Foreign Capital and Food Security in China, Part I

Since China's accession into the World Trade Organization (WTO) in the year-end  2001, it has gradually opened its door for free trade as committed. In agriculture, it has increased quotas and reduced tariff rates for agricultural imports; and allowed foreign players into its food market. Yet wariness remained as Chinese policymakers juggle between liberalizing its food trade and safeguarding food security, especially when global food prices have been soaring and short supplies in some countries triggered social turbulences earlier this year.

This two-part focus series explores China's progress in liberalizing its grain market and its attitude towards foreign capital in the sector. The Part I below looks into the "privatization" of grain warehouses and suspicion against interested foreign buyers.

Part II, to be published soon, will look into possible tightening of Chinese regulations to guard against foreign capital in grain procurement.

Foreign Capital and Food Security in China, Part I

The ownership of many Chinese grain warehouses at and below the county-level remained in the hands of local government, despite that only four months remain before the deadline for liberating the grain distribution system under a reform launched in 2004.

The market-oriented reform has cut off central government subsidies, waived agriculture taxes, and ended state-driven grain procurement from farmers, cash-strapping many once-influential local warehouses and leaving them bare.

Foreign food giants have of late showed keen interest in taking over these struggling grain warehouses, yet some domestic players have responded warily, fearing the latter would gain control over grain sourcesand threaten China's food security.

Accomplishing Reform
On August 28, a notice from the provincial grain administration of Jilin, one of China's major grain basins in the northeast, reached one near-empty local warehouse with only three workers on duty.

The notice demanded all local grain administrations to "exercise extreme measures and stay alert as if facing a battle, in order to ensure the reform for the ownership of state-owned grain procurement and marketing enterprises would progress smoothly, and to ensure grain warehouses remain secured".

The four-year-old State Council-directed "grain logistic and marketing system" sought to shed staff, cut losses, and reduce overdue and expired grain at state-owned grain procurement and marketing enterprises (hereafter as grain enterprises) and the warehouses under their management. Measures included liberalizing grain prices, diversifying procurement and marketing channels, providing direct subsidies to farmers, and establishing market supervision mechanisms.

Official data revealed that in 1998, China had some 30,000 state-owned grain enterprises, employing some 1.94 million staff and rolling up debts of over 200 billion yuan. By the end of 2007, these state-run enterprises employed about 547,000 workers following a few years of reform.

Under the reform, select grain enterprises - which used to be the only grain procurement and marketing channels dealing directly with farmers - would remain in the hands of central, provincial, municipal or county level governments to act as reserve depots, while the rest would be privatized.

In Jilin alone, there were 778 state-owned grain enterprises, of which 643 were rushing towards consolidation, to be sold or lent out within the next four months. A similar phenomenon was also taking root in major grain production provinces like Heilongjiang, Inner Mongolia, Henan and Anhui.

Wary of Foreign Capital
Li Qiang (pseudonym), a manager at a grain warehouse in Jilin saw a reduction from 1,200 to 50 workers, had been receiving numerous enquiries from interested domestic and foreign buyers.

The warehouse under his watch was located near the Siping-Changchun highway and a web of rail tracks connecting major northereastern cities in China like Shenyang, Changchun and Harbin. It could store up to 200,000 tons of grain, and was equipped with grain processing facilities.

"Domestically, mainly private grain processing enterprises expressed buying interest. They come from all over the country, including Zhejiang, Guangdong, Shanghai and Sichuan," Li said, adding that a few foreign companies had also contacted him.

"I told them (foreign companies) that the warehouse belongs to the state, and present reform regulations remain unclear. I am only the keeper of the warehouse, I am not authorised to negotiate with them," Li added.

Another manager from a state-owned grain enterprise said ownership of a local warehouse could lead to other benefits. "In the northeastern region, if one offers big money to buy a local grain warehouse, one basically has secured the rights to source for grains in surrounding areas, some up to a 100km radius from the warehouse," said the manager who requested anonymity.

The manager said such sources of grain was regarded as the baseline of China's food security and if foreign capital gained access to them by owning warehouses, that could pose a threat. He believed limitations should be set on foreign ownership.

"Such as spelling out the criterion for qualified buyers, or restricting the number of warehouses each buyer may own. In a time when food prices are soaring, businesses are bound to invest in warehouses at all cost," he added.

Foreign Threat Exaggerated?
An official from Jilin Grain Administration declined to answer EO inquiries on whether or not the local government would open the door for foreign capital to own grain warehouses, and if the authority feared foreign companies would jeoperdize the country's food security.

The official only said: "The provincial government will soon hold a mobilization meeting, and details on reform policy and formula will become clear after that."

Another grain management official, also from Jilin, told the EO: "I personally don't think there is a concern. The truly high-end and influential grain warehouses are basically still in the hands of central or provincial governments."

A foreign grain enterprise manager admitted that his company was interested in acquiring local grain warehouses. He said: "Foreign participation will stir up competition and lead to more creativity in products and services, not a conspiracy of controlling grain sources and market manipulation."

He added, however, foreign food companies would be cautious in making huge investment to buy grain warehouses, as the government policies remained unclear and unstable at the moment, thus heighthening investment risks.

One senior food expert from the State Administration of Grain said the idea of "foreign threat" should not be exaggerated. He said: "On one hand, the state has absolute control over grain reserves system, which foreign firms are unable to challenge.

"On the other hand, we have laws and regulations to prevent malicious market behavior and manipulation, such as rulings on grain logistics and marketing, and antitrust laws."