Chinese grain market policy with special emphasis on the domestic grain trade

• Ministry of Agriculture, China

The project focused on understanding the political economy of the Chinese domestic grain marketing system (mainly rice, wheat and maize). The system was characterised by a lack of competition, costly inefficiencies, and cycles of reform. It was a complicated marketing system with extensive government control over pricing, transportation and storage.
Despite various recent reforms, the State continued to play a large part in managing the domestic marketing system. It set floor prices, bought and resold grain, stored and distributed it through its own agencies, and excluded private traders from dealing directly with farmers.
Various analyses suggested that these arrangements were unsustainable, particularly as there was a considerable financial burden on the State. Often the government policy objectives conflicted and therefore had unintended consequences. As China had started to rely more on market forces in grain distribution, the policies tended to exacerbate the fluctuation in prices and that, in turn, exaggerated concerns by farmers about prices and by others about the security of supply.
Responsibility for implementing policies designed in Beijing rested with provincial governments, a practice that seemed to raise significant barriers to trade in grain within China. This project addressed some of these problems, measuring the extent of inter-regional grain transfers and examining how effectively policies met the goals of income growth and security for farmers while maintaining the security of supply for consumers (mainly urban-dwellers).

The main aim of the project was to assess the current transfers of grain between regions within China, examine constraints on grain movements, and evaluate policies that could affect transfers.

The work was divided into four sub-projects. The first measured the volume of grains and certain other foodstuffs transported, and recorded those areas that are net domestic exporters and those that are net receivers of grain. The second estimated grain yields by crop type and by region, and then measured the impact of existing barriers to trade within China and with the rest of the world. This allowed the team to rate the competitiveness of different regions of China.
The third sub-project analysed the existing marketing system and measured the costs currently incurred in managing it. It also involved assessing the impact of proposed reforms on farmers, state grain bureaus and other relevant bureaucracies, and on consumers.
The final sub-project comprised two surveys of 1000 households across five provinces, to discover how grain circulates among peasant households in different regions. This was an important source of data for the other parts of the project, and was carried out by Chinese researchers working with personnel of the rural economic management stations in the provinces.

The project estimated yields of food and grain crops by regions and identified major grain surplus and deficit provinces. It also estimated the detailed volume and direction of domestic trade in major grains for six provinces. Researchers found that regional grain flows were expanding, leading to significant changes in domestic inter-regional grain trade patterns.
The team collected regional wholesale and retail price data, regional quota negotiated and market price data for the major grains and food products. Researchers measured the degree of market integration to estimate the impact of domestic trade barriers. Their estimates of various indices applicable to China helped rate competitiveness of main grains in major agricultural regions.
They described the political economy reasons for the development of China's grain marketing system since the 1978 reforms. After determining the preconditions needed to successfully implement the 1998 grain policy objectives they concluded that the policy package was bound to fail. They identified signals and key components that would push the market-oriented grain marketing reform started in 2000 and reached the conclusion that policy retrenchment was less likely when the next supply-constrained cycle arose.
The researchers found that government control over the domestic grain market and control over international trade had destabilised prices in the market and resulted in excessive surpluses. Reforms were erratic, and the considerable uncertainty this generated for consumers and farmers was reflected in their responses to grain marketing policy changes.
In 1999-2000 the team surveyed 1000 households in five provinces and 20 counties, and data now exist for the period 1993-5 to 1999-2000 (5 years in total) for four of the five provinces. This provided a micro basis to support an aggregate analysis of grain flows among regions.
The outputs from the project should help Australians better understand the long- and short-run implications of China's accession to WTO as well as China's inter-regional grain trade volumes and regional comparative advantage in various crops. This will help to identify opportunities for Australian agriculture in terms of future trade relations with China.
Project results have had a positive role in promoting a new round of grain marketing reform in China. At the final review of the project the Chinese project leader commented that results have been used in decision-making of China's high administration - for example Jianxu Province was advised not to buy soft red wheat at the protected price, and it complied. Henan Province undertook an analysis of grain grades being supported under the grain policy, and implemented the recommendation that grades of less than 3 be excluded from the protected price scheme. The Vice Premier of Henan also accepted the analysts' advice to increase the price of hard wheat.
Nanjing University used the methodology and analytic framework developed in the project. Policy advice on regional comparative advantage in agriculture provided to the provincial government was well accepted.