China is going to have another bumper grain harvest this year, despite damage caused by the worst floods in 44 years. However, a bigger output is not necessarily good news for the government, which buys most of the grain and maintains the biggest grain stocks.
The good harvest means the state has to spend more on grain procurement in a year when its budget is awash in red ink. It also means that the state's storage system, already bursting at the seams, will be further strained. Much of the grain will end up rotting in the open air.
The fiscal and storage problems caused by the grain surplus have raised doubts over `the more, the merrier' policy of storing grain. International experience shows that it is sufficient to keep grain reserves equal to two months of consumption, says Mr. Lu Feng, a professor at the China Economic Research Institute of Beijing University. China, he estimates, is keeping about six months of reserves.
Maintaining an excess supply of grain in state 'warehouses has led to annual average losses of Yn30bn-Yn40bn, says Lu. "This is a huge amount that could be put to better use for other purposes," he says.
Keeping inflation low
China's bumper harvest came as a surprise, as officials had expected the summer floods to have damaged much of the crop. As it turns out, the autumn harvest is expected to more than compensate for the summer losses. The Ministry of Agriculture estimates that the grain harvest this year will top 495m tonnes, surpassing last year's 492.5m tonnes.
This is good news for farmers and consumers, but not for the government which has promised to buy grain at a fixed high price. Private companies are prevented from trading in grain, although some traders are still active in provinces where there are grain shortages. The government's buy-all commitment was made to ensure that farmers would continue to grow grain to meet rising demand – and not shift to cash crops as they did when they had such difficulty selling their grain stocks after the bumper harvest of 1993.
The policy is well intentioned, but is breaking the back of the government treasury. Each year, Beijing provides state-run grain stations with billions of yuan to enable them to buy at inflated prices as much grain as peasants are willing to sell to the state. The grain stations in turn sell the grain at a lower price to urban consumers, so that food prices remain low and stable nationwide.
Grain subsidies have helped to keep inflation low, but have led to big losses in the bud-get. In essence, it means that the more grain farmers produce, the more grain the state has to buy at a high subsidised price. Economists say the `buy-all' policy has sent a wrong signal to farmers, who interpreted the continuing high procurement prices as an indication that the market needed more grain.
The government does not reveal how much grain it has stored or what losses it has sustained from storing the excess supply. However it is clear from bank figures that the fiscal burden has become heavier because of the successive bumper harvests since 1995. Between April 1992 and March this year, government loans advanced to state agencies to buy grain totalled Yn543.1bn. In contrast, the stock in the granaries was worth only Yn329. l bn.
To be sure, part of the gap could be attributed to corruption and mismanagement. The Chinese press is full of stories of how funds earmarked for grain purchases have been diverted to other businesses, such as property and securities investment. In addition, the overstaffed and inefficient state-run grain bureaux have used up a big chunk of state funds. The sector employs four million workers, three million more than is required, industry analysts say.
In 1995 and 1996, state agencies bought a lot of grain when prices were at their peak. Then prices went down, recently hitting a record low. "It is like buying equities at the peak of the market and prices then fall heavily. Grain agencies are now stuck with the losses," comments Lu.
Tightening control
To reduce losses, the state has launched a crackdown on grain agencies, punishing officials found to be diverting grain funds for other purposes. In July, the state media revealed that three grain enterprises had diverted Yn300m in grain purchasing funds to real estate and futures trading. Another report said a grain official in south-western Yunnan province was fired for misusing Yn132m. In a separate move in mid-July, Beijing fired Luo ailing, the director of the State Grain Reserve Administration.
Punishing incompetent and corrupt officials aside, Beijing is also trying to tighten its grip on the grain market. Under the buy-all policy, the government currently controls about 70 per cent of the grain that is commercially sold, or 150m tonnes a year. The rest is consumed in the farms. To have total control of supply and price, the government needs to buy even more, around 200m tonnes, estimates a Western agricultural diplomat in Beijing.
Economists believe the long-term solution to make the grain business more efficient is to allow grain prices to fluctuate, just like any other commodity. Beijing also should allow private individuals and companies to do grain trading.
But the call is likely to fall on deaf ears in the short term because Chinese leaders are still obsessed with food security. Their fears of food shortages have been exacerbated by some Western forecasts that the country will be short of food in the next century. The World Bank, for example, says China's consumption of grain is expected to grow to 700m tonnes by the year 2020.
Such enormous future demand is the main reason why Beijing becomes nervous at the slightest drop in grain supply and opts to retain as much as possible, even if this policy defies conventional economic sense.
Progress – at a price
China's newest municipality is proud of its enhanced status, but its extended boundaries now encompass some big problem areas.
Nineteen months after becoming a municipality directly under the authority of the central government, Chongqing is slowly coming to terms with a fresh set of challenges. This industrial city perched on the steep banks of the Yangtze River is finding it difficult to adjust to its new status.
The March 1997 vote by the National People's Congress gave Chongqing more autonomy, but it also detached the city from landlocked Sichuan province. Formerly, Chongqing was a commercial and industrial centre of six million inhabitants in an area of 22,000 sq km. Now it is a region of 82,000 sq km, including some very poor districts of eastern Sichuan., Its population has expanded to 30 million, the vast majority of them peasants.
The lure of the interior
The decision to grant Chongqing enhanced status was hailed as a triumph by the city leadership. Chongqing became the first inland municipality, on an equal footing with Beijing, Tianjin and Shanghai. That meant it was able to keep a larger share of its fiscal income and also gave it more leverage in winning: approval for big investment projects. New tax concessions and incentives were designed to attract foreign investors. Taxes on the income of foreign enterprises investing in Chongqing have been reduced from 33 per cent to 24 per cent and those operating in the agricultural sector now enjoy a 15 per cent reduction in income taxation after the exemption period expires. The new status also allows domestic companies to enjoy the same tax benefits as foreign investors.
However, the task of making Chongqing an engine for economic growth in central China, complementing the role of Shanghai at the mouth of the Yangtze River, is fraught with difficulty. The new boundaries have created an imbalance between the western, industrial part of the municipality and its eastern areas, made up of the Three Gorges Dam area and several very poor rural districts. This is the hidden cost of the new status: Chongqing will have to bear most of the financial burden of resettling up to one million people displaced by the dam project, as well as taking responsibility for improving the well-being of two million people who currently live below the poverty line.
These obstacles have failed to dent the enthusiasm of Chongqing's municipal leaders, as was apparent when they gave a press conference in Beijing during the NPC session, one year after the change of status. "The establishment of Chongqing municipality is intended to give full play to the geographical advantage of this municipality," explained a Chongqing party secretary. "Chongqing should play the role of a window to the outside world and to others part of the country, acting as a dragon head of the Yangtze River valley and bringing social and economic progress to the upper reaches of Yangtze and also the south-western part of our country as a whole."
To realise these goals, the municipality has emphasised city planning and improvement of infrastructure in its 43 districts. This massive task masterminded by 1,000 engineers and city planners still awaits the final approval of the central government after two years of preparation. Meanwhile the heart of the city, home to 400,000 people, is already being reshaped. Built on a slope, the oldest part of Chongqing is a maze of narrow, murky and overcrowded back alleys. The houses and small shops which line the streets are crumbling because of poor quality construction materials. The municipality is now sending in the bulldozers as part of a long-term plan to transform these neighbourhoods into green parks overlooking the river. Chongqing will attempt to protect its cultural heritage by devoting Yn10m to the protection of historical buildings.
Mr. Li Shiyu, director of the city planning bureau, says drastic changes are on the drawing board . "We will control the number of people living on the shores because we would like to establish a green belt of trees around the river," he says. "We will establish a preventative zone against floods. Buildings beneath this line will be prohibited. We don't wish boat passengers to see these insalubrious habitations."
To improve the environment, the municipality will also have to tackle the long-standing problem of wastewater treatment. World Bank loans will go towards building 10 waste treatment stations.
Reducing traffic congestion
Another priority is the reduction of traffic congestion, which is said to have exasperated President Jiang Zemin when he came on an official visit to Chongqing a few years ago. Since then, the municipality has built the first part of a ring road that will run 50km around the city centre when completed. A metro project is being evaluated and several options have been discussed with Japanese and French companies. A feasibility study for a first 17km line is being drafted and the Japanese government has offered to provide loans. Additional infrastructure projects include the construction of up to 17 new bridges across the Yangtze and Jialing rivers. Four have already been built, two of them with Portuguese participation. "Our goal," says Li, "is to emulate the planning of the River Seine in Paris."
In addition to all this work, Chongqing has to bear the cost of resettling many city residents to the suburbs. The new administrative centre in Jialing alone will involve the resettlement of 50,000 inhabitants on a five sq km area north of Chongqing. Most families are to be allocated larger accommodation about 10 sq metres bigger than before. Alternatively they will be offered financial compensation.
The strategy is popular since residents are anxious to improve their living conditions. "Some discontent does exist, but the majority are satisfied," says one official. "Real estate is booming; new buildings are sold before they are completed." This has resulted in a shift in the pattern of real estate development in central Chongqing. Following investments such as the Yn1bn Metropolis Plaza, a shopping, entertainment and restaurant complex funded by the Hong Kong magnate Li Ka-shing, attention is now turning to residential housing in the suburbs.
Privatisation experiments
However, the path to modernisation faces another historical obstacle. The city has inherited numerous defence-related state factories as a result of the political circumstances of the 1950s. During this era, key industries were moved to the city by Mao Zedong to protect them from possible foreign attack. Today, Chongqing has more than 10,000 enterprises, some with huge workforces of between 50,000 and 100,000 employees.
These conglomerates are short of modern equipment, management techniques and increasingly lack cash to keep themselves.