Food Security and Economic Reform

In recent years, China’s grain economy has been the subject of intense study and concern. The focus has been the country’s capacity to feed its population and the impact on the world grain market of any shortfalls in her grain production. While careful research has shown many of these concerns to be overstated, the development of China’s grain economy remains an issue of major significance. It relates not only to the above questions, but also to the nature of China’s economic reforms and to the problems of a transitional economy. This volume approaches these topics from the perspective of the development of China’s grain marketing system. The focus is on the development of the domestic marketing system, but this system cannot be considered in isolation from the linkages to world markets. Factors affecting the design of trade policy are the theme of the final chapter of the volume. Before that, a number of other issues in the domestic system are reviewed, including the pace and content of reform so far, the development of wholesale markets, and the growth of a complementary financial system.Along the way, a series of implications of these reforms are highlighted, including the links between reform and productivity growth, between events in grain markets and inflation in China, and between reform and stockholding decisions, and thereby trade. A special interest is the impact of marketing reform on regional trade patterns in the domestic market

Reform of the grain marketing system has been among the slowest and most cautious of all the elements of China’s rural economic reform programme. Given the fundamental emphasis previously placed on grain production, this is not surprising. Since 1949, grain self-sufficiency and stable grain supplies at low prices have been among the primary goals of China’s agricultural policies. The deep-seated commitment to these aims and the fear of food instability have, inevitably, led to considerable caution on the part of government in its management of change in the grain sector. As a result, grain has been among the last of the agricultural commodities to be considered for full liberalization. This wariness was demonstrated most clearly by the stalling of grain reform in the mid-1980s. It was not until the economic uncertainties of the late 1980s were overcome, and the structural changes of the 1980s had become consolidated, that grain market reform began to move ahead again after 1991.

Since 1949 China’s system for grain purchases and sales has passed through four main periods of development. The first was the free trading system during the early 1950s. The second was the unified purchase and sales system established in 1953. The third was the replacement of that system with the ‘dual track system’ in 1985. The fourth has been the gradual process of reform since 1988, which first involved unifying purchase and sales prices and then the deregulation of prices and of trading. This chapter describes and analyses the process of the reform since 1988.

In the period from 1993 to 1994, inflation became a major topic of discussion in China. At the time, a widely held view was that the rise in grain prices was the source of inflation. It was thus argued that controlling inflation in the first place required turning off the source by restricting the rise in grain prices. The basis for this view was the 24.1 per cent rise in national urban consumer prices, within which food consumer prices rose by 31.8 per cent. Within food prices, grain consumer prices rose by 50.7 per cent. The issue is whether these figures provide the evidence that the rise in grain prices was the source of inflation and whether the 1994 rise in agricultural product prices was the major factor that influenced inflation in that year. This requires objective and practical analysis.

Projections of grain demand in China vary widely, and the aim of this chapter is to identify the sources of this variation. After discussing a number of factors that influence grain demand, we present a new set of projections of Chinese grain consumption. On the basis of those calculations, we also present a set of new projections of grain consumption. The sensitivity of the projections to key parameters is discussed, and that discussion is used to suggest priority areas for further attention.

The development of an open and competitive grain market requires the establishment of an integrated wholesale marketing system. Such a system not only provides an efficient mechanism for price formation, but also forms the basis for economic exchange between town and countryside and for the growth of inter-regional grain trade in ways that encourage specialization and diversification in production. In contrast, the dual-market, dual-price system that evolved during the 1980s, where by a significant proportion of marketed grain is subject to administratively determined prices and passes through planned channels, generates distortions and acts as a mechanism for economic redistribution.

Before the reforms in grain marketing and prices of 1984–5, grain markets in China were characterized by a two-track system, under which grain producers were required to deliver a certain amount of grain to the state at lower than market prices.² In some major grain producing areas, however, a shortage of funds for state grain procurement and the issue of IOUs and cheques that could not be cashed emerged as early as 1985.³ By 1988, the problem became widespread and IOUs amounted to 8 to 10 billion yuan, or about 8 to 11 per cent of the total funds paid for grain purchases and 21 to 27 per cent of the total funds paid during the autumn purchase season of September to December (Food, Marketing and Trade Research Group, 1991, pp. 4–5). It was estimated that in central and western China, IOUs were used to pay for 50 per cent of the grain delivered to the state (Johnson, 1994). With a bumper harvest in 1989, the grain bureaus in many grain-producing provinces either issued more IOUs or ceased to purchase grain, because of the lack of funds (Xiao Fuping, 1990, p. 122).

Before the 1980s, local self-sufficiency was a strategy enforced by the Chinese government in dealing with regional grain production and supply. Under this strategy, each province was required to produce sufficient grain to meet local demand before it could produce other products. When the selfsufficiency strategy was enforced, regional comparative advantage was given little consideration, and local resources often could not be used efficiently. As a result of this policy, intra-regional grain transfers were kept as low as possible, and the evidence shows that during the 1970s they accounted for only around 1 to 2 per cent of total production, compared with 5 per cent or more in the 1950s (Lardy, 1990, p. 4).

The rapid increase in the nominal prices of grain in free markets in China that began in late 1993, and continued throughout 1994 and into 1995 has been the subject of considerable discussion and debate. More importantly, the rapid increase in nominal prices resulted in the government of China abandoning the important grain market reforms it had instituted in 1993. These reforms were the culmination of more than a decade of efforts to reduce governmental intervention in the production and marketing of grain, and would have made considerable progress in completing the necessary conditions for a national market for grain.

In the fall of 1992 an academician at the Chinese Academy of Social Sciences reported that China’s grain stocks for 1990 were 491 million tonnes (Wen Guifang, 1992). The new estimate raised several important issues: How do China’s statisticians define stocks? Who are the stockholders and what are the relationships between them? How do stocks relate to grain imports and exports. Why does China import grain when it has large stocks? Why do farmers hold large stocks? What factors influence stock holding? Under what conditions might grain stocks be reduced and how might stock increases or decreases affect China’s grain imports or exports? In the coming decades, stocks likely will decrease slowly as economic reforms continue, grain markets become more efficient, transportation lines are improved, and financial markets become established.

For six years following 1978, agricultural output in China grew more than twice as fast as the average growth rate over the previous twenty-five years. This impressive growth followed the introduction of the package of economic reforms associated with the household responsibility system (HRS) in 1979 - the privatization of farming and the support of rural development. The control of farmland changed from a team to a household-based system, the incentives to work the land improved, and the new system resulted in efficiency gains.

This chapter examines the linkages between domestic grain market reform in China and China’s international grain trade. We focus on the economic and political determinants of that trade. In the process of making the analysis, we also refer to the issue of the volume of the grain trade, an issue that has already attracted considerable attention in response to the book by Lester Brown (1995). A recent example of that response is Lin, Huang and Rozelle (1996). We argue here that understanding the prospects for China’s trade depends on both a clear understanding of the trajectory of reform within China and a greater degree of desegregation of the food sector than has so far been achieved.