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China and World Food Supplies Economic Impact

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  • Student: Tianhao Cao

 

1. Introduction

The way that a country trade with the world is greatly depending on its economic system and government policies. Changes in policies will inevitably result in countries foreign trade regimes and trade performance for economic reform. Agriculture, as an important role in China, largely contributes to economic development and ensure a continuous increase in agricultural commodities, as well as competitiveness with other countries. Obviously there is a close and essence relationship between Chinese government’s agricultural policies and China’s trade with worldwide. Agricultural liberalization starts the China’s economic reform, which successfully transformed collectives to household-based framing between 1978 and 1983, producing remarkable growth in grain and meat output. These reforms provide the necessary condition for China’s economic growth, with agricultural output strong expansion through reform period.

This study aims to provide the relationship between China’s food supply and demand with world. It will start with the analysis of agricultural reform policies in China which determine the ability foundation in this sector. China’s agricultural trade is an important implication to the China and world economy. Followed by the supply and demand analysis, there will be a clear map about the China and world.

2. Agriculture development and policies in China

Agricultural development and policies are very important to China. At the micro economic level, China has made dramatic progress during the last 20 years, with the aspect of improving household agricultural production and reducing the incidence of malnutrition. To evaluate the performance of agricultural sector, it is fundamental to review the role of policies in agricultural development.

2.1 The reform of institution

China’s agricultural reform was initialed by poor farmers in Anhui province in 1978. Production team members’ earnings were connected with their work performance, so farmers a contract system between the production team and households or members was introduced. It was a full contract system because households were completely responsible for inputs, outputs and tax and sales obligations. It was officially named as the household responsibility system (HRS) which started the China’s rural economic reform, dismantling the communes and contracted agricultural land to households with the measurement of family size and number of labor force. In 1984 the HRS reforms were completed. At that time the average farm size with aspect of cultivated land was about 0.6 ha. The size of farms were different according to the regional variation in land endowments.

China's land rights are both complicated and changing (Brandt et al., 2002). The first term of the land contract was marked as 15 years. Within this period, the land ownership was kept for the collective, income and control rights that was given to farmers. This land policy impacts on the equitable distribution of land to farmers, enhances the food security and alleviates poverty between rich and poor. The income and control rights greatly contributed to the agricultural production and productivity growth in the early 1980s (Lin, 1992; Huang and Rozelle, 1996). From the late 1990s the term of land contracts were extended to 30 years. But the collective ownership of land caused the frequent village land reallocation. To solve the problem of insecure and negative effects on investment, China passed a new land law called the Rural Land Contract Law, effect on 1st March 2003. This law is aimed at increasing tenure security. Over the past years the Chinese government is trying to find a way to give farmers access to additional cultivated land and then finally increase their competitiveness and income. The frequency of land rented in and out is increasing. The new Rural Land Contract Law illustrates the rights for transfer and exchange of land. Inherit is allowed within the contract period in this legislation. Farmers are encouraged to efficiently use their land and increase farm size.

2.2 The reform of input price and marketing policies

China takes the strategy of gradual reform in the area of fertilizer, seed and other input market. In the first period of stage, the policies were to provide incentives to individuals for main products. For less important commodities, reformers kept the existing institutional structure that provided cheap food to the urban economy. The administrative output price gradually improved incentives to farmers. To meet the goals of food sector, China’s leaders made few adjustments to the rest of the rural economy in the early 1980s, such as unchanging and planning the machinery, fertilizer and the seed systems. In the middle of 1980s, the market liberalization has been gradually implemented beginning with pesticides and machinery.

2.3 The reform of price and marketing policies

Price and market reforms are very important and played as key components of China’s transition strategy to shift from a socialist to a market-oriented economy. In the late 1970s the price and market reforms were initiated to increase farm level procurement price and gradually making the market liberal. Although the liberalization is steady proceeded, the process of price and marketing system reform has not been completed after 19 years of reform, especially for cotton and grain. It is the process of reintroduction of controls and deregulation of policies. In 1979 the government significantly lifted state procurement price for 18 major farm products. At that time the increasing in state procurement prices were the main mechanism to maintain farmer’s incentive and sell products to the state. At the same time the products prices which was under control for unifying procurement and marketing system was reduced. More products have been liberalized from the middle of 1980s, such as fish, pork, tea, poultry, fruit and vegetables. But the main pricing and markets are still under the governments’ control. The liberalization efforts have a significant impact on productivity and crop selection decisions at the household and national level. The price responsiveness of farm households is increased due to the shift from the collective system to the HRS.

2.4 Rural credit policy

It is important to mobilize and efficiently use available financial resources in rural areas. In this way it can achieve high rates of economic growth, especially in developing country’s rural area where such typical funds are in short supply (Nyberg and Rozelle, 1999). It is expected that the capital moves from agriculture to industry, for the greater financial intermediation accompanies higher incomes. With economic growth, financial institution is crucial in directing resources to the most productive use. However, in developing countries government often controls the banking system to pursue policy goals. But it generally are not always complying with efficient intermediation. This is due to the fear of funds shortage for farmers and the activities they want to keep.

Concerning about China’s rural financial institutions, regulated interests rate imply credit rationing that makes private entrepreneurs and farmers. The poor is less likely to have gaining credit access. Park, Brandt and Giles (2002) have shown that without access to formal credit in agriculture, informal credit has taken its place. The loan from relatives and friends is the main informal credit in the agriculture sector in China. In return there is an implicit obligation to provide an interest-free loan back in the future if necessary. Farmers are not constraint by the credit to invest in business and large consumption goods and their daily agricultural production activities are still as normal.

2.5 Exchange rate policy

Macroeconomic polices can greatly and significantly influence on the overall incentives of producers in the agricultural sector. Exchange rates can have great implications for trade because the nation’s exchange rate policy is influenced and created by the main mechanisms. China’s policies govern the nation’s external economy and highly influence on shaping the structure and growth rate of agricultural production as well as trade for many decades. During reform period policies are implemented to seek counteract earlier distortions and contributing to lower level protection. With the implementation of economic reform in 1979, China introduced the foreign exchange retention system to provide incentives to different enterprise. Local government can increase foreign exchange earnings by the exports expansion. With the system both enterprise and local governments can maintain a certain proportion of foreign exchange through exports. A two-tiered foreign exchange rate systems controlled the exchange rate management. The one rate set by policy, named official one. The other rate was set by a swap center. The following is the official and swap market exchange rate and real effective exchange rate indices from 1979 to 2001.

Year

Official exchange rate(CNY/USD)

Black market or swap center (CNY/USD)

Real effective exchange rate (1994=100)

Ratio

1979

1.56

2.33

397

1.5

1980

1.5

1.95

403

1.3

1981

1.7

2.05

359

1.2

1982

1.89

2.27

343

1.2

1983

1.98

2.39

337

1.21

1984

2.32

2.69

299

1.16

1985

2.94

3.05

254

1.04

1986

3.45

4.03

185

1.17

1987

3.72

4.4

160

1.18

1988

3.72

6.5

133

1.75

1989

3.77

6.6

154

1.75

1990

4.78

6.6

137

1.38

1991

5.32

6.6

121

1.24

1992

5.51

6.92

108

1.26

1993

5.76

8.28

94

1.44

1994

8.61

8.7

100

1.01

1995

8.35

8.5

109

1.02

1996

8.31

8.6

117

1.03

1997

8.29

8.6

123

1.04

1998

8.28

8.6

123

1.04

1999

8.28

8.6

117

1.04

2000

8.28

8.5

118

1.03

2001

8.28

8.4

121

1.01

Source: From IMF database.

     
         

To further foreign exchange rate system Chinese government unified the official exchange rate and the swap market exchange rate. In this way it adopts a single currency and manages the exchange rate system. From this table we can see the rate was supposed to be managed at the consistency with supply and demand in 1994. So the rate was effectively devalued from the official exchange rate of CNY 5.76 per USD 1 in 1993 to the managed exchange rate of CNY 8.61 per USD 1 in 1994. This shift indicates a one-off devaluation of more than fifty percent.

2.6 Reform of trade policy

China was liberalizing the international trading system when the exchange rate system was implemented. In the case of many products, imports and exports were stimulated for the competition among non-state foreign trade corporations (Martin, 2002). The actions of reducing the taxes assessed at the border were matched with the moves to relax rights to access to import and export markets. In 1990s China made effort to reduce the level of formal protection after reducing restrictions on imports and exports of agricultural commodities. So changes in trade and domestic marketing polices led to a dramatically shifting of trade patterns. China used export subsidies prior to its WTO accession to increase the export of two commodities. China subsidized certain agricultural commodities in this way. With the commitments connected with WTO accession, it can lower the tariff on all agricultural products. As well as increase access to China’s markets and remove quantitative restrictions on others. It is an important link with world to accelerate China’s economic growth.

3. China’s agricultural trade

China has reached the level of developed countries for per capita food availability. Since the mid-1980s China has been a net food exporter. (NSBC, 2003). Economic growth and rising income boost the demand for agricultural and food products. At the same time trade liberalization make challenges for food and agricultural economy. The balance between supply and demand is crucial for China’s food import and export.

3.1 Food consumption in China

Since 1980 China’s food consumption patterns had been changed greatly, happening with the national aggregate level as the urban sector expansion. The changes occurs both in rural and urban areas as a result of income growth and demand changes. Consumer behavior changed dramatically across Asia because of countries urbanize. Urban residents consume less grain and demand more milk, meat and fish than rural residents. The ratio of urban to rural residents is changing fast. This population shift impacts on the consumptions too. The predictions of future consumption patterns are based on the structural transformation of the economy, and the consumption difference between urban and rural consumers should be taken into consideration too. The following table is market development and per capita food consumption (kg) in rural China, 1997-2001. It shows how food market development is linked to food consumption in rural. This table shows the percentage of food consumption purchased from the rural market, which can express the food market development. The home-produced commodities such as grain and vegetables decline with food market development.

Market development and per capita food

Market consumption (kg) in rural China, 1997-2001

Source: National Statistical Bureau of China 2001.

3.2 food supply and demand

The growth in domestic production results in the increase in food consumption in China. The rapid growth of domestic food supply can improve national grain self-sufficiency. By early 1980s the average income elasticity of cereal grain was still positive. The increase supply coming from income growth was offset by a decrease in consumption with the rapid development of food market. China need to balance the supply and demand. In the past two decades the increase in grain production was effected to meet the increase in demand for cereal grain as food. China has the ability to release a large share of produced grains for feed use, because of the reducing supply pressure on food demand. Meanwhile the domestic policies help China to improve food security. Land distribution according to land law indicates that the farmers’ income have been risen as a result of the increased output.

4. China and the world

As a result of China's high economic growth rate, its share in global GDP in constant prices will gradually increase from 4% in 2001 to 7% in 2020 (Dimaranan, 2002). China specializes in products with relatively decreasing world prices. Because of high economic growth rate, China’s role in the world trade is strengthened and increased. China’s world export market share increases for the comparative advantage. In the world imports, China will increase in particular its share in plant fibers and oil.

China is very important to EU trade, because China’s exports and imports development may significantly impact on world market price. China will grow as a strong competitor on its export market. Also the world’s trade with China will be influenced by the developments in China. As a agricultural country, China plays an important role in agricultural commodities imports and exports, for the share will increase for many products. In the following table we can see more than a fifth of all Chinese exports go to the EU. Within agriculture pork-poultry are the main export products. Services ratio 50% and industrial sectors 23%, based on statistics EU is a very important export destination as agricultural products are less important than others. Chinese imports account for only 5% of imports, as textiles (16%) and processed food (9%).

China’s role in the world will be increased significantly just in the course of time. It is a result of high income-growth rages and accession to WTO. China is able to feed its large population. It can be foreseen there will be a high growth rate of China’s export to the EU. China is important to the world.

5. Conclusion

In conclusion, China’s reform from 1978 has brought astonishingly impact on the Chinese economy, generally in China’s rural and agricultural sector. Markets play an increasingly important role in agricultural commodities and trade. Complying with China’s comparative advantage, land and labor are reallocated for agricultural resources. It means a rapid growth in agricultural commodities and trade.

With high developing pace, China has a great impact on world economy without any doubt. Especially the accession to WTO allows more opportunities to both China and world. However, the impact of China’s accession will be limited for the policy changes which are directed to international trade during reform period as running up to accession. Although China is in the high way of developing, it is still a long way to go.

Works Cited :

Lin, J., 'Rural reforms and agricultural growth in China'. In: American Economic Review 82 (1992), pp.34-51.

Huang, J. and S. Rozelle, 1996, 'Technological Change: The Re-Discovery of the Engine

of Productivity Growth in China's Rice Economy'. In: Journal of Development Economics, 49 (1996), pp.337-369.

Nyberg, Albert and Scott Rozelle, Accelerating China's Rural Transformation. Washington, D.C: The World Bank, 1999.

Park, Albert, Loren Brandt, and John Giles, 'Competition and Credit Rationing: Theory and Evidence from Rural China'. Working Paper, University of Michigan, Ann Arbor, MI.,2002.

Martin, W., 'Implication of reform and WTO accession for China's agricultural policies'. In: Economies in Transition (forthcoming).

Dimaranan, B. V. and R.t A. McDougall, Global Trade, Assistance, and Production: The

GTAP 5 Data Base. Center for Global Trade Analysis, Purdue University, 2002.

NSBC (National Statistical Bureau of China), 'Statistical yearbook of China', various issues from 1981 to 2002. China Statistical Press, Beijing.


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