China's New Wind of Agricultural Protectionism

Cover Story, issue no. 384, September 8, 2008
Translated by Liu Peng
Original article: [Chinese]

This is the second of a two-part focus series exploring China's progress in liberalizing its grain market and its attitude towards foreign capital in the sector. Part I explored the "privatization" of grain warehouses and suspicion towards foreign buyers.

A sudden wind of protectionism is stinging foreign agriculture firms in China, the latest round being a verbal mandate by central grain authorities halting new grain purchasing permits to foreign firms.

In an absence of clear black-and-white document backing the directive, local grain authorities from south to north have begun denying purchasing permit applications by foreign firms and ignoring existing ones.

The decree is just one volley of arrows set loose after Chinese grain experts and academics have lobbied for more attention to be paid to what they see as a threat that foreign firms bring to China's food security.

Beside the mandate, two weeks ago Ministry of Commerce officials met with foreign agriculture giants to gauge their investment ambitions as part of a threat assessment report for the State Council. And just last week, an influential memo from China's  top development agency called for the strengthening of local soybean processing industry.

All of these come as China is under global scrutiny to further liberalize its agricultural market according to commitments it made to the World Trade Organization in 2001.

Under Lock and Key
After interviewing many local officials, the EO confirmed that the halt on permits aimed to prevent foreign firm from controlling China's grain sources.

One Henan grain official told the EO that they had received a directive to stop issuing the grain purchasing permits to foreign firms and had thereafter denied one foreign firm of the permit.

In Hebei province, a manager of a foreign firm told the EO that one of its edible oil processing businesses in Langfang had been banned from purchasing the grain there despite having already obtained the official permit in the past.

One official in northeastern provinces said the Heilongjiang and Jilin province had attracted many foreign firms, so it would be hard to revoke permits. But he added, "It would be impossible for them to enter the grain market [after the order]," he added.

A manager from a different foreign firm told the EO that when they contacted the SAG to ask about such a policy document, the official denied its existence.

"There simply was no document. It was a verbal command," said one local-level grain official who wished to remain anonymous. They added that this had led to varying interpretations and implementations of the directive between local administrations.

The EO has learned that some provinces only halted future issuance of the permits, while others ordered foreign firms to discontinue their grain business.

Said one city-level grain official: "Even we're perplexed. Is it a full ban on all purchases, or just a ban on new permits? How long will the policy last? We haven't a clue. All we can do is wait for a provincial-level notice."

According to the "Regulations on the Grain Circulation" enacted by State Council in 2004, both domestic and foreign enterprises must obtain grain purchase permits before they could enter the grain business.

One official from the grain administration in northeastern provinces said that previously, permits were issued on a much looser basis: "We usually issue the permit as long as you (the foreign firm) had enough funds, qualified grain warehouses, and submitted the application to us."

However, the official from SGA expressed that the top policy-maker's intention and the directive's valid period was still unclear at present. He estimated there would be further announcements in the near future.

The SAG was not the only one government organ to take such kind of moves. Last week, the National Development and Reform Commission (NDRC) also released a document--"Guidance on Promoting the Healthy Development of the Soy Bean Processing Industry".

The document pointed out the concerns on the contraction of domestic enterprises' processing capability and turnover and thus demanded to change their lower market shares status and their weak competitiveness.

Foreign Firm a Threat?
"In fact, the SAG has been wary of foreign firms because as the WTO's transitional protection period for China's agricultural sector expires, many multinationals will swarm into China's grain market," The above SAG official said. 

In some grain experts' viewpoint, China had been able to resist the recent grain crisis mainly due to its massive grain reserves and strict control of grain imports and exports.

The SAG worried that if foreign firms indeed swarmed into China, their macro-control efforts would be significantly weakened.

In addition, the SAG feared the foreign firms would duplicate their South America operation model in China, in which their shadows were permeating in the whole production chain.

One SAG expert said: "For instance, they (foreign firms) purchase or contract the fields, provide materials like fertilizer and seeds to the farmers; they purchase the agricultural products like soy beans, conduct trade, process the products."

Most critics used soybean as an example where China was losing to foreign firms. They believed China incorrectly opened up the soybean processing industry during WTO trade negotiations, and said that as a result, foreign firms have monopolized it, pushing out local firms droves.

They added that opening the floodgates to soybean imports from the Americas have hurt profit margins for domestic farmers of it.

After this, four domestic agriculture associations including the China National Association of Grain Sector (CNAGS) filed a report to China's State Council recommending that investment in China's edible oil industry be restricted within the framework of the WTO agreement.

Last Wednesday, the NDRC published a memo calling for the encouragement of the domestic soybean processing industry.

After seeing the report, one manager at a foreign agricultural processing company told the EO: "It will be impossible for foreign firms looking to develop further in this industry."

Some grain issue researchers and experts, convinced that the threat of foreign dominance in China's grain industry was imminent, went to lobby the government at every level.

Cao Yuanhai, an expert in China Academy of Social Sciences, said his biggest fear was that foreign firms would be able to legally snatch up and deal in large portions of China's grain.

Some experts in China worry that because local grain storehouses are so loosely guarded, anyone can go in appraise them. There are fears that these foreign firms actually know more about local grain stores than the government agencies charged with supervising them.

Policy regarding foreign investment in corn processing was adjusted last year. According to the newly-revised industrial catalog for foreign investment in China, which came into effect last December, the non-ethanol corn processing industry fell into the "restricted" catalog. Foreign firms needed approval from the NDRC in order to enter it. 

A source from a foreign firm in this field told the EO that such applications went unanswered.

Foreign Firms Respond
The policy adjustment was already changing the outlook of foreign firms.

Huang Juhui, a press officer for US-based food and agriculture giant Cargill, confirmed that it had taken an interest in China's grain purchase business.

He said that by bringing the world's most advanced production and purchasing models to China, they could help farmers allocate production according to orders and future contracts, which can help them more effectively avoid market risks.

"But now, we are worried about the risks triggered by the policy adjustment and have to reconsider our investment plans," he added.

Two weeks ago, the Commerce Ministry held a discussion with several large foreign firms hoping to get a sense of their investment plans in China and to assess the potential threats to China's food security caused by them.

During the discussion, many foreign firms responded to the criticisms that had been lodged against them. One foreign firm complained, "in the beginning, it was your government that invited us to invest here. Now you criticized us for investing too much."

At the end of that meeting, the foreign firms successively handed in reports responding to the fears. One such report said: "China's historical experience has proved that foreign investment in agriculture has strengthened, not weakened, China's grain security."

That report cited soybean as an example of a product that, once in short supply in China, had become widely available after foreign investment in it in China.

The EO has learned that after reviewing the information gleaned from that meeting, the Ministry would compile a threat assessment on foreign investment in China's edible oil industry and report it to the State Council. An official from Ministry refused to comment on this issue.

Some Chinese scholars thought that if China really restricted foreign firms' behaviors in the grain market, they would likely strike back through the WTO.

Liu Xiaohe, an agriculture trade policy research director at the Chinese Academy of Agricultural Sciences, said, "If the two parties can't resolve disputes internally, the foreign firms would seek external pressures for the Chinese government."

He thought "One possibility is they will likely appeal to the WTO, demanding China to eliminate the investment barriers; the other is to adopt trade retaliation. They will likely restrict investment from China."