bonded warehouses waiting for customs duties to be paid. In 2016, raw sugar imports shrunk to 2.6 million MTs (a -37% decline from 2015) partly as a result of market uncertainty over whether imports would be allowed to make it past customs. Interestingly, amid this import slowdown in September 2016, China’s National Development and Reform Commission (NDRC) announced that it would sell 350,000 MTs of sugar from its state reserves at the high price of CNY 6,000 (~USD 900) per MT.

Within China, from 2015 to 2016, the largest importers of raw sugar were the port cities of Dalian (combined 1.51 million MTs over the two year period), Qingdao (1.46 million MTs), Zhanjiang (669,000 MTs), and Huangpu (541,000 MTs). Of the four, Zhanjiang and Qingdao had the largest import drop-off from 2015 to 2016, recording a -59% and -44% import decline (by volume), respectively. Interestingly, Huangpu was the only major Chinese importer to record a net import increase (3% rise). The biggest loser was Shandong Province’s Jinan, which saw its raw sugar imports shrink -88% from 458.200 MTs to 55,200 MTs. Over the same period, the largest importers of refined sugar were the port cities of Hong Kong (combined 316,700 MTs), Tianjin (268.000 MTs), Shanghai (202,500 MTs), and Huangpu (185,700 MTs). Of the four, only Hong Kong managed to avoid a significant import decline (only a -13% drop by volume), while the other three cities saw their imports decline from 40% to 60% over the 2015 to 2016 period. Based on the above analysis, the most robust Chinese demand for raw sugar originated from Dalian and Huangpu, while Hong Kong exhibited the strongest demand for refined sugar.

Glucose and Fructose

Over the past 25 years, high fructose corn syrup (HFCS) has emerged as the preferred sweetener for the soft drink industry due to its low cost and sweeter taste versus ordinary sugar. HFCS is derived from high-starch dent corn, a less labor- and water-intensive crop which also has a greater cultivation area than sugar cane. Corn is a commodity that China has an abundance of, with an estimated 250 million MTs stored in state reserves alone in early 2016. Consequently, China is a net exporter of HFCS, particularly HFCS-55, a super sweet mixture of 55% fructose and 45% glucose that is the preferred sweetener used by soft drinks industry. China also produces glucose syrup (less than 20% fructose), of which 42 DE Corn Syrup is the most popular variety. Also known as “regular” confectioner’s corn syrup, 42 DE Corn Syrup is only half as sweet as sugar and is used mostly as a thickener in beverages and sauces, or to prevent crystallization in ice cream and candies. In 2016, China exported more than 656,000 MTs of glucose syrup, mostly to ASEAN countries and South Korea, and 454,500 MTs of HFCS 55, primarily to the Philippines. Fueled by corn surpluses, Chinese exports of HCFS 55 to the Philippines alone skyrocketed from 54,800 MTs to 300,700 MTs between 2012 and 2016. The flood of HFCS 55 from China became such a headache for the Philippine sugar industry that it successfully lobbied its government in February 2017 to impose tougher import restrictions on all shipments of HFCS 55 coming into the country.

Apart from corn syrups, China was also a major exporter of invert sugar, which is ordinary sugar that has undergone hydrolysis to split the bond between its glucose and fructose components. This split allows invert sugar to retain more moisture in baked goods and prevent crystallization in comparison to regular granulated sugar.  Additionally, since it is a sucrose-based syrup, it is sometimes used as a healthier alternative than HFCS. In 2016, China exported 394,000 MTs of invert sugar primarily to ASEAN countries, South Korea, and Russia. Unlike glucose and HFCS 55 exports which saw increased exports in recent years due to a corn glut, invert sugar exports remained comparatively flat owing to lackluster domestic sugar cane and sugar beet output.



Outlook

It is estimated that 1 to 2 million MTs of sugar is smuggled annually into China from Southeast Asia due primarily to the ever-expanding price gap[1] between high-priced domestic sugar and relatively inexpensive international sugar. This price gap stems from a variety of factors, though mostly center on the fact that Chinese sugar cane production is simply less cost efficient than international producers. In 2013, the cost of sugar production in China was estimated at approximately CNY 5,800 per MT (~USD 880 per MT) after tax, while the equivalent cost in Brazil (world’s largest producer) was roughly CNY 2,500 per MT (~USD 380 per MT). Bridging this price gap by lowering production costs would be a difficult task as Guangxi Region and Yunnan Province, China’s top two sugar cane growers, are among the country’s least economically developed regions. In 2013, only 30% of sugar cane output in China was mechanized, with the bulk hand harvested. Additionally, both regions are situated along China’s porous border with Southeast Asia, an area that includes Thailand, a sugar producer that rivals China its terms of output but not costs. Complicating matters is the fact that importing large amounts of sugar at the 15% basic tax rate has become an extremely profitable business venture for local companies. As a consequence, sugar importers have been incentivized to prefer that domestic sugar prices never shrink to international levels. This preference could translate into lobbying government officials to maintain the inefficiencies associated with the current status quo. Lastly, some importers who are unwilling or unable to legally profit from this form of arbitrage will simply turn to smuggling. To combat this, in January 2016, Guangxi Region went so far as to cancel a regulation that permitted individuals to import up to 1 kg of sugar per day. However, China’s increase of its TRQ from 50% to 95% and its 2014 NTB measure to force out-of-quota importers to secure special permits before clearing customs do nothing to fix production inefficiencies and may inadvertently lead to an increase in sugar smuggling in order to avoid these obstacles.

[1] From January 2015 to November 2016, sugar spot prices in Kunming, Yunnan Province, progressively increased from CNY 4,240 (~USD 653) per MT to CNY 6,890 (~USD 997) per MT. Meanwhile in Beijing, sugar spot prices rose from CNY 4,500 (~USD 693) per MT to CNY 7,100 (~USD 1,027) per MT. Over the same time period, US sugar export (ICE futures) prices increased from USD 338 per MT to USD 446 per MT.

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