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Food Price Policy in an Era of Market InstabilityA Political Economy Analysis$

Per Pinstrup-Andersen

Print publication date: 2014

Print ISBN-13: 9780198718574

Published to Oxford Scholarship Online: January 2015

DOI: 10.1093/acprof:oso/9780198718574.001.0001

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The Political Economy of Food Price Policy in China

The Political Economy of Food Price Policy in China

Chapter:
(p.362) 17 The Political Economy of Food Price Policy in China
Source:
Food Price Policy in an Era of Market Instability
Author(s):

Jikun Huang

Jun Yang

Scott Rozelle

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198718574.003.0017

Abstract and Keywords

The overall goal of this chapter is to analyse the political economy of food price policies in China during the global food crisis. The results show that given China’s unique economic and political context and the nature of its agricultural markets, the government’s reaction to the crisis was swift and decisive. Responses, which considered the interests of the relevant stakeholders, included both short-term counter-measures that covered a wide range of domestic and border policies as well as long-term policy changes on biofuels and agricultural investment. This, in conjunction with the country’s political system, meant that the decision-making process encountered no problems and that the impacts of policy responses by the government achieved the envisaged objectives.

Keywords:   China, political economy, food price policy, food crisis, government response

17.1 Introduction

Although China is often cited as one of several countries that have successfully dealt with the food crisis and food price volatility, there is a dearth of information on how China responded to the crisis and whether or not the counter-measures taken were successful. This chapter seeks to understand China’s economic and political environment, its response to the food crisis, what the policy-making process involved, and the effectiveness of the policy responses. In addressing these questions, the chapter tries to explain why the government of China, in responding to the crisis, chose a specific set of policy measures that included the release of the government’s grain reserves in the beginning of the crisis, long-term future/forward contracts with trading firms in exporting countries, provision of subsidies and insurance to producers, cancellation of support for storage and transport of export grains, increased subsidies on grain production and input, and enhanced social protection for urban consumers. As in many other countries, however, China also used wider measures at the border to protect domestic prices from international food price fluctuations. Furthermore, China adjusted its long-term development strategies on biofuel development and strengthened the commitment to invest in agriculture.

17.2 Country Context

17.2.1 Economic Growth and Ability to Respond to External Crises

Over the past two decades, China has exhibited considerable capacity to respond to external economic shocks, as exemplified by the Asian financial (p.363) crisis in the late 1990s. While the shock did affect economic growth (from 9.7 per cent over 1985–95 to 8.2 per cent over 1996–2000), recovery thereafter was rapid. This was largely due to the fact that the government took decisive action to combat sluggish growth, which created the perception of stability, and re-established producer and consumer confidence. Fiscal spending (mainly on infrastructure), for example, was raised by 100 billion yuan to stimulate demand and increase the efficiency of the nation’s business environment in the second half of 1998. Other stimulating measures were implemented in 1999.

More recently, like many other countries, China was also seriously affected by the global financial crisis. After a 14.2 per cent growth rate in 2007, growth fell sharply to 9.6 per cent in 2008 and 9.2 per cent in 2009 (NSBC 2010), and the drop of 4.6 percentage points between 2007 and 2008 was the largest of any major country. However, despite the serious effects of the global financial crunch, the economy was able to recover quickly as a result of China’s rapid and massive response. As the financial downfall took its toll, in order to maintain economic growth, the country initiated an aggressive stimulus and monetary expansion package for 2009 and 2010 valued at four trillion yuan (US$586 billion), accounting for 14 per cent (or nearly 12 per cent) of China’s GDP in 2008 and 2009, respectively.

While there was concern over the long-term impact of these expansionary policies, China’s massive and rapid response to the external crisis was quite effective––and unique. Decisions could be made quickly at the central level of government and implemented without any major resistance from the public and other stakeholders. Thus, based on China’s past responses to the Asian financial crisis in the late 1990s and the recent global crunch, it will not be difficult to understand its similar reaction in the face of the global food crisis.

17.2.2 Political Regime and Development Goals

Based on the national constitution, the Communist Party of China (CPC) is the country’s sole political party in power. This fact has ramifications with regard to the decision-making process on national policies, including food policy and the government’s response to global commodity crisis. Under the national constitution, all rights are vested with officials who exercise their power through the National People’s Congress (NPC) and local congresses at all levels. The State Council is the highest administrative body of the government.

Democratic centralism guides the decision-making principle. The CPC’s most powerful policy- and decision-making entity is the Politburo, comprising the Party’s two dozen or so national leaders and its Standing Committee. Generally, members of the Politburo and its Standing Committee (p.364) simultaneously hold state positions with functions and tasks similar to their personal Politburo appointments. The role of the Politburo is mainly to decide on long-term development strategies and short-term policies related to political and social crises. China is also strongly committed to agricultural and rural development.

Policy formulation for agricultural and food economy is largely vested with the State Council, the highest government administrative body and the cabinet of the Chinese government. National food and agricultural policy decisions are made by the premier and a vice-premier in charge of agriculture. These two top leaders1 consider agriculture to be a fundamental sector for overall economic growth, and have expressed particular interest in agricultural growth, farmer income, and rural development. Grain security, however, is priority number one among the national leaders.

17.3 Food Price Transmission

To understand the political economy of China’s food pricing policy during the global food crisis, it is useful to have an overview of the performance of the nation’s food market and its functions.

17.3.1 Trends, and the Transmission of International and Domestic Food Prices

Trends in Domestic and International Prices

Figure 17.1 gives the annual prices of major foods in China and on the international markets at border for the years 2000–10. Prior to the global food emergency, domestic food prices moved with border prices. However, the domestic and international price co-movement weakened during 2007–9 for all food products analysed with the exception of soybean. When international prices for rice, wheat and maize increased sharply in 2007–8, domestic prices for these commodities increased only moderately, an indication of the likely impact of China’s policy responses to the global food crisis. Soybean is the exception because it has been fully liberalized and there is no policy tool that could be used to arrest price transmission between international and domestic markets.

The Political Economy of Food Price Policy in China

Figure 17.1 Rice, wheat, maize, and soybean prices in China and the international markets (at border), 2000–10

Source: Computed by authors based on farm-gate price from the NDRC; wholesale price from the MoA; border price from the MoC.

Price Transmission from International to Domestic Prices

To find statistical evidence of, and to evaluate, the price transmission from international to domestic price, we apply the cointegration analysis method (p.365) and the error correction model (ECM). The analyses are based on monthly domestic wholesale market price and international price for the commodities examined here (rice, wheat, maize, and soybeans) for the period January 2003 to December 2008. Domestic data are taken from the Wind database, and international prices are from the International Monetary Fund (IMF) database.

Both the cointegration analysis and ECM analysis show that China’s domestic agricultural prices were affected significantly by international prices in 2003–6 (a period prior to global food crisis in 2006–9). The cointegration analysis reveals that there was a long-run transmission of international prices to China’s domestic prices, with a statistical significance at the 1 per cent level for all four commodities in 2003–6. The estimated long-run adjustment parameters indicates that the domestic price of rice, wheat, maize and soybean would increase by 0.54 per cent, 0.25 per cent, 0.50 per cent, and 0.84 per cent, respectively, in the event of a corresponding international price increase of 1 per cent.

Similar results are found with the ECM analysis. Estimated speed of adjustment was statistically significant for all four commodities, ranging between –0.02 for rice to – 0.16 for soybean. The results also show that short-term effects for soybean and maize were larger than those for rice and wheat. A 1 per cent international price increase for soybean and maize would directly lead to 0.22 per cent and 0.15 per cent increase in domestic prices for these crops. For (p.366) wheat and rice, the short-run adjustments are 0.07 per cent and 0.04 per cent, respectively, for a 1 per cent increase in their international market price. The higher impacts in the short term and quick adjustment speed imply that the time needed to transfer international price changes to the domestic market would be much shorter particularly for soybean, but also for maize.

17.4 Food Price Shocks and Policy Responses

17.4.1 The Threat—Rising Prices in World Food Markets

The 2006–9 global food crisis, like similar situations in the early 1970s, came on fast. After a long period of falling prices, international food prices began to rise in 2006, accelerating in 2007 and early 2008. Although prices fell sharply after May 2008 after the global financial crunch, international commodity prices remained high, with significant fluctuations.

As prices of major commodities in international markets rose, three aspects of China’s food economy became critically important. First, food still accounts for more than 35 per cent and 41 per cent of consumer budgets in urban and rural regions, respectively. In 2010, the bottom 10 per cent of urban population (measured in per capita income) spent more than 46 per cent of total household expenditures on food. Second, given this high share for food expenditure, any substantial price increase on foodstuff would almost certainly have implications for national price stability and overall consumer price inflation. Third, as the trade of many food commodities is not restricted across China’s borders and domestic markets are highly integrated (Huang and Rozelle 2006), international food prices are easily transmitted to domestic markets. By mid-2007 when international food price increases started to accelerate, officials were concerned that rising prices were becoming a problem that could threat China’s food economy and overall price inflation (Wen 2008).

17.4.2 Short-term Responses

With the rapid rise in food prices on the international market, particularly for imported soybean, edible oils and other foods, China recognized that this could become a threat to domestic food security and undertook a series of policy responses in late 2007 to mid-2008.

Agricultural Policies

The first agricultural policy response was the grain reserve scheme in late 2007, which released rice, wheat and maize from government reserves. This was a major measure commonly used by China in the past to maintain (p.367) domestic grain price stability. Grains that had been stored mainly as a precaution against natural disasters and to control seasonal price fluctuations were now released through the National Development and Reform Commission (NDRC) and the State Grain Administration (SGA) in consultation with Ministry of Agriculture (MoA) and other relevant ministries. The size of China’s grain stocks is not generally known, but Premier Wen Jiabao’s (2008) press announcement in March 2008 indicated that even after several months of sales, China still had between 150 and 200 million tons of grain available for stabilizing domestic prices.

The second short-term response in agricultural policy was the effort to find external sources for grain and meat during the last quarter of 2007. As grain reserves declined, the NDRC officials, in consultation with the Ministry of Commerce (MoC) and MoA, authorized the China National Cereals, Oil and Foodstuffs Import and Export Corporation (COFCO) to sign long-term future and forward contracts for grain (and meat) with exporting countries. In late 2007, escalating domestic prices for pork also triggered a policy response from NDRC to provide subsidies (and insurance) to producers. When it became clear that China would not be able to import large volumes of food due to high world prices, government action in the second half of 2007 focused on efforts to increase domestic supplies, and to try to hold down local prices.

Third, short-term measures were taken to create a disincentive for cereal exports late in 2007. As international food prices continued to rise, the NDRC and the MoC undertook increasingly strong action to prevent the cereal released from domestic stocks from being exported. International prices had increased to such an extent that domestic grain traders (mainly national and provincial grain reserve agencies and COFCO) were beginning to recognize the benefits of shipping the relatively low priced grain to global markets. Maize was the first target, as it had historically been exported in large volumes, and government (NDRC) measures made it increasingly expensive to continue to do so.2 In November 2008, subsidies for the storage and transport of export-destined maize were suspended. But as international grain prices continued to mount through the first part of 2008, the NDRC and the Office of the State Council decided to cancel valued added tax (VAT) rebates. At the same time, there was also apprehension over rice and wheat. As no transport or storage subsidies had been applied to the export of these grains, China recalled the policy on VAT reductions. A mere month later, to further dampen export incentives for wheat, maize and rice, China assigned a 5 per cent export levy on all shipments, except those destined to Hong Kong, Taiwan and Macao.

(p.368) The fourth short-term policy reaction to the dire global food situation came late in the winter of 2008. Even after the release of stocks and cancellation of export subsidies (and introduction of export levies), national leaders and NDRC decision makers were not convinced that the measures were enough to offset the continuing surge of international food prices. Stronger measures were needed, and the nation’s top leaders announced a total ban on the export of food and feed commodities. Wen Jiabao (2008) proclaimed that ‘in order to control rising food prices, China will strictly restrict the use of food by industry and for grain exports’. Chen Xiwen (2008), one of the chief architects of China’s agricultural policy, sanctioned the ban, emphasizing that the restrictions, which would be in effect only for 2008, were necessary in order to keep up domestic supplies. Thus, between the period from summer 2007 to March 2008, China had shifted its stance from exports subsidization to levies and quantitative restrictions on exports; it clearly did not want traders buying domestic grain to sell on export markets.

Fifth, the government turned its attention to fertilizers in February 2008. Similarly to the rise in global grain prices in late 2007, international fertilizer prices also increased significantly, and this increase was largely transmitted to China’s domestic markets in 2007 and 2008. For example, the rising international chemical fertilizer and energy prices meant an increase of more than 40 per cent between July 2007 and June 2008 (NBSC 2008). The extra cost of fertilizers lowered demand particularly from grain producers, posing a further threat to production, and therefore to the increasing food prices.

In response, in early 2008 the Chinese leaders approved the NDRC and MoA proposal of export taxes on fertilizers. Phosphate fertilizers were first, and on 15 February 2008 all exports of phosphate fertilizers and any chemical fertilizers containing phosphates were to be taxed. In April, an additional 30 per cent was applied to triple super phosphates, and in May, 35 per cent on urea exports. Finally, in an effort clearly designed to halt all chemical fertilizer exports, a 100 per cent export levy was announced in mid-May. These policies were in effect until the end of 2008 when international food and fertilizer prices fell significantly because of the global financial crisis.

Consumers and Social Protection

Consumer and social protection targeted to low-income groups has been enhanced in recent years during and after the global food crisis in 2006–9. Although most of China’s poor live in rural areas, the share of food expenditures in 2008 for the urban population in the bottom 5 per cent of the income scale was as much as 49 per cent (NBSC), making these people highly vulnerable to increasing food prices. Fortunately, prior to the crisis, China already had in place a comprehensive safety and social protection system (e.g., Chengshi Dibao programme) that extended basic living allowances to the (p.369) urban poor. This system was enhanced during the global food crisis period by increase of food subsidies.

17.4.3 Long-term Responses

Biofuel Policy

Faced with the growing dependency on oil imports and the need to improve energy security, in the early 2000s China began to formulate an ambitious biofuel programme that was aimed at producing ten million tons of bioethanol and two million tons of biodiesel annually by 2020. Several supporting policies were implemented to ensure the achievement of these goals. By 2006, China produced 1.3 million tons of bioethanol. Maize is the primary feedstock of the biofuel firms in the northeast, and wheat is the other important feedstock for bioethanol in Henan, the nation’s top wheat production province.

However, after 2007 the policies supporting biofuel expansion shifted dramatically. Concerns about rising food prices and national food security triggered a moratorium on the building of the new biofuel programme. By the end of 2007, China decided to revise its biofuel development strategy and decreed that: (i) biofuel production should not compete with grain for land; (ii) biofuel expansion should not vie with humans for food; and (iii) feedstock for biofuel should not compete with livestock over feed. While existing biofuel plants could continue production, their expansion was to be based on the use of alternative feedstock such as sweet sorghum, sweet potatoes, cassava, and other non-grain products.

Agricultural Development Policy

The global food crisis also prompted China to increase commitment to agriculture and rural development. China normally dedicates the first policy document of the Central Committee of CPC, often called the Number-One Policy Document, to the country’s most significant issue. To re-affirm the commitment to agriculture and rural development, the Number-One Policy Document in 2004–6 underlined these issues. While the continued emphasis on agriculture for 2007–12 in the Number-One Policy Document is mainly indicative of China’s national development policies, the rising concern for food security triggered by the global food crisis may also have contributed.

Two recent reports among these Number-One Documents are worthy of mention as they are directly related to food security: (i) the 2011 document which outlined plans to invest about US$630 billion in water conservancy over the next ten years to ensure food and water security; and (ii) the 2012 document which specifically highlighted innovation in agricultural science and technology for boosting farm productivity and substantial increases in investment in agricultural technology. The annual growth rate of public agricultural research (p.370) and development expenditure increased in real terms from an average of 16 per cent in 2000–9 to more than 20 per cent in 2010–11. This is expected to become higher in the coming years.

17.5 Political Economy Context

Why and how was China able to apply policy responses to the global food dilemma so quickly? In addition to the country’s political regime and development goals that were briefly discussed earlier, this section reviews the background of its political economy with a special focus on the framework and partners that make up the decision-making process in agricultural economy.

17.5.1 The Decision-making Framework for Long-term Development Strategies and Law

Three political bodies are vital with respect to agricultural policy and the relevant laws. The State Council is the highest body of government; the CPC central committee decides the basic principles and mandates of agricultural policy, and the National People’s Congress (NPC) is in charge of the constitution and the laws and thus, in theory, has an important voice in supervising and auditing the state’s fiscal budgets. Each of these three bodies carries out its mission in collaboration with other relevant organizations. Under the State Council, the MoA, the NDRC, the Ministry of Finance, and several other ministries related to agriculture are the major organs that formulate the annual five-year and long-term plans and policies on agricultural development. Within the National People’s Congress, there are nine special committees, three of which3 are important in setting laws related to agriculture. They also have a supervisory and a consultancy role with regard to implementation.

Normally, the general procedure for policy-making is as follows: The CPC central committee in conjunction with the State Council decides the issues to be considered by NPC. Based on the outcome, the State Council then prepares the implementation plan for approval by the NPC. The NPC then authorizes the State Council to implement the plan.4

(p.371) 17.5.2 Key Actors of the Decision-making Framework within Food and Agricultural Policy

Overall Profile

In China the major actors embodied in the decision-making process are the CPC and various government organizations as well as major research institutes. These include the State Council and two inter-ministerial governance organs under CPC jurisdiction, known as the ‘leading groups’ (one specializing in finance and economy, the LG-FE, and one on rural works, the LG-RW). Other entities such as the NDRC, MoA, and the Ministry of Commerce are included as well. Key research institutes and think tanks also have a vital say in the national decision-making mechanism. The role of the private sector is limited. Political lobby is not a common phenomenon. However, views and interests of the private sector and the public with respect to national food policy can be aired at least partly through the media, which is expected to have indirect effect on national policies.

The State Council

The State Council, as the cabinet of the government of China, is responsible for all major policies on social and economic development. It meets approximately once a month to decide on current matters of national significance, agriculture included. The top body within the State Council is its standing committee. Comprising the premier, four vice-premiers, and five state councillors, the daily administration of the government is handled by the State Council’s standing committee. Agriculture and food is handled by one vice-premier.

The Leading Groups of the CPC

The leading groups are inter-ministerial governance bodies. Each leading group has an executive office headed by an official at the level of a minister. Under the jurisdiction of the CPC and the State Council, the LG-FE led by the premier and the LG-RW (one of the few sector- or area-specific LGs) led by a vice-premier play a vital role in decision making of China’s agricultural policy. The executive offices of these leading groups prepare national policy documents, coordinating with the relevant ministries and various tiers of government. Currently, the LG-RW executive office is headed by Chen Xiwen who is also deputy head of the executive office of LG-FE.

The MoA

The MoA is primarily responsible for agricultural production. Contrary to other countries, responsibility for agricultural input and output marketing as well as international trade policies is vested with NDRC, the Ministry of (p.372) Commerce, and SGA. But MoA does submit policy suggestions on matters affecting agricultural input and output prices, tariff adjustment, marketing, rural credit, taxation, rural financial subsidies, and rural economic reform.

NDRC and Other Relevant Ministries

The NDRC is a key player in the formulation of development plans and responding to crises in all sectors, including agriculture. One of its major functions is to find a balance between the interests of the different ministries or sectors. The NDRC is also in charge of the state reserve of strategic commodities and materials; it handles and supervises the collection, utilization, rotation, management, and price fluctuation of agricultural products and inputs.

Research Institutes and Think Tanks

Research institutes5 and leading economists and scientists have an important role in proposing, consulting, and preparing national policy. Policy research institutes and think tanks under the auspices of the government (e.g., NDRC and MoA) normally mirror the stance of the supervising authorities. Agencies affiliated with academia have greater autonomy to express their views.

Media

Although the media in China has traditionally been run by the state,6 independent media coverage is emerging. Since 2000 the internet has emerged as an important communication medium, and there were more than 485 million internet users in China in 2010. While politically related issues are often censored, news on economic development and food security face less regulation. The role of the media in the decision-making mechanism has been growing.

In order to analyse the media coverage given to, and its likely role in, China’s policy responses to the global food crisis, we selected the following four widely distributed newspapers: two are run by the state (People’s Daily, the most influential official newspaper in China, and Farmers’ Daily), and two are independent, commercial papers (South Weekend and 21st Century Business Herald). These papers were reviewed daily from 1 January 2007 to 31 December 2008, and the major content of each report noted.

(p.373) Figure 17.2, giving the average number of reports related to food prices during 2007–8, clearly illustrates its increasing appeal among China’s media. Interestingly, the trend of media coverage in Figure 17.2 resembles the trend in global food prices, except for the break in February 2008 (coinciding with the Chinese Spring Festival). The number of articles rose significantly in March–April 2008, but as global food prices fell after May 2008, so did media coverage.

The Political Economy of Food Price Policy in China

Figure 17.2 Number of reports on food price issues per month in the four selected newspapers during 2007–8

Source: Authors’ survey.

17.6 The Policy-making Mechanism Guiding the Responses to the Global Food Crisis and their Policy Impact

17.6.1 The Policy-making Process on Major Policy Responses

Faced with rising global food prices, recognizing the threat of transmission of international food prices to domestic market, and overheating and high inflation in the late 2007, the State Council quickly decided to take counter-measures to stabilize domestic food prices. Given the one party-rule and a decision-making mechanism based on internal democratic centralism, it is not difficult to understand how China was able to make such quick decisions when the economy faced a challenge. China’s massive and effective responses (discussed early) to financial crises, first in Asia in the late 1990s and then more recently in 2008–10, may also help to understand its rapid response to the recent global food crisis and its decision-making mechanism.

(p.374) The Policy-making Process Related to Short-term Policy Responses

As policy decisions in the short term do not affect long-run national development strategies, institutions, or laws, the State Council and relevant ministries are the key decision-making organs. While it is not easy to determine who initiated this policy process, we were told that NDRC and LG-FE played an important role in securing approval from the State Council for introducing the stabilizing counter-measures. Once the State Council decided to contain food price inflation in late 2007, each relevant ministry had to identify its own approach for achieving this aim. In designing the detailed counter-measures to be implemented in various stages during 2007–8, major think tanks were also invited to several policy consultant meetings for comments and suggestions.

One major initial change in policy was to release the government’s grain reserve. Recognizing the threat posed by the global food situation, particularly after the number of food reports in the media continued to climb in the second quarter of 2007 (Figure 17.2), the State Council, NDRC, and LG-FE convened several times to discuss the likely future trends of international and domestic prices and whether China should start to control its food prices. In late 2007, the State Council made a final decision to release grain reserves for the market––as its first effort to deal with the likely significant grain-price hike before the end of the year.

The decision to open the government’s grain reserve met no resistance. NDRC and the SGA are major governmental departments in charge of grain reserves and were thus the decision-making actors to have directly influenced the State Council (or the premier) to adopt this recourse. This was necessary because of the pressure from escalating domestic prices as border prices increased. Furthermore, grain stock adjustments had been a standard approach in the past. There was no opposition from the farmers as China does not have a national or regional or any large-scale farmers’ association.

Once the State Council had decided to take steps to counter food inflation, each relevant ministry decided on its own proposal for stabilizing domestic prices. Based on its mandate of increasing agricultural production and farmer income, the MoA would have favoured a moderate rise in farm prices but the ministry has little authority in the control of domestic food prices. In general, MoA follows the decisions made by the State Council, and by NDRC in particular. Thus, the ministry proposed a plan for expanding the production of grain and other foods through non-price methods such as better technological service and measures for controlling natural disasters. It also recommended a subsidy on swine to increase pork production. Supported by NDRC and the Ministry of Finance, this proposal was approved by the State Council for implementation in late 2007. A decision was also taken within the MoC to (p.375) authorize China’s largest oil and food importer and exporter, COFCO, to sign forward contracts with grain trading firms in exporting countries. All these decisions were made within a couple of months.

When domestic inflation topped 6 per cent in late 2007, climbing to more than 8 per cent in early 2008, and international food prices were still rapidly climbing, the State Council undertook further action to improve existing policy implementation and explore new stabilizing measures in 2008. Policy responses included: limiting and later banning the exports of maize and other grains, restricting fertilizer exports, increasing input subsidies to farmers, revising existing plans on biofuels, and supporting low-income urban consumers and students. During this period, major government-affiliated policy think tanks frequently participated in the decision-making mechanism. Given the need for speed in the policy-making procedure, academic think tanks had no major role except to provide information on the current economic situation and likely future trends.

At this time, NDRC and LG-FE, working closely with the ministries of commerce and agriculture, the SGA, the People’s Bank and other government authorities under the State Council, coordinated directly with the national leaders. This is only natural, because contrary to other ministries, the jurisdiction of NDRC and LG-FE is not restricted to a special sector or field, which makes these organs key players in the face of any emerging economic issue. The restriction on grain was easy because international trade of rice, wheat and maize is managed by state-owned enterprises. The limitation on fertilizer exports, however, did invoke some opposition from the industry, but this was dampened by the significant increase in domestic fertilizer prices in 2007–8. The policy outlining extra input subsidies for farmers was applauded by all ministries because it complemented the goals of the NDCR, MoA and LG-FE for improved farmer income, although it was now up to the Ministry of Finance to find the budget to do so. Based on the division of governmental functions, support to low-income urban consumers is the responsibility of local government. Despite the resulting budgetary implications for the local government, their commitment to the central government to maintain a ‘harmonious society’––i.e., local social and political stability––and to avoid unruly demonstrations or rebellious acts was more important

Local government and industry played a very minor role in China’s policy-making process. For example, the ban on maize exports initially did raise protests from the local government in the northeast (China’s major maize production zone) and from maize exporters. This did not alter the situation, although agricultural subsidies were nevertheless increased (covering nearly all farmers in addition to maize growers) in 2007 and 2008 (Huang et al. 2011). The chemical industry was aware of the proposed policy to limit fertilizer exports and appealed for compensation, but without results because (p.376) domestic fertilizer prices had also increased significantly, albeit less than on the international market.

Experts had a two-sided role in the decision-making framework that worked either to facilitate or impede the process. Policy research institutes and think tanks continued to provide information and comments on stabilization policies but opinions among the experts differed. Debates centred mostly around the issue of whether or not China should let grain prices trend up, a topic widely examined in the media and internal reports. On the one hand, arguments favoured rising grain prices because (i) higher prices meant greater incentive for grain production, thereby promoting food security; (ii) improvement in the income of poor farmers and grain producers was more important than food price inflation or urban consumers, as these were covered by social protection programmes; and (iii) inflation in 2007–8 was also partially due to macro-investment and monetary policies. On the other hand, arguments supporting the control of prices included (i) apprehension over high inflation; (ii) increasing living costs for low-income consumers in urban areas; and (iii) the need to avoid social instability.

Media reports reflect the level of concern among the different stakeholders. As Table 17.1 shows, comments in the media were frequently from the journalists themselves (33 per cent), then from officials (30 per cent), and experts/scholars (18 per cent). As can be expected, comments by officials were largely supportive of all food-price control measures; on the other hand, opinions of the experts differed. The agriculture-oriented think tanks were strongly in favour of farmer benefits, while macroeconomic analysists supported consumer interests. Agricultural think tanks reported on the causes of food price increases, including the role of biofuel expansion in the rest of the world. Articles by the journalists themselves concentrated on food price increases in the domestic and international markets, or at times, outlined their newspaper’s stand on national policies.

Table 17.1 Views and opinions reported in four selected newspapers in China, 2007–8

Views expressed by:

Officials

Experts

Consumers

Farmers

Companies

Journalists

Total

Total

30

18

2

5

11

33

100

People’s Daily

39

7

2

7

7

39

100

Farmers’ Daily

29

17

1

2

7

44

100

South Weekend

17

20

10

3

13

37

100

21st Century Business Herald

31

28

1

7

22

9

100

Source: Compiled from authors’ survey.

(p.377) There is some divergence among the views and opinions reported by the four papers. The People’s Daily is the top newspaper owned by the central government, and journalists’ views mirror the official stance, accounting together with the Farmers’ Daily for 78 per cent of the reports. South Weekend and 21st Century Business Herald, as commercial newspapers, reported the viewpoints of experts and of companies more frequently. Interestingly, except for South Weekend, consumer views were almost non-existent. Farmer voice in the media was minimal, and accounted for only 2–7 per cent of all reports.

The Policy-making Process of Long-term Policy Responses

The response to the global food crisis generated two major long-term policy modifications to China’s biofuel development plan and agricultural commitment.7 The nature of these policy changes, which were introduced as long-term development strategy and short-term modifications, suggests that the relevant decisions were taken at the central level of government by the highest decision-making bodies, the CPC central committee and the State Council. It was clearly announced on several occasions that there was to be no trade-off between biofuels and food, and that increasing agricultural productivity through investment was the primary tool to ensure the country’s food security.

These decisions, although quickly made, were based on a round of consultations. The same was true for biofuel. Discussions with experts as well as the media reports on the likely impact of biofuel on global and domestic food security convinced the national leaders that renewable energy or biofuels utilizing grain as feedstock, even though vitally important for the country’s future energy security, had no role to play. However, the existing biofuel plants that utilized maize and wheat as feedstock for ethanol protested. Negotiations between the biofuel industry and NDRC eventually led to a compromise: existing biofuel firms using grain as feedstock could continue to operate and produce bioethanol up to the 2007 production level, but future expansion would have to depend on non-grain feedstocks.

China’s commitment to improve national food security and investment in agriculture were pre-existing policy stands but additional measures were taken after the global food crisis. Key decision makers were members of the policy document preparation team coordinated by LG-FE. These included representatives from the major think tanks and different ministries.8

(p.378) 17.6.2 Impacts of Policy Responses

Impacts Examined with a Graphical Analysis

To assess the effect on domestic agricultural prices of China’s counter-measures in the face of the global food crisis, we need to trace the monthly food price fluctuations on international and China’s domestic markets. The results are presented in Figure 17.3, which shows that China did well in keeping domestic prices from rising as much as international prices. Between January 2005 and December 2008 the trajectories of domestic and international prices differed distinctly. While international prices of the three cereals increased steeply starting in 2007, domestic prices went upward only gradually (Figure 17.3).

The Political Economy of Food Price Policy in China

Figure 17.3 Graphical analysis of international and domestic monthly prices of rice, wheat, and maize, January 2005–December 2010

Source: International prices are from International Monetary Fund (2011). Domestic prices are from China’s MoA’s wholesale market price database.

Why were China’s grain-price trends so different from those on the international markets? The explanation is, of course, the policy responses introduced. Although trade liberalization policies had allowed domestic prices to move towards international prices before the middle 2000s (Huang et al. 2009), the pattern was broken when China released grain stocks onto domestic markets and closed its borders. This forced domestic prices to fall below world market prices after 2007.

The trends in soybean prices, however, reveal another interesting story. China is the world’s largest importer of soybean, more than three-quarters of the domestic soybean consumption is imported. As shown in Figure 17.3, domestic and international soybean monthly prices moved very closely because, unlike grains, soybean is not a state-traded product, and was thus subjected to only a 3 per cent tariff and 13 per cent VAT. China had no policy measures in place to force down domestic prices in the short run. Importantly, the relation between China’s grain prices and those on the international market was restored roughly two years after the onset of the financial crunch. For example, the domestic price of rice moved slightly upward and has been approaching the international level since late 2008. Prior to 2006, the price of wheat in China corresponded roughly to the global level, but during the crisis, world market price surpassed China’s. Since late 2008, the two price trajectories have moved in parallel. The price development of maize is similar. By the end of 2010, the price difference between China and international markets reflected just international transportation costs plus value-added tax at the border.

Impacts Examined with a Simulation Model Analysis9

Impacts of the major factors affecting China’s grain prices in 2005–8 have been quantitatively analysed in our recent study (Yang et al. 2008). Yang et al. (2008) finds that rising international oil prices and the biofuel expansion had (p.379) (p.380) affected grain prices in China. Had there been no other effects, the higher international price of oil would have pushed up the price of rice, wheat, and maize from 16.6 to 27.9 per cent (Yang et al. 2008). This would have been enough to account for 85 per cent of the actual price increase in rice. Similarly, had there been no other factors, the price of wheat and maize within China would have risen by 190 per cent and 105 per cent, respectively, while in reality these rose by 11.2 per cent for wheat and 26.5 per cent for maize. The price of oil would have also forced up soybean price by 39 per cent. We also find that the emergence of the global biofuel production added a similar upward pressure on China’s grain prices. All other factors being equal, biofuel expansion in 2005–8 would have pushed up the price of rice by about 16 per cent, maize 20.6 per cent, and soybean 24.5 per cent.

The results also find evidence of the effectiveness of China’s price stabilization policies during the global food crisis. Although other factors may have had some role, it is likely that the government’s policy responses did lower the price of rice by 16.6 per cent. Given the actual 19.5 per cent increase during 2005–8, this implies that had it not been for government measures, the upsurge would have been 35.1 per cent. Likewise, wheat would have increased by an additional 29.6 per cent and maize 27.7 per cent. The results on soybean also show that domestic policy does not matter for fully liberalized commodities (Yang et al. 2008).

Impacts Based on Price Transmission Analysis

The price transmission analysis presented in previous sections shows that China was fully integrated into world markets and international prices had been transmitted to domestic markets prior to 2006. However, based on recent data, our analysis finds that the above results either disappear or become considerably weaker in 2007–8. The results further indicate that China’s policy responses were important and that they were effective in preventing price transmission from international to domestic markets.

During the 2006–8 global food crisis, the previous and significant long-run correlation between rice and wheat faded. While a long-run association still existed for maize, the estimated parameter (0.18) was much smaller (0.50) than in 2003–6.10 The short-term price transmission in 2007–8 did not affect rice and wheat, and even for maize, the degree of price transmission in the short run fell from 0.15 to 0.08. Moreover, the speed of adjustment was not statistically significant. Over time, however, the transmission of price seems to have become pronounced, as the long-run cointegration coefficient increased from previous 0.84 to 0.99. The short-term price transmission for (p.381) soybean also speeded up somewhat, from – 0.16 to – 0.18. Greater change occurred in the short-run adjustment parameter, which increased from 0.22 in 2003–6 to 0.90 in 2007–8. This is as expected because (i) China’s soybean imports have increased significantly in recent years (rising from about one million tons in 1996 to more than 52 million tons in 2009) (NBSC 2000–10); (ii) China’s soybean market has been fully integrated in the world market; and (iii) no policy instruments existed that could have effectively intervened, as was discussed earlier.

17.7 Concluding Remarks

Given China’s unique characteristics—its economic and political environment, the nature of the agricultural market, the national goal of food security, the large share of food expenditure in consumption budget, the country’s past experiences in responding to external economic shocks—it is not surprising that the government’s reaction to the global food crisis was swift and decisive. Counter-measures were introduced in the early stages of the crisis and covered a wide ranges of domestic and border policies. Short-term counter-measures, implemented with considerable speed, were comprehensive, and extended to domestic grain supply, demand, and trade. Moreover, fulfilment of the national goal of improved food security was further boosted through modifications to the biofuel development strategy and strengthening of the nation’s commitment to agricultural development and food security. Investment in agriculture, particularly agricultural technology and water, has increased significantly in recent years and is expected to continue to increase further.

The decision-making process in China reflects the country’s unique characteristics. The decision on the overall direction to stabilize domestic food prices and ensure national food security in the short term was made by the CPC and the State Council in the fall of 2007. The NDRC and the LG-FE as well as some major government-sponsored think tanks played an important role. Media reports had some influence as they collated information and options from different stakeholders. Once the overall policy direction had been set by the CPC and the State Council, each relevant ministry established its own path for promoting the policy goals in the short term.

There was no significant resistance from the relevant stakeholders to either the decisions or implementation. Again, China’s political system––decision-making based democratic centralism and balanced policies––directed the different stakeholders. The primary focus of agricultural policies is food security, and this objective was commonly sanctioned by all ministries. Although there were debates among scholars over grain price control and (p.382) the trade-off between producers and consumers, the decision to stabilize food prices and concurrently to increase subsidies to producers and low-income consumers was made by the national leaders. Furthermore, even though limiting fertilizer exports for a few months delayed its upward price trend, the chemical industry did benefit from price increases on the domestic market. All stakeholders related to agriculture, including farmers and consumers, will benefit from China’s renewed commitment to invest in food and agriculture.

Policy response impacts were impressive. With the exception of soybean which was fully liberated, domestic grain price increased only moderately. After the global financial crunch, grain prices in relation to the international trend returned to levels that had existed prior to the global food crisis. Soybean and edible oil prices increased, and consumers faced higher prices on several commodities, but fortunately most of China’s poor live in rural areas. This means that they might have some land for subsistence farming and there are few truly destitute residents. On the other hand, China has significantly increased investment in agriculture, and this will have important implications for long-term food security.

China’s food price stabilization policies have helped the nation to reach its food security goals by safeguarding domestic grain prices from the increasing trends seen on international markets, but it is worth noting that this does not imply that all of these policies are beneficial for the world. China’s counter-measures to keep domestic food prices down might also have helped to exacerbate the difficult global food situation, as the levy of export tariffs prevented major grains and fertilizers, agricultural commodities and other inputs from reaching world markets. Of course, China did not act alone: 28 other countries (World Bank 2008) responded to rising international prices with measures to levy export taxes or to prohibit exports. To deal with similar emergencies in the global food supply, it is essential there is a new global governance system, which can effectively coordinate action among major food importers and exporters.

References

Bibliography references:

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Huang, J., and S. Rozelle (2006). ‘The Emergence of Agricultural Commodity Markets in China’. China Economic Review, 17(3): 266–80.

Huang, J., Y. Liu, W. Martin, and S. Rozelle (2009). ‘Changes in Trade and Domestic Distortions Affecting China’s Agriculture’. Food Policy 34(5): 407–16.

(p.383) Huang J., S. Rozelle, and M. Chang (2004). ‘The Nature of Distortions to Agricultural Incentives in China and Implications of WTO Accession’. World Bank Economic Review 18(1): 59–84.

Huang, J., X. Wang, H. Zhi, Z. Huang, and S. Rozelle (2011). ‘Subsidies and Distortions in China’s Agriculture: Evidence from Producer-Level Data’. The Australian Journal of Agricultural and Resource Economics 55(1): 53–71.

Ministry of Finance and General Administration of Customs of China (2008). ‘The Regulation of Temporarily Increasing the Export Tariff on Certain Fertilizer Products’. Available at: <http://news.xinhuanet.com/newscenter/2008-02/18/content_7625695.htm>.

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Notes:

(1) At the time of writing, these were Wen Jiabao and Hu Liangyu.

(2) Ministry of Finance and General Administration of Customs of China (2008), and personal interviews with officials from the SGA.

(3) The Committee of Agriculture and Rural Development, the Committee of Finance, and the Committee of Environment and Natural Resources.

(4) For example, the fifth session of the sixteenth CPC central committee adopted as its theme the modernization of agriculture and the steady promotion of the development of a new socialist countryside. This was outlined in the ‘Suggestions on the 11th Five-Year Plan of the National Economy and Social Development’. Based on documentation, the State Council drew up ‘the Outline (draft) of the 11th Five-Year Plan for the National Economy and Social Development’ and sent it to the 4th session of the 10th NPC for discussion, recommendations, and approval. After ratification by the NPC, the plan was implemented by the State Council.

(5) Major research institutes and think tanks that have influenced agricultural policies include the Policy Research Department of CPC, Development Research Center of the State Council, Academy of Macroeconomic Research of NDRC, Center for Chinese Agricultural Policy of the Chinese Academy of Sciences, and Rural Economic Research Center of MoA.

(6) For example, Xinhua, CCTV, and People’s Daily.

(7) This was communicated through several Number-One Policy Documents (see Section 17.4).

(8) For example, in drafting the Number-One Policy Documents on agriculture and rural development for approval by the CPC central committee and the State Council, the LG-FE works closely with NDRC, Ministry of Science and Technology (MOST), the Ministries of Finance, of Agriculture, and of Water Resources as well as others related to agriculture. These policy documents, together with the 12th Five-Year Plan (2011–15) in agriculture, as prepared by the MoA and approved by the State Council, have become the national guidelines for agricultural policy and investment.

(9) This part of the discussion is mainly based on the earlier study by Yang et al. (2008).

(10) For a comparison with the pre-food crisis period, see Table 17.1.