New Mutual Aid Funds in Zhejiang

Zhejiang Province introduced new regulations allowing registration of rural mutual aid funds. The regulations were jointly issued by Zhejiang’s commerce bureau and provincial branch of the bank regulatory commission, and they took effect October 28.

The mutual aid funds are described as a cooperative-style community banking organization that can take deposits, make loans, and perform settlement business. They can only do business with members, and business must be in the local community; they cannot form branch organizations. They can be established at the township level with minimum investment of 300,000 yuan (under $44,000) or at the village level with 100,000 yuan ($15,000). No member's share can exceed 10% of the value of stock; bank regulator approval is required if a member's share exceeds 5%.

The article notes that farmers and small rural enterprises can "voluntarily" form mutual aid funds at the township or village level. This contrasts with the rural credit "cooperatives" that everyone was forced to join in the 1950s.

The reporter says many rural financial institutions in China take deposits but don’t make loans, with the funds mostly going into city financial organizations. In recent years, rural mutual aid funds have been tried as pilot programs in many areas of China. From now on, Zhejiang also can also organize this kind of “rural bank.”

Wal-Mart + 1 Million Chinese Farmers

According an online report, a forum on the "Farmer-Supermarket Linkage" program was held in Beijing on October 29, where the Ministries of Commerce and Agriculture signed memoranda of cooperation with Wal-Mart. This project promotes direct purchases of produce by supermarket chains from farmers (actually cooperatives or distribution centers run by farmers). Wal-Mart announced that it plans to involve 1 million Chinese farmers in its “farmer-supermarket linkage” project by the end of 2011.

Since 2007, Wal-Mart has established 11 direct purchasing bases in 7 provinces. The bases cover an area of 150,000 mu [10,000 hectares] and 200,000 farmers directly benefit [10 farmers per hectare!]

Wal-Mart’s International Business chief told a reporter, “The farmer-supermarket linkage program is representative of Wal-Mart’s development strategy in China. We want to bring our world-wide experience in farm product operations into China’s supply chain, spread scientific crop-production, environmental protection, strengthen food safety monitoring, to give customers in China quality products at a low price.”

China to be a Leader in Ag Science?

The mantra of China's current administration is "scientific development." The implicit assumption is that all problems can be solved by science and technology. And it has to be Chinese technology, not from Dupont, Monsanto, Pioneer, or some other foreign company.

This week, China's Ministry of Agriculture is trumpeting its ambitions to be a leader in science and technology.

On October 26, a meeting on national agricultural science and technology innovation and dissemination work. The Minister of Agriculture, Sun Zhengcai, said China will strive to become a world leader in agricultural science and technology in the next 10 years or so, relying on science and technology with "Chinese characteristics" suited to the special situation of the country and the industry. The speech calls for support for creating agricultural innovations that increase the productive capacity of agriculture. An interesting phrase is the reference to independent innovation--not sure what this means, whether it refers to independence of researchers or China's independence from the global biotech industry. Another facet is building a system to disseminate technology and science to farmers. There is a lot of reference to "service." This may be related to another big push going on to develop farmer cooperatives--many of them are attached to extension stations and technology service is a big part of the rhetoric in that movement. There were a number of other articles about agricultural innovation on the MOA web site this week I haven't had a chance to read.

Another prominent announcement on the Ministry of Agriculture web site today is about the construction of the Ministry's National Agricultural Transgenic Biological Safety Evaluation and Testing Center. This is a big center that will have laboratories to test the composition of transgenic agricultural products and their safety for food and the environment. (As an interesting aside, the project got special funding from China's stimulus package.) The center is expected to be the domestic authority on assessing transgenic crops and animals and to be a world leader in publicizing and regulating transgenic safety, setting standards and issuing "emergency alerts."

China has big ambitions to be a player in agricultural science and technology. They don't plan to sit by and let multinationals sell them seeds and biotech crops. But can shiny buildings filled with imported lab equipment make China a leader? The big problem is that the best and brightest Chinese researchers are exported--they're mostly working in labs in the U.S. and Europe. Can government-run Chinese labs compete with huge companies that have hundreds of years of experience in the business?

Ecological Compensation System

China is emerging as an interesting player in the world of "green" policy. China knows it has serious environmental/ecological problems, and the country has adopted all kinds of "green" measures. Not many people are aware of the extent of what China has been doing. On October 16, the Farmer's Daily described efforts to install an "ecological compensation system," apparently based on a conference held in Ningxia to discuss ways to improve the program. It's not clear how this works, but it seems to involve government funding to address deforestation and desertification problems, mostly in western China. They have plans to use tax incentives and arm-twisting of banks and companies to chip in funds in the future.

According to the article, China started a pilot fund for central forest ecological efficiency compensation in 2001-04. Since 2005, the Ministry of Finance invested over 20 billion yuan, and the program covers 700 mllion mu of key ecological forests. In 2006, national government issued a document about restoration of mining areas and a pilot compensation program was initiated. The Finance Ministry increased expenditures on environmental protection and developed transfer methods, increasing spending for Qinghai’s three-river area, the south-north water diversion project area, and some natural forest protection areas.

Over the past 10 years compensation projects included implementing reforestation and pasture restoration, natural forest protection, Beijing-Tianjin sandstorm control, northwest karst area desertification control, Qinghai three-river plain natural preservation area, Southern Gansu Yellow River important water resource compensation.

The authoritarian system in China makes it one of the few places where textbook solutions can be implemented. This paragraph sounds like it came from an environmental economics class:

"Through the establishment of the compensation mechanism external costs of ecological environment were internalized, so that those who damage the environment pay protectors of the environment in a rational compensation process that raises the environmental protection consciousness of all segments of society. The 'Ecological Compensation Regulations' will now establish a better legal framework."

The article says, "The overall basic weakness of our country’s ecological protection has not been changed. The advance of ecological improvement and environmental protection benefits has still not been rationalized." Spokespeople from NDRC and Ministry of Environmental Protection said establishing an environmental compensation system is a new task with various work just at the beginning, the coverage is not yet determined, and the compensation standard is not scientific, compensation methods are standardized, funding sources lacking, and policy and regulation system are lagging.

They plan to continue working on the pilot project, including the karst desertification project and a new one on the Tibetan plateau. They will expand coverage of the forest ecological compensation system and raise the amount of compensation. They plan to build infrastructure and public service systems, and explore land and population control policies, tax policies, getting investment from commercial banks and "social capital."

This last part is an important and unique reflection of how China carries out policies. It uses its control over land and financial institutions to control how land is used and generate huge amounts of funds for new policies quickly. "Social capital" means convincing companies to invest in projects favored by the government in exchange for access to some other lucrative market. This control over land and capital enables China to implement policies like this much quicker than in democratic countries.

Grain marketing under the microscope

Each April local teams conduct surveys of a sample of farmers' grain sales, income, and on-farm stocks for the preceding 12-month period. The samples are small and results are released for only a few prefectures, but the surveys provide a small window into what's happening in grain markets. Like Chinese grain farmers under a microscope.

I came across two articles--one from Suyu in northern Jiangsu and a second from Wenling in eastern Zhejiang. Farmers in both areas grow long-grain indica rice and short-grain japonica rice. In Suyu they also grow some wheat.

The Suyu article emphasizes the effect of improved indica rice varieties. Traditionally, farmers here prefer japonica rice, but a new indica variety with high yield and improved taste has made inroads. Farmers have been switching to indica because it has lower production cost and the price is now about the same as for japonica. They're eating more indica rice too.

The Suyu article also emphasizes the social changes. Most families have someone who either works in a city or a township enterprise. With fewer people at home, rice consumption is down. People mainly consume rice they grow, but more are buying rice in the open market.

In 2008-09, the district’s household average grain production was 5494.36 kg per farm, up 6% from last year. Grain used for food averaged 1049.49 kg, down 94.12 kg from the previous year. Sales averaged 4927 kg per farm, up 427.87 kg from the previous year’s.

In Wenling, grain sales were down, but there was a diversification of sales channels. Both surveys cite the farmers' enthusiasm for the minimum price purchase policy. In Wenling, a little more rice was sold to state-owned grain purchasing units due to the policy. The survey says there was a big increase in the share of rice sold to private traders who go door to door, making it easy and convenient to sell. Sales to big companies were down due to the effects of the financial crisis (and public purchases "crowding out" private purchases?).

In Wenling, average grain production per household was down 2.1% due to less planted area. Average sales were down 7.48 kg and inventory increased. On April 1, 2009, average grain inventory was 772 kg, up 46.83 kg (an increase of 6.46%). Late indica rice inventories accounted for 57%, early indica 4%, japonica 37%. The main food is late indica rice inventory, about half. Inventories mainly were for food, feed until new grain arrives. Sales are just 17.5% of production in Wenling.

Grain Inventory Results: 225.4 mmt

In April 2009 the State Council ordered a nationwide check to find out the actual level of grain inventories. There were 10 government departments involved and thousands of provincial, prefecture, and county people involved. The check was carried out in response to rumors that warehouses supposedly filled with grain were actually empty.

The results show that at the end of March 2009 national state-owned grain enterprises held inventories of 450.8 billion jin (225.4 million metric tons in unmilled grain). This is in line with figures revealed previously. The inventory surpassed half of the 2008 harvest (roughly 6 months of consumption). The March date was presumably chosen because it precedes the summer grain harvest and inventories would be near their seasonal low.

This total appears to be central government reserves. There are also provincial and county-level reserves. It does not include private sector reserves (probably much smaller). Usually there are surveys of on-farm reserves conducted in April but I didn't see any this year. They usually report about 300-400 kg per farm on average, which could translate to 60-70 mmt of grain stored on-farm at the end of March.

Other results of the grain inventory check are vague. The mix of grains has become more reasonable and the regional distribution is improved. Accounts are 99.7% accurate, quality generally good, with a compliance rate of 97.1% and 99.1% of inventories are at their proper level. Management was generally good, but some unspecified problems were uncovered. A small amount of grain was poor in quality. Policies were carried out unevenly. Issues raised by each locality are being addressed through rectification work.

Dollar Drags Yuan Down WIth It

The dollar is sinking. That tends to happen when you print vast amounts of your currency and drive interest rates to zero. Making matters worse, Australia and some others are starting think maybe it's time to start raising interest rates. Can you hear the great sucking sound of currency leaving the U.S.?

What no one seems to be talking about is the U.S. dollar is taking the Chinese yuan down with it. The dollar has not depreciated substantially against the Chinese yuan because Chinese monetary authorities won't let it do so. They have kept the exchange rate pegged at near 6.84 yuan per dollar since July 2008. That means as the dollar goes down it takes the yuan with it. The U.S. dollar has depreciated by about 13% against the Euro since February, but the yuan has depreciated by 13% against the Euro as well. That means bargain vacations at the Great Wall and cheaper adoptions of Chinese orphan girls for Europeans. But how can the currency of the country that supposedly is leading the world out of the recession (China) be depreciating? How is the trade deficit and its twin--the growing mountain of Chinese dollar holdings--ever going to go away if the yuan never appreciates against the dollar?

The Chinese leaders have painted themselves into a corner. They now hold huge dollar assets, so a depreciation against the dollar would cause them to lose huge amounts of money on their Treasury Bills and other dollar investments. So they can't break the dollar peg without impoverishing themselves. And the dollar peg combined with an unmitigated trade surplus means the Chinese keep piling up even more dollars. Meanwhile, one-in-ten U.S. workers is unemployed and we make less and less of our stuff at home. Where does this road lead?

Oh, and you say the dollar-yuan peg is not that important since U.S.-China trade is not that big. Well, not true, because China's competitors/traders are very conscious of how their exports are priced vis-a-vis China's, so they don't let the yuan devalue too much against their currencies. The yen has depreciated only 3.5% against the yuan since February.

Anti-U.S. Food Safety Propaganda

On September 27, the Ministry of Commerce issued documents announcing an antidumping investigation of imported chicken products originating in the United States. The investigation covers broiler products of chicken products. In case you're wondering, this includes HS codes 02071100、02071200、02071311、02071319、02071321、02071329、02071411、02071419、02071421、02071422、02071429 and 05040021。

On September 30, an article posted by the National Food Quality and Safety Supervision and Testing Center trumpets "Emerging Problems with Imported Food From the United States." A google search shows the article was carried on dozens of Chinese web sites.

According to the article, testing by Chinese inspection officials have been catching an increasing number of food products from the United States. Of a 154-name “black list”, 39 problem products came from the United States. Of those, 12 were frozen pork and frozen chicken meat. "Lean meat powder" (probably ractopamine which is legal in the U.S.; in China this term usually refers to clenbuterol) was detected in some frozen pork and pig feet, and staphylococcus aureus and nitrofurazone were found on some chicken. These contaminants are frequently found in US exported products.

Companies like Mead Johnson, Coca Cola, Pepsi, and Proctor and Gamble are on the “black list.” The article says, statistics clearly show that problems with America food quality are rising.

After the domestic dairy industry crisis, how can more food safety problems becoming from America? A knowledgeable person about the industry in southern China says, “The financial crisis is putting cost pressure on American food industry. Companies are cutting corners on raw materials and internal quality control to save on costs. This trend directly affects the quality of American food.”

"That’s not all," says the expert. “What’s worse is that some companies are using cheaper ingredients to substitute for usual ones. Worse yet, some companies are sending ‘garbage’ that won’t pass U.S. quality inspections to sell in the Chinese market.”

Sounds to me like he's reading from the Chinese manufacturer's instruction manual.

Land Transfers on a Slow Rise

Everybody knows that Chinese farmers have been moving to cities in greater numbers and renting out their land to others in recent years. But nobody really knows the extent of renting out land. A short article by Wu Zhigang published in the annual report of China's Research Center for Rural Economy (RCRE) provides a good set of statistics on land renting from a large national sample of rural households. Better yet, they survey more or less the same farmers every year, so the data can show us whether farmers are increasing their rental of land.

From 2003 to 2008, more and more farm households transferred land. About 8% of all rural households subcontracted land to others in 2003. That share fell in 2004 (coinciding with the introduction of farm subsidies that year), but it rose to over 8% again in 2006-07 and reached 9.8% in 2008. The rise reflects increasing departure from agriculture.

The share of all rural households who subcontract land from others has been fairly steady at about 6%. More households rent out land than rent in and the difference is widening, reflecting a modest concentration of land operation. Subcontracting land from others is becoming more common among those actually engaged in farming. The share of households who cultivate land that subcontracted land from others rose from 10.7% in 2003 to 12.5% in 2008.

The average amount of land operated and subcontracted by farm households has changed at a slower pace. The average cultivated land area operated by rural households in 2003 was just under 7 mu (1.14 acres) in 2003. It rose to 7.33 mu in 2004 (consistent with the decline in subcontracting that year) and then gradually declined to 7.25 mu in 2008. The average number of plots per household fell from 4.9 in 2003 to 4.2 in 2008.

The survey shows that about 12% of farmland is subcontracted now. On average, farmers who operated land in 2003 subcontracted .64 mu from others--9.3% of land operated was subcontracted. Subcontracted land peaked at .88 mu per household in 2007 (12.1% of land operated) and fell slightly to .85 mu (11.8% of land operated) in 2008. Doing a similar calculation shows that 58% of U.S. farmland is rented.

The average amount of land subcontracted from others exceeds the average land subcontracted to others, reflecting a slight concentration of land operation.

Modes of land transfer include subcontract, transfer of contract, exchange, rent, and other modes. A 2008 special survey by RCRE shows that subcontracting is used by 89% of rural households who transfer land to others. Eleven percent "permanently" transferred their use rights by transferring their land contract (zhuan rang). This method is used mainly by households in which all members have gone out to work.
A few households exchanged land with another household and some lease land to village collectives which then lease it to other farmers. This is generally mobile/flexible land (ji dong di), or land on mountains or riverbanks for which the use rights are auctioned to villagers or land contracted to the collective or other economic organizations for a fixed rent

From the survey we can see there are two main effects of land transfer:

(1) A trend of large farmers accumulating farmland is emerging. Of the households who operate land, those who subcontracted land operated an average of 13.15 mu, of which 3.69 mu was subcontracted from others. This is much higher than the overall average of 7.25 mu operated.

(2) There is an adjustment of production structure. In 2008, grain accounted for 71.6% of cultivated area for all households, but just 62.8% of subcontracted land was planted in grain. Farmers who subcontract land plant a higher proportion of it in cash crops, vegetables, fruit trees, fish ponds, and nonagricultural uses.

Most contracting is between relatives and neighbors. Of households who subcontracted to others, relatives got 38.2%, neighbors 30.2%, and 31.6% to collectives and economic organizations.

The survey shows that land subcontracted mostly comes from within the village. However, 25% of those subcontracting land dealt with people outside the village, including 12.5% who subcontracted to someone outside their county.

Most subcontracts of land are informal arms-length agreements, not for a fixed period, nor with a clear written contract. Only 22.1% of households who subcontracted other peoples’ land signed a contract. Of those who subcontracted to others, 32.7% signed a contract. Many places have established land transfer accounts, have no contract. The contracts are not enforceable. There are all kinds. The lessor and lessee’s rights are not clearly specified, leading to many needless disputes.

Adam Smith beats Mao in Rural China Labor Market

Recently, there have been reports of labor shortages in China's coastal manufacturing regions. A Sept. 30 article in the Farmers Daily provides some good economic analysis of the emergent labor scarcity.

The article notes that a July report from Zhejiang Province said employers were only able to hire 354,000 of the 603,000 they wanted, and a Shenzhen's labor shortage increased form 23,000 in April to 60,000 in June. The author asks, "Where did all those people go?" Moreover, there are seemingly contradictory reports of many rural workers who can't find satisfactory work and other factories who have no problem finding work.

The author argues that China doesn't have a shortage of labor; it has a shortage of cheap labor. The recent experience of factories hiring workers as commodities at rock-bottom wages is not the future of China. Rural Chinese people are gaining more skills and higher expectations for their lives. Moreover, they have more choices. There are more employment opportunities in cities in central or western provinces, or even in rural areas near their homes. Even agriculture is getting better--it's no longer the last resort. The article argues that China is entering a new stage where rural peasants no longer are consigned to a choice between grinding poverty in the rice fields or accepting low wages from factories in coastal cities.

The so-called labor shortage is a conflict between the diversity of choices available to rural migrants and the continued expectation of urban factory owners that peasants will still work for low wages.

The author points out that returns to labor and capital have been out of balance--labor gets a low return and capital a high return. He says some economists think a whole string of problems are due to this imbalance--overinvestment, trade surplus, curency appreciation, skyrocketing real estate values, high pollution, energy inefficiency. Upward pressure on wages may start to restore balance. The "backward" labor-intensive, polluting, energy-wasting companies that depend on low-wage labor may be driven out of business. Higher wages can wean China off its dependence on export industry by creating more domestic demand.

The Farmers' Daily argues that the "labor shortage" occurred due to laborers voting with their feet and the effects of the market's visible hand. Solid neoclassical economic analysis in the Communist Party's mouthpiece for peasants--Adam Smith prevails over Chairman Mao in China's countryside.