By Yang Guang
Published: 2008-03-28

From Nation, page 9, issue no. 360, Mar 24, 2008
Translated by Zuo Maohong
Original article:

Unlike other neighborhood stores in his village, Hu Shiyun has enjoyed a prospering business. His mini-market, about 70 square meters in size, has been selling more than 100,000 yuan worth of goods every month.

The key to his success was joining the Cikelong Supermarket chain, itself part of the Chinese government's rural marketing project, dubbed "Millions of Villages, Thousands of Towns". Hu's village in Cixi county, Ningbo region of Zhejiang province was one of the project's pilot areas.

The project, launched four years ago by the Ministry of Commerce, encourages urban supermarket chains to set up bases in the countryside to increase rural consumption and improve the quality of their commodities. It also provides subsidies to participating supermarkets.

As a result, rural stores that joined the project in Ningbo have been acquiring over 90% of their farm supplies and 70% of daily necessities through the chains' distribution network.

Ningbo Municipal Bureau of Trade's marketing official Zhang Yuping said the project owed its success to the revival of the supply-and-marketing cooperative (SMC) system, using it to unify and standardize the rural market.

Reviving the Cooperatives
The idea of carrying out the project through SMCs stemmed from a worry that capable companies wouldn't be willing to enter town or village-level markets since the low consumption rates there would lead to low profit levels.

"While they served as the main channel of logistics during the planned economy, SMCs accumulated rich resources and equipment. Taking advantage of SMCs is a necessity for the program," said Pan Kongyun, deputy director of the municipal SMC of Cixi, the county where Hu's town is located in.

The cooperative system is a legacy of the planned economy, during which the government organized local communities into supply and sales units for all basic goods under a banner of economic development.

Around 20 years ago these cooperatives withdrew from the public ownership system, and ten years ago they underwent shareholder reforms. But recently, the cooperatives have been resurrected, though in a different form. Once powerful and once diminished, they have found a new role as a vehicle for Ningbo's supermarket project.

The Virtual Monopoly
Forty-two-year-old Hu was a farmer in Qianbing village. In May 2005, he became the owner of a chain named Zaoye Convenient Store under the Cikelong Group, and subsequently received a 20,000 yuan subsidy from the government.

The emergence of Hu's store was undoubtedly a threat to other businesses in the neighborhood. Chen, the owner of a grocery store 50 meters away from Hu's, complained his store used to bring him a yearly profit of 40,000 yuan before 2005, but could only make 20,000 yuan at most in recent years.

For these rural private stores in Cixi, Cikelong was obviously the biggest competitor. As of 2007, there had been more than 230 Cikelong chains in the county.

In 1998, Cikelong was set up by the Cixi SMC with a registered capital of five million yuan. Wu Jian, an employee of the municipal SMC of Ningbo, said that after the Cixi CMS created Cikelong, it banned other capital from entering the daily necessities market in the county.

Thereafter, Cikelong emerged as one of the top 50 supermarkets in the nation.

After seven years of growth, during which its assets gradually rose to 100 million yuan, Cikelong was bought out by the state-owned China Resources for 280 million yuan in 2006. The Cixi SMC thus withdrew from operation of the supermarket, though it still owned its property and intervened in business as an administrative manager.

Farm supplies, another focus of the above-mentioned marketing project, were also controlled by the Cixi SMC—unlike free-market operations, all such supplies in the county were dispatched by its exclusively-invested company.

At the company, which was named Xinghe Farming Materials, a purchaser told the reporter that this was the only place where all local farm supply stores could stock on goods from.

According to Xinghe's board chairman Chen Xuenian, the company was founded in March 2005 with a registered capital of five million yuan, and had expanded to one of 53 million yuan's value within the following three years. In the meantime, its chains had multiplied from less than 30 to 106.

The monopoly of farm supplies was said to emerge on accident. In August 2004, autumn rice in two other counties in Zhejing, Yuyao and Shangyu, had died off after being sprayed with a pesticide, causing a total loss of 9.1 million yuan for 5,617 farmers. The accident aroused concern from Premier Wen Jiabao, who later initiated a thorough investigation of the case.

The matter also triggered controversies on whether farm supplies should be government-controlled or left in a free market, said Zheng Genfu, a researcher at the municipal SMC of Ningbo. A proposal from a top official of the Ningbo municipal government was finally adopted--local cooperatives restored the right of farm supply distributors, and the government would support in principle its monopoly in the trade.

Statistics from the municipal SMC of Ningbo showed that by the end of 2007, there had been 806 farm supply chains, seven leading chain companies, and five dispatching centers in the city, with the total amount of supply worth over 800 million yuan. 

SMC holdings at three supermarkets in Ningbo varied from 20% to 40%. Some of their properties also belonged to SMCs—municipal SMCs alone were reported to own a total of over 90 properties.

A New Lease on Life
While it was rumored that SMCs were having their hard times in a market-oriented economy, Zheng disagreed with a laugh, "Actually they are living better than before." In his opinion, SMCs had indeed been through some trouble when China first embraced the market economy, but their profits today were growing steadily. It was just a new way of living—to go on controlling rural and urban logistics through chain supermarkets and village-level comprehensive services. The scale of such logistics had doubled that before 2000, he said.

China Mold City, a mold market in Ninghai county of Ningbo, was another witness to this "new way of living". According to Zheng, the property of the over 2,000 mu (about 133 hectares) of land the market occupied belonged to SMCs. Holding a few shares, charging rents and land commissions were the main means for SMCs to survive, he added.

When being questioned if SMCs were monopolizing the rural market through administrative means, Zheng replied that the government redefined SMCs as public entities in order to guarantee farmers' interests to the greatest extent. "Companies work to maximize profits, and therefore can't guarantee farmers' interests, especially when there're conflicts between different groups of people," he explained.

To Zheng's understanding, there wasn't a monopoly there. SMCs were just organizing individual entities together and supplying the same goods to them in the form of chain operations, he said, adding that not only was this saving money and labor, but also guaranteeing the quality of goods sold.

For those who were still running private stores, pressure was mounting. Chen, one of them, lamented, "I'll sell it if things turn really bad. Small stores can't win against big, government-backed ones, by any means."