China: A Dragon in Reserve?
Gigi DiGiacomo
Institute for Agriculture and Trade Policy
October, 1997
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.
Production Capacity Strengthens
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.
Prices Drive the Trade Decisions
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.
International Dialogue Needed to Promote International Food Security
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
