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China Embraces the World Market

Case Studies - Specialist Boxes


In recent years, the Government initiated reforms in its grain purchasing and distribution systems. Prior to 1998, despite two decades of market-oriented reforms, the state still controlled two thirds of China's grain marketing, mainly to support its grain self-sufficiency policy, boost farmers' incomes and keep food affordable in urban areas. Although half of grain market transactions were conducted at close to market prices, the Government's remaining purchases were at controlled prices. This imposed a significant burden on its budget through mounting state grain bureaus' deficits and on the banks via misappropriated loans.

To stem these costs, the Government launched some grain distribution reforms in 1998, but these failed to tackle the fundamental problems such as state grain enterprise inefficiency and their obligation to procure grain at high prices to safeguard farmers' incomes. Consequently, the state grain system continued to acquire stocks of low-quality grains and faced increasing financial and storage problems. This policy package also continued to distort grains pricing and production.

Hence, in 2000, the authorities launched a new series of reforms to rectify the procurement system's deficiencies. Importantly, they phased out procurement of low-quality grain, including spring wheat in northern China, and wheat, maize and early indica rice in southern China. At the same time, the Government allowed Zhejiang province to trial further grain liberalisation, including separating grain administration departments from their business operations, freeing up grain distribution and ceasing discrimination against private distribution investment, phasing out subsidised grain purchases and allowing farmers further choice over their farm operations.

In August 2001, due to the success of this trial, the State Council extended this initiative to three major municipalities and five other coastal provinces, ahead of possible nationwide implementation (China International Business,, January 2002). Despite these encouraging developments, state grain procurement, pricing controls and import restrictions still significantly distort local grain markets. Given the system's many long-standing problems, most analysts believe the best way to resolve grain distribution inefficiency and cut resulting financial burdens is to abolish state procurement. Dismantling the state grain enterprises' monopoly power also will assist China to comply with the WTO requirement to not discriminate against imports.

Authors: Associate Professor Harry Wu and Ms Esther Shea, Hong Kong Polytechnic University

This page last modified: Tuesday, 10 December 2002 11:42:34 AM

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