The Dragon in Chinese culture personifies strength, power and
respect. According to recent analysis by the US Department of
Agriculture and others, China itself represents a sleeping dragon
for US and other major grain exporters seeking new marketshare.
Most of this analysis was fueled by the release of Lester Brown's
book in 1995, titled Who Will Feed China? Brown's book
claims that China's population growth, natural resource constraints
and economic expansion will limit the country's ability to "feed
itself" in the future. The questions raised by Brown regarding
Chinese production capacity are important and have been treated
accordingly by the research community and the Chinese Central
Government over the past two years.
However, equally important questions about China's reaction to
and impact on international grain market prices have been relatively
ignored. China entered the international grain market in 1995
to purchase 20 million tons of grain, largely due to what the
world called internal supply shortages. It is true that China
lacked sufficient quantities of grain to supply its internal demand
that year, but a recent trip to China by an APM (Global Peasant
Association) delegation revealed that China's supply shortage
was due to a combination of price responses in 1994 and marketing
failures by the Central Government, rather than to production
shortages.
International market prices responded quickly to Chinese demand
in 1995 as did grain traders and input dealers in grain exporting
nations to what they considered the beginning of a long term increase
in Chinese import demand for food and feed grains.
China's response to international grain prices and its commensurate
affect on traded grain prices will undoubtedly have significant
implications for grain importing countries and the outlook for
global food security. Therefore, the international community
should expand its range of questions beyond whether or not China
can feed itself, to ask how internal Chinese and international
market price fluctuations will affect China's trade decisions
and international food security.
In general, a country has two options to improve food production.
It can devote more land to crop production and/or it can improve
output per unit of land. China has the ability to do both in
its grain sector.
The APM delegation spent two weeks traveling throughout the diverse
Shanxi and Jiangxi provinces, meeting with the Development Research
Center of the State Council in Beijing, and with Wenxi and LePing
county leaders. It was very clear from these meetings that China
is deeply committed, both culturally and economically, to preserving
and enhancing its productive capacity and food self-sufficiency
at all levels.
In late 1994 and early 1995, for example, the Chinese Central
Government implemented what it calls the "grain bag responsibility
system." Under this system, Central Government responsibility
for the supply, use and financial management of grain was shifted
to the Provincial governments in an effort to stimulate grain
production. According to USDA analyst Frederick Crook, provincial
governors are now responsible for stabilizing the land areas sown
with grains in their respective provinces; guaranteeing investment
in inputs; meeting central government targets for stock levels;
ensuring the completion of grain transfers into and out of their
provinces; and stabilizing grain supplies to urban areas, among
other things.
The results of the grain bag system, thus far, indicate that the
government's policy objectives are being met. Chinese farmers
have responded to internal price subsidies by increasing the amount
of land sown to grains versus vegetable, fruit and oilseed crops.
Farmers have also increased their use of inputs in response to
the higher market prices for grain and direct input subsidies.
Thus, contrary to the expectations of Brown and others, in the
short term at least, China's grain plantings and yields have increased
significantly and resulted in record wheat and corn crops over
the past two years.
The trend toward increased grain production seems likely to continue
as the government pursues ways to make more efficient use of available
resources and to mechanize its agriculture sector in preparation
for industrialization and rural out migration as part of the country's
overall economic reform process. The APM delegation witnessed
many examples of direct national government and village support
for increased efficiency on individual farms belonging to the
local collectives. For example, in the arid Wenxi county where
water is extremely limited, the delegation visited a well and
irrigation project that had been developed at low cost by a peasant
to make the most efficient use of scarce water resources. The
in-ground, drip irrigation system was applied to the collective
and supported financially by the peasants and the government leadership.
This irrigation project allowed the collective to reap two intercropped
harvests each year instead of one, consisting of wheat, cotton,
watermelon and beans in a area that has received only five centimeters
of rain between May and August 1997 -- the county's traditionally
rainy-season.
There are many other examples, but in general it is sufficient
to say that China's agriculture sector will be able to make more
efficient use of existing resources as it encourages the innovative
use of inputs, continued individual control of farmland, the spread
of peasant-led research, government financial support for inputs
and collective projects, price supports and increasing access
to domestic "free" markets.
Moreover, Brown and others have raised questions regarding China's
capacity to meet increases in consumer income and concurrently
their demand for more meat products. This shift from a grain-based
diet to a high-protein or meat-based diet has occurred in most
developing countries and likewise is taking place in China. The
APM delegation had the opportunity to visit numerous hog and chicken
breeding and finishing facilities throughout north and central
China. The delegation was told that livestock feed needs will
not become an internal-supply problem as demand for meat grows
since China has excess corn production capacity. In fact, China
is a traditional net exporter of feed corn. Rather, China's industry
leaders noted that the country will likely import feed grain for
quality-related reasons until China can begin producing higher-quality
corn.
Although production challenges related to water resources, environmental
sustainability and rural outmigration exists, it appears after
only a brief visit that China can and will be able to feed its
growing population in the short term.
Assuming China has the ability to sustain and increase its production
capacity throughout the next decade, it is reasonable to expect
that China will not need to rely permanently on the international
marketplace for food due to supply constraints, nor from lack
of reserves, since they have maintained food reserves at national
and village levels which exceed international historic averages.
However, China can still be expected to enter the international
grain market periodically in response to price-related movements.
The APM delegation was told by the State Council that China maintains
fairly low import quotas and tariffs on grains and therefore China
itself is subject to international market price fluctuations.
For example, they said that prior to 1994 the country's internal
grain price was below that of the international market price and
consequently China exported grain that year -- in fact too much
grain. Therefore, in the beginning of 1995 when the international
grain price was initially below China's internal price, the country
imported 20 million tons of grain (more than half of which was
wheat) to fill the supply gap that had resulted from excess Chinese
grain exports in 1994.
A comparison of Chinese State Fixed prices, internal free market prices and the US export price for wheat reveals that:
1. China's internal wheat prices were in fact significantly lower than international prices (represented by US export prices) in 1994;
2. China's internal free-market wheat price jumped above the international market price in late 1994, when the country began buying wheat from the international community; and
3. The international market price began increasing in late 1994,
most likely in response to Chinese demand, but remained below
the Chinese internal free market price throughout 1995 and 1996.
This pricing situation does not apply to corn, however. Internal
Chinese free-market corn prices remained well above the US export
price throughout the 1991-1996 period examined, while China's
fixed procurement corn price was set below the US export price.
Considering their 1994 trade experience an oversight and marketing
failure, the Chinese Agriculture Ministry reportedly adjusted
their trade policy in 1996 to ensure that they do not over-export
in the future. The delegation was not told what type of policy
"adjustments" were made, but the adjustments likely
apply to quota volume adjustments.
The country initiated a Tariff-rate-quota (TRQ) system in April
1997, setting its "in-quota" tariffs equal to one percent
for corn, wheat and rice -- similar to what had existed prior
to 1997. The "over-quota" tariff equals 40 percent
for corn and 114 percent for wheat and rice. However, the quota
volumes, to which the TRQs apply are not transparent and have
become one of the leading sources of contention in the international
community over China's bid to join the World Trade Organization
(WTO). The maintenance of relatively transparent "in-quota"
tariffs will allow the direct transfer of international price
signals into the Chinese market. Consequently, the international
community should expect that the Chinese government will perform
periodic buying and selling in the international grain market.
Periodic and unpredictable Chinese market entry as either a grain
exporter or grain importer have already resulted in serious consequences
for global food security. Relatively small Chinese buying and
selling activity compared to its national grain flows, have the
ability to move the international market price up or down, respectively,
as occurred in 1994 and 1995. Therefore, just as China responds
to international market prices, it likewise has the ability to
significantly affect market prices.
It seems clear that if China maintains a fairly open border for
grains, and if it pursues reductions in existing quotas and tariffs
in its bid to join the WTO, both China and the world market could
be subject to increased price volatility as competitive pricing
advantages and seasonal production capacity shifts from year to
year among major grain producing countries.
China's future decisions about tariff and quota levels, as well
as its desire to maintain direct national and collective support
for the developing rural sector, will pose new questions and challenges
for both WTO members and non-members, particularly for peasant
producers and consumers in grain importing countries who are the
brunt of China's grain trade activity.
A new dialogue with Chinese APM partners is needed to discuss
the preservation of their production and food security goals under
the WTO and to consider other nations' ability to cope with increasing
international market price volatility associated with Chinese
activity and other factors. China's ability to continue its grain-bag
system under the WTO and hence to improve its production capacity
are critical to enhancing international food security as Brown
pointed out several years ago. Furthermore, the grain importing
countries' ability to insulate themselves from sporadic price
shocks in the international grain market, will be vital for many
developing countries who already face high import bills and debt.
1 Frederick Crook, "Grain Galore: China Refocuses on Grain Production, Despite the Toll on Government Coffers," THE CHINA BUSINESS REVIEW, September-October 1997.
2 Only wheat and corn prices are available for a comparison. Data obtained from Frederick Crook, USDA, Economic Research Service, Agricultural Commodity Division.
3 The delegation was not told what type of policy "adjustments" were made -- this will be important to learn.
4 Customs Duty of the Peoples
Republic of China: Policy, Regulation, Practice, Tariff, 1996;
Lynn Alfalla, USDA, Foreign Agricultural Service, AAEE program