Publications
Executive Summary
The summer of 1992 is a time of abundance, national self-confidence and
economic reform in China. There is a buoyant political mood in the months
leading up to the five-yearly Conference of the Chinese Communist Party, to be
held in late 1992. This mood builds upon a successful program of macroeconomic
stabilisation since the realisation in the summer of 1988 that the inflation
and external payments deficits reflected profound and unsustainable economic
imbalances. It also builds upon steady and substantial progress in economic
reform and internationalisation, which made decisive progress through the
winter and spring of 1990-91 largely unnoticed by those in the West whose
perceptions were blurred by the human rights catastrophe of mid-1989.
Reform has been tested severely since 1988, both politically and
economically. Within an environment that was favourable to reaction against
reform in late 1989, some leaders sought to re-establish a central role for
large state enterprises in development, and to diminish the role of village
and township enterprises. These attempts were rolled back by inexorable
pressures for further market-oriented reform.
No where has the progress in reform been stronger than in the grain
economy. The back of resistance to grain price reform was broken in the spring
of 1991, when there were major price changes for the first time since 1965,
with ration prices to urban consumers being raised by around two-thirds. Other
adjustments were made to arrangements for sale and purchase of grain by the
State until, by the early summer of 1992, there was virtually a free domestic
market in grain, with prices not far from contemporaneous international market
prices. In two of mainland China's thirty provinces, Guangdong and Hainan, the
mechanisms for state procurement and allocation by coupon had been removed,
and in many other provinces the continued formal presence of those mechanisms
was no longer of economic relevance. Rice ration coupons traded at six fen per
kg in Wuhan in central China and close to that level in other cities - the
tiny residual value reflecting the gamblers' guesses at the probability that
effective rationing would be restored one day.
In Guangdong and Hainan, the right to trade grains internationally, without
recourse to Beijing, survived from before the time of abundance, and held out
the prospect of foreign trade equilibrating domestic and overseas prices.
Elsewhere, licensing of grain trade by the central state trading company,
Ceroils, remained in force. Domestic and international markets continued to be
linked, through high levels of wheat imports, in recognition of consumer
preferences. Thai and sometimes Australian rice were appearing in the markets
of most large cities to cater for consumers who were prepared to pay high
prices for special quality.
The consequences of the huge changes in institutions and relative prices in
the Chinese grain economy since early 1991 are immense, and will take some
years to emerge fully in the statistics, or to be assimilated completely into
professional knowledge. Direct per capita human consumption of food grain has
ceased to grow, at least in volume, for a while, as consumers respond to
higher prices and to the removal of the psychological influence of valuable
ration coupons. Consumption has shifted to reflect consumer preferences for
higher quality, leaving an unsaleable, almost valueless surplus of the
high-yielding hybrid grains that were promoted in the drive to expand
production volumes from 1989 - totalling 10 million tonnes on the most
cautious estimates. No doubt the low consumption of 1992 is influenced as well
by three successive years of low growth in farm real incomes (0.7 per cent per
annum per capita in 1989, 1990 and 1991) and by the explosive expansion of
alternatives to food consumption - the expansion in variety, quality and
availability of manufactured consumer goods and of instruments for household
saving.
The changes are probably less profound on the supply side of the grain
economy - although our final judgement must await analysis in two or three
years' time. Total grain production in 1990 was prodded and pushed past the
earlier 1984 peak, with increased State funding for investment in irrigation
and other public facilities, stronger emphasis on quantities in State
mandatory purchases, and subsidies to the supply of agricultural inputs tied
to state grain procurement. This was a last success and last gasp of central
planning in agriculture, eventually crowned by consumer rejection of lower
quality output in the more market-oriented consumer economy. Higher average
prices for producers encouraged production, although the effects of the
institutional and price changes on incentives at the margin are difficult to
compute. Slower growth in the non-agricultural economy in 1989, 1990 and into
1991 diminished competing claims on rural labour and land resources
Nevertheless, per capita grain production remained below the peak level of
1984, even in 1990. Faster non-agricultural output growth and market-driven
emphasis on quality at the expense of yields since then have made it unlikely
that output will expand as rapidly as population in the new institutional
setting. It is noteworthy that the agricultural share in the total rural
economy fell sharply from 46 per cent in 1990 to 43 per cent in 1991 [SSB
1992: p. 54].
Food supply in the new deregulated environment continues to be influenced
by subsidies to some current inputs. Both supply of and demand for some
high-value foods - not grain directly, but indirectly through demand for
animal feed - in the major urban centres continue to be affected by subsidies:
only about one quarter of municipal and country-level governments were said to
have withdrawn from these subsidies when one of us returned to Beijing in late
September 1992. Municipal-level subsidies to high-value foods vary
considerably across cities, being highest in Beijing.
The State continues to conduct open market purchases for and sales from its
stocks after the removal of most consumer and some producer subsidies. It has
also retained its infrastructure for participation in intra- and
inter-regional trade in grain. The costs of holding stocks and of internal
distribution continue for the time being to be heavily subsidised. It is
current policy that such trading and stock-holding will become subject to the
financial responsibility of enterprises within two years, without subsidy.
The net effect of recent changes in supply and demand is currently an
abundance of grain. The grain problem, for the moment, is the storage of the
surplus. The state storage has overflowed, and about 50 million tonnes, in
some estimates, is being held under impermanent cover. The surplus will be
pegged back by supply and demand responses to current market conditions, in
the medium-term by the restoration of growth in farm incomes, and over the
longer term by the effects of growth in nation-wide incomes on demand for
food. The financing of large stocks is a substantial drain on public finance,
which exerts its own pressure for further reform as a means of limiting the
fiscal demands of the agricultural sector.
In the meantime, as in great agricultural states at least from the time
when Joseph was advising the Pharaoh, the abundance is a source of confidence
in the advisers to the State.
This study analyses developments over the past decade in the Chinese grain
economy, and compares the mainland Chinese experience with that of other East
Asian economies in the course of rapid growth. It uses the conclusions of this
analysis to outline a view of the possible course of Chinese grain demand and
supply in the decade ahead. The perspective which emerges depends heavily on
interaction between China and the international community, which can be
expected to influence grain trade policy as well as trade. Analysis of this
interaction leads to suggestions for an international grain policy, which are
of considerable significance for grain exporting economies such as Australia.
The significance of China's interaction with the world grain economy
derives from the fact that China accounts for about one fifth of the world's
production and consumption of grain - larger than either the United States or
the European Community (Table 1). Changes at the margin in China's consumption
or production thus have the potential substantially to affect the balance
between supply and demand in world markets, and therefore world prices.
Although almost self-sufficient in grain, China in recent years has accounted
for around 10 per cent of world trade. Internationalisation of the Chinese
grain economy has the potential substantially to influence the whole shape of
world trade.
The following twelve chapters deal with a number of important issues
related to China's grain demand, supply and trade. The main conclusion of
these chapters are as follows.
Chapter Two: Past Patterns of Food Consumption
After years of stagnation, per capita food consumption in China has grown
rapidly during the reform era, from 1978. Food grain consumption per capita
has fallen a little from a peak in the mid-1980s. Most grain-using staple
supplements (especially meat, fish and eggs) have continued to experience
strong growth in demand. Consumption of what we have called 'luxuries' has
continued to grow very strongly throughout the reform period.
There are large, persistent inter-regional variations in food consumption.
While Engel's Law (the tendency for the share of food in total expenditure to
fall as incomes rise) has been evident in national consumption, food
consumption has claimed as high a proportion of expenditure in urban areas
(where residents have much higher incomes) as in rural areas. Rationing and
housing subsidies may provide the explanation. Inter-provincial differences
tend to follow income differentials, suggesting that consumption patterns in
high-income coastal areas provide a guide to the future.
Chapter Three: China's Food Consumption in East Asian Context
China's food consumption in the process of economic growth seems to have
been following closely the patterns of other East Asian economies during their
periods of high growth. The similarity with Chinese communities in Taiwan,
Hong Kong and Singapore is particularly close. However, the similarity of per
capita consumption of main foods with these communities was when their per
capita income was around three times current Chinese levels. This adds to the
accumulating evidence that the official international data underestimate
Chinese GDP, relative to other low-income developing economies, by a factor of
two or three.
If we multiply official per capita income in China by three, we see that
per capita consumption of food grain, poultry, beef and mutton through the
reform period tracks the relationship between incomes and consumption in
Taiwan in the 1960s very closely. The similarities do not hold for fish (where
per capita consumption is much higher in Taiwan) or eggs (consumption much
higher in the mainland). Guangzhou consumption is, however, quite close to
Taiwan's when its per capita income was about three times Guangzhou's current
level, even for fish, suggesting that the economy-wide differences for fish
and eggs reflect inter-regional differences in taste and seafood availability.
Chapter Four: Price and Income Elasticities of Food Demand
Structural change through the 1980s makes it extremely difficult to compute
price and income elasticities of demand for food. As a result, there are large
variations in results from attempts to estimate elasticities. This casts
doubts on sole reliance on standard methods of estimating demand elasticities
in projection of China's grain demand prospects. Income elasticities for
grain-using food products, but not for food grain, appear to be high. Price
elasticities do not appear to be as powerful.
Chapter Five: Other Determinants of Food Consumption
Structural changes associated with economic reform have had, and continue
to have, large influences on food consumption, beyond their reflection in
incomes and prices. Housing reform may increase somewhat the consumption of
food in urban areas if higher housing costs are compensated by higher incomes.
Fiscal reforms which have the effect of raising food prices in urban areas
will have the opposite effect. The beginnings of fractures in the wall of
centralised foreign trade in grain, most notably in Guangdong, and increased
internal integration of food markets, will have profound implications for food
consumption, by removing artificial barriers to the reflection of preferences
in actual consumption.
Chapter Six: Food Grain Demand: Adjusted Estimates
Careful analysis of the data shows that direct consumption of food grain is
substantially lower, and indirect grain consumption in animal products
substantially higher, than the official data suggest. This finding has
important effects on the trends of food and overall grain consumption in China
for the 1990s.
Chapter Seven: Feed Grain Demand: An Overall Assessment
Our modifications of food and feed grain demand estimates provide more
reliable guides to feed grain consumption than the official data. Growth in
feed grain demand is extremely high, due to rapid increases in consumption of
meat, eggs, fish and milk in the 1980s.
Chapter Eight: Seed and Industrial Demand for Grain
Growth in industrial demand for grain, especially for alcohol, is very
strong, but from a low base. This highlights the need to pay special attention
to the potentially large market for special types of grain.
Chapter Nine: A Provincial Case Study: Guangdong
Guangdong is at the cutting edge of economic reform, internationalisation
and incomes growth in China. The experience of its grain economy provides
useful insights into likely future developments elsewhere in China.
Total grain absorption has continued to grow strongly in Guangdong in
recent years, driven by high-value foodstuffs, especially animal feed. Rapid
economic reform and a greater role for markets in resource allocation have
tended to reduce grain production, although Guangdong has more physical
potential to increase grain yields than any other province in China.
Guangdong's grain deficit has risen to over 4 million tonnes per annum - half
of China's total in some recent years. The Guangdong experience demonstrates
the power of reform logic in China: each step for market-oriented reform
introduces pressure for others. It also exhibits the political potential for
East Asian-style agricultural protectionism to emerge in the industrialisation
process.
Chapter Ten: Grain Demand Projections
The odds favour continued strong growth in economic output and incomes in
China - at or a bit below the high rates of the 1980s. As in the 1980s, high
average rates will be associated with wide annual fluctuations.
Applying average income elasticities of demand from the recent Chinese
experience, and insights from the Taiwan experience, to normal growth and high
growth scenarios straddling our mean expectations of Chinese growth
performance, we derive estimates of 547 million tonnes and 593 million tonnes
for Chinese grain demand in 2000. These estimates assume no large changes in
relative prices.
The projected increase in demand is concentrated on feed grains. Within
food grains, there is a substantial shift from rice to wheat, continuing the
trend of recent years.
Chapter Eleven: Grain Production
Massive institutional changes make it difficult to use historical
experience for estimation of the response of grain production to changes in
price and incomes.
The resources available to agriculture, particularly grain, are expected to
shrink (labour, land) or grow slowly (capital) over the next decade, due to
competition from other activities. Yields are already reasonably high and are
expected to grow slowly.
Grain production per capita is not likely to grow from the 1990 peak, on
our initial assumption that domestic prices will not diverge greatly from
international prices. This suggests an upper limit of about 500 million tonnes
total production in the year 2000, even if there is substantial expansion in
public investment and some lift in real producer prices. It is more likely
that output will fall short of this level than exceed it. However, there is
physical capacity substantially to increase yields, and this would turn into
expanded output if there were massive increases in producer prices in the
pattern of other East Asian economies (Japan, Taiwan, Korea) at a similar
stage of their development.
Chapter Twelve: International Trade in Grain
China is one of the world's largest net importers of grain, and in some
years the largest importer of wheat, despite being largely self-sufficient.
Imports (of wheat) began in the famine following the Great Leap Forward. Net
imports have tended to increase in the reform period, although this tendency
was held at bay for a while by extraordinary growth in grain output up to
1984.
The natural evolution of the Chinese grain economy, in the context of
continued market-oriented reform and economic growth, and in the absence of
large divergence between domestic and international prices, is likely to push
net grain imports to between 50 and 100 million tonnes at the end of the
century. The mid point of this range would represent almost half of world
trade in grain in recent years. Such developments would place some upward
pressure on world prices, which, if it were large, would feed back into
Chinese policy and grain trade: raising production and reducing net imports,
and possibly making it easier to maintain open grain policies.
These developments are not inevitable. China may follow Japan, Korea and
Taiwan into food protectionism in the 1990s. However, the political economy of
grain may be more favourable to open trade than elsewhere in East Asia.
The natural evolution of Chinese trade would see growth in imports
concentrated in feed grain, and to a lesser extent industrial grain and wheat.
Chapter Thirteen: China Grain Strategy
The move to a relatively free domestic market for grain creates an
opportunity to link domestic and international markets for the first time.
This link could be secured at relatively low adjustment cost at present, while
the divergence between domestic and international prices is small. The
difficulties of adjustment to internationalisation will increase rapidly as
the 1990s proceed as, in its absence, domestic prices are likely to rise
strongly. There is an urgent need for the idea of internationalising the farm
sector to be introduced into the thinking of Chinese policy makers. These next
few years are the window of opportunity for internationalising the Chinese
grain economy.
There are already cracks in Chinese central controls on grain trade,
notably in the decentralisation of decision-making to local government and
grain users in Guangdong. To make full use of opportunities created by this
partial decentralisation, Australian and other suppliers will need to be
highly flexible, and capable of responding to highly diversified requirements.
The wider linking of Chinese to international grain markets is the largest
challenge and opportunity for international grain diplomacy facing Australia -
quantitatively larger than the challenges associated with the Common
Agricultural Policy in Europe. Australia must recognise it as a centrally
important issue in bilateral relations with China, building on shared
interests in internationalisation. Bilateral negotiations in the context of
Chinese entry to GATT should focus on grain, as one of three 'billion-dollar'
China trade interests for Australia. Some of the most promising ground for
encouraging grain internationalisation is provided by the Asia-Pacific
Economic Cooperation (APEC) forum.
Bilateral, regional and multilateral efforts to encourage the linking of
domestic and international grain markets must address Chinese concerns about
food security. Analysis can demonstrate that price instability is likely to be
greater under domestic autarky than internationalisation. Nevertheless,
regional price insurance arrangements may be helpful to Chinese confidence in
reliance on imports. Secure Chinese access to international markets for
labour-intensive exports is also a necessary condition for Chinese grain
import liberalisation.