The Wall Street Journal / By STEPHANIE HOO
SHANGHAI -- As China presses forward with reforming its inefficient grain sector, the government is severely narrowing the scope of state grain buying, but actively buying favored grains, analysts say.
For example, less than a week after China served notice it will remove several grain strains from price protection this year, Premier Zhu Rongji Sunday told the opening session of the National People's Congress that the government will continue buying surplus grain from farmers at protective prices - without any limit.
Zhu's remarks had some wondering how serious China is about promoting market reforms.
"One thing is very clear. They will continue to procure at prices above the market value," said Stephen Casale, researcher at Clear Thinking Inc., a Beijing-based consulting firm. "Zhu Rongji said that unequivocally."
As such, Casale and other Western analysts said that even though China is removing many protections, they wouldn't rule out some backtracking if the burden for farmers becomes too great and risks social instability.
Overall, the different policy statements shed little light on China's import trends for the near-term, several analysts said.
But government researchers maintain that moves toward a more market-based system are very much on track, and that Zhu's comments were meant mostly to reassure farmers during a time of great change.
"Actually, this 'without any limit' is impossible," said Chen Xiwen, research fellow at the Development Research Center, an advisory body under China's State Council, or cabinet. "We do have limits in terms of money and in terms of warehouse space."
"The government will continue to protect farmers when the demand-and-supply relationship is unbalanced," Chen said. "But there is a clear trend that the government has been lowering the protective prices since 1998."
WTO Restrictions
In particular, the government needs to prepare farmers for increased competition following China's expected entry to the World Trade Organization when price protections must be removed. Reducing protections also reduces graft, said Benny Chiu, China services research director at HSBC in Hong Kong.
If the government buys less grain, that automatically cuts down on the amount of money lost or stolen in the notoriously inefficient procurement system, Chiu said.
He added that he anticipates the reform process will be slow. China will remove some grains from price protection, see how that goes, then maybe remove a few more. "They're feeling their way," he said.
"In terms of GDP (gross domestic product), agricultural output is declining, but it's important psychologically," Chiu said. "Grain production is a very important factor in the minds of the leaders. It's food."
China said last week it will remove some of what it deemed inferior grain strains from the state's price protection this year, to urge farmers to improve quality and increase diversity, the official Xinhua News Agency reported.
But, that doesn't necessarily mean the state will stop buying these inferior grains, a government researcher said.
Specifically, China will stop paying protective prices for spring wheat from northeast and north China, early indica rice from south China, and wheat and corn from the Yangtze River valley and regions south of the river, Xinhua said.
Also, Xinhua in January reported that China reduced the planting area of winter grain crops by 5.6% in 1999 to 27.8 million hectares following the government's decision to stop paying protective prices for winter wheat, though the report didn't say when this protection was removed.
All in all, Chinese agriculture has entered a "critical phase," where farmers must learn to emphasize quality instead of quantity, said Ma Xiaohe, a department head at the Institute of Economics, a research body under the State Planning Development Commission.
China introduced its protective-pricing policy in 1990, removed it in 1991, then reinstated it in 1996, when a bumper crop pressured prices, Chen said. "It's the government's responsibility to keep demand and supply balanced for basic commodities," he said. "Foreign governments do this, too."
But Ma shrugged off suggestions China might backtrack in the face of WTO entry. "Chinese people keep their promises," he said.
Looking past WTO, Chen said the government can protect farmers from market shocks by setting up national agriculture insurance, paying income subsidies and actively maintaining national grain stocks.
-By Stephanie Hoo; 8621-6218-3268, stephanie.hoo@dowjones.com
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