Thursday, May 31, 2012

Surging Wages and Real Currency Appreciation in China

On May 29, China's National Bureau of Statistics (NBS) released estimates showing rapid growth in average wages for private employers and non-private employers (state-owned companies).

Annual wages paid by private employers increased by 18.3% in 2011 to reach 24,556 yuan. Manufacturing wages were up 20.1%.
Annual wages paid by non-private employers (government and state-owed enterprises) increased 14.3% in 2011 to reach 42,452 yuan. By far, the highest wages reported were in non-private financial services (state-owned banks) at 91,364 yuan and non-private information and computer services 70,619 yuan.
These numbers are not adjusted for inflation.

The China CPI number of 5.4% for 2011 is often offered as the measure of inflation but there is wide variation in price increases depending on which index one looks at. So it's hard to say exactly what inflation is in China. 

Wage growth numbers shown above were more than three times faster than reported CPI inflation. However, the growth in wages was only a few percentage points faster than food price growth and similar to the growth in agricultural prices in 2011. Over the past two decades earnings generally rose faster than food expenses, thus cheap food allowed urban Chinese consumers to spend increases in earnings on discretionary items like cell phones, appliances, housing, and cars. These numbers suggest that nominal wages are still rising slightly faster than food prices but the margin has shrunk.

In the 2011 statistical communique, the main price indexes were:
CPI 5.4%
CPI for food 11.8%
ex-factory industrial prices 6.0%
producer purchases 9.1%
agricultural products 16.5%

The money supply (M2) was up 13.6%.

NBS reports the inflation-adjusted increase in non-private wages at 8.5%, much slower growth in real wages than has been reported any year since 2000 (see chart below). Growth was reported at 10% in 2010 and 12%-to-13% most years from 2003 to 2009. Early in the 2000s decade public salaries were jacked up 15% a year.
Blue line shows the inflation-adjusted increase in wages paid by non-private employers in China, 2000-2011. 
Bars show average annual wages. (Source: National Bureau of Statistics).

An article giving an experts' interpretation of the wage data accompanying the articles on the NBS web site  explains that a goal of the 12th five year plan is to increase the amount of income distributed to workers, and all levels of government are reforming wage systems to accomplish this. It says 24 provinces raised their minimum wages by an average of 22%. This matches the average increase in migrant workers wages reported last month by NBS. This growth also is slightly faster than the 20-percent increase in manufacturing wages and 17-percent increase in construction wages. The article also reports that 27 of 31 provinces have issued "guidance wages" in 2011. They are also continuing to issue "allowances and subsidies" to public officials.

Despite the rapid growth in worker earnings, funds are pouring into the coffers of government, state-owned enterprises and state-owned banks. The report says that tax revenue went up 22.6%, more than double the rate of of GDP growth (9.2%). Profits of above-scale industrial enterprises (think SOEs) went up 24.4% in 2011. Thus, more income is in the hands of government and retained earnings of large companies (that are "saved" and not paid out as dividends). Bank deposits held by individuals were up 15.5%, growth that the experts linked to growth in wage earnings.

The experts then explain that rising wages are an increase in costs for Chinese firms. China's plentiful, cheap labor situation has turned into a trend of rising labor costs in recent years, affecting the competitiveness of firms. The article notes that rural migrant workers' nonfarm monthly earnings rose 21.2% and broke through 2000 yuan for the first time in 2011.

Rising wages and other costs and prices suggest a substantial real appreciation of the Chinese currency (RMB). The nominal RMB-Dollar exchange rate appreciated 5.1% during 2011. The U.S. CPI was up about 3% in 2011. Take your pick of the above numbers for what Chinese inflation is. In terms of agricultural products China's increase in prices (16.5%) was slightly faster than the year-on-year increase in the U.S. prices received by farmers index (15%), thus the appreciation in the nominal exchange rate of 5.1% accounted for most of the real appreciation in Chinese ag prices--the main driver of China's agricultural import boom.

There is a trend toward rebalancing but China's not there yet. Imports grew at a faster rate than exports last year, thus the trade surplus shrank. Foreign exchange reserves increased by 11.7%, still fast but slower than the ridiculous 43% increase in 2007. Retail sales were up 17.1% in 2011--about equal to wage growth--but that was slower than the 18.3% increase during 2010 and much slower than the 22.7% increase during 2008.

Wednesday, May 30, 2012

Wheat Reserves Falling

As the wheat harvest approaches the Economic Observer last week discussed the prospects for the government to buy wheat at the minimum price this year.

Last September the National Development and Reform Commission (NDRC) announced that this year's minimum price for wheat would be 1.02 yuan/500g. That was a relatively large .09 yuan increase from last year. On May 23 NDRC issued an announcement of this year's minimum price purchase program.

In early April, the government auctioned grade 3 wheat from reserves at 2040 yuan/mt (1.02 y/500g), the same as this year’s minimum. The market wheat price rose slightly in April, and the current price is at about 1.04-1.08 yuan. Some in the industry were speculating that the minimum price would be boosted higher to 1.04 yuan since the market price is well above the 1.02 yuan minimum, but there was no change.

Wheat was not purchased at the minimum price last year. Reserves are believed to be down to about 20 million metric tons, consisting mostly of wheat bought in 2009 and 2010. The NDRC and Grain Bureau are said to be eager to buy more wheat this year to replenish stocks, one factor behind the rumors of an increase in the minimum price.

Another factor depleting reserves is the increase in feed use of wheat. Due to high corn prices, many feed mills have been substituting wheat for corn. Last summer a big feed company in Jiangxi Province began offering a pig feed product composed entirely of wheat, sold at a 100-yuan discount. The China Grain Net estimated that feed use of wheat rose 6 mmt to reach 14 mmt in 2010/11. Most of the increase in wheat use this year is attributed to feed use. Total use is projected at 111.25 mmt.

The National Grain and Oils Information Center projects a 2.02% increase in wheat production this year. With the market price above the minimum, industry sources think there probably will not be purchases at the minimum price this year. However, in southern Henan and parts of Anhui and Jiangsu Provinces surges in production may be big enough to push prices back down to the minimum.

Flour mills complain that wheat they buy from government reserves has serious quality problems.  According to Economic Observer, there are more than 1000 depots that take part in wheat policy purchases. Some buy excess amounts to collect more subsidies, creating quality problems for reserves. In the government’s annual checks these depots use various tricks, falsifications and methods to "muddle through." The flour mills have to go into the open market to buy wheat instead of relying on purchases from reserves.

As far back as 2009, the Wudeli flour milling group sent a letter to NDRC and the Grain Bureau complaining about deteriorated and adulterated wheat and other illegal behavior. The departments have begun investigations, but no results have been made public.

After corruption was exposed at Sinograin’s Henan Branch last year, Sinograin cleaned up management of warehouses. Economic Observer learned that 306 grain companies in Shanxi Province were stripped of their policy procurement qualifications. In Henan depots stockpiled wheat and “round tripped" grain. Thirty-three noncompliant depots received a notice of criticism and 32 people received party and/or government discipline.

Saturday, May 26, 2012

Ag Insurance: Companies Carry Out Policy

China has quietly been building up probably the world's largest agricultural insurance program over the last five years. The program was rolled out on an experimental basis in 2007 and was hastily launched as a package of pork industry policies in 2007 when the industry was shaken by widespread disease outbreaks. China's subsidies for agricultural insurance are now the equivalent of $ 1.5 billion. Chinese officials have been pushing the idea of agricultural insurance since the 1990s as part of a broader development of modern agriculture and transitioning from the traditional "depending on the weather to eat" to risk management.

While risk management is a critical problem for Chinese agriculture and insurance is a good idea on paper, the implementation is difficult. Like many of China's agricultural policies, the agricultural insurance program is implemented by giving subsidies to profit-seeking companies as part of their "social responsibility." Like many other programs, this one doesn't work as advertised.

On May 4, the State Council issued regulations on agricultural insurance clarifying the character of the program as government-subsidized commercial insurance with voluntary participation by farmers. According to the Xinhua News Agency's description, the agricultural insurance program has expanded rapidly and is now nationwide in scope but the legal stipulations were incomplete. Xinhua says the insurance program faces problems that include lack of stable government support, unclear definition of rights and obligations of parties, legal obstacles to participation by rural grassroots organizations, and unclear distinction of responsibilities of various government departments. The regulations are supposed to address these problems.
Agricultural insurance worker collects data in wheat fields (source: Dahe Finance).

An article from the Henan Daily hails insurance for promoting healthy agricultural development by insuring scattered risks in agriculture. The reporter recounts the story of a villager who discovered his pig sty in flames one cold January morning. After being alerted by telephone, the insurance company adjuster and a veterinary official rushed to the scene where he saw the farmer's daughter-in-law in tears over eight sows that perished in the fire. That afternoon the insurance company issued the farmer 8000 yuan in compensation. The farmer exclaimed, "Agricultural insurance really rescued our family from an emergency!"

At the end of 2011, agricultural insurance in Henan covered 80.9 million mu (about 13 million acres) of rice, corn, and cotton. It also covered wheat, peanuts, soybeans, rapeseed, public forests, reproducing sows and dairy cattle. Over 12 million farmers participated in Henan Province (six times as many farmers as are in the entire United States) and premiums totaled about $184 million.

The insurance is offered by provincial branches of state-owned insurance companies. Most of the premiums are paid by central and local governments. Farmers pay only 1.8 yuan per mu (about $1.70 per acre) for wheat insurance, 20% of the premium. The central government pays 40%, province 25%, prefecture 5%, and county pays 10% of the premium.

According to the Henan article, agricultural insurance has a number of problems. One big problem is that the insurance companies lose a lot of money on it due to the "big risk." A company official in Henan says that the company collected sow insurance premiums of 130 million yuan in 2010 but paid out 300 million yuan in indemnities (2010 was a big year for disease. See post, "Sow Insurance Moral Hazard"). Another insurance company man told the reporter agricultural risks are too big, cumbersome and complex...they can't handle it.

The insurance companies mainly serve urban markets. They have no networks in rural areas and little experience with agriculture so it's hard for them to take on agricultural insurance business. A recent academic article on insurance in Hunan said that companies generally have only 2 or 3 staff members per county in charge of agricultural insurance.

With no presence in rural areas, it is hard for companies to verify losses and they often have disputes with farmers. Farmers expect to be compensated for the full value of their crop, but the insurance actually covers only their cash production expenses. A company official says that nearly all claims have to be settled through negotiation.

Some farmers have a traditional concept of relying on "luck" and don't want to pay even the low subsidized premium for insurance, said one insurance official.

The reporter in Henan said he often heard that you can't do agricultural insurance business without a push from the government. (Performance in agricultural insurance work is a factor in job evaluations for some local government officials in Henan.) Since the insurance companies don't have an extensive service network in rural areas it's hard for them to carry out their tasks without help from the network of local officials. Companies say the central and provincial funds for subsidies usually arrive on time but they have a hard time collecting insurance subsidy funds from local governments. According to the Hunan article, the company headquarters collects subsidies from central and provincial government but the local subsidiary has to collect the subsidy from the local government.

The Hunan article reports that the multiple government departments involved creates complexity. Financial bureaus at four different levels of government disburse subsidies, and local weather, water, and agricultural bureaus are engaged in advising on weather, flood, disease and pest problems, administrative bureaus determine whether disasters have occurred.

The Zhumadian official recounts an incident when hail storms struck the county's 700,000 mu of corn during 2007. The company has about 15 employees in this county, and they spent 3 months trying to assess the damage but never finished the work.

One company official gave his grim assessment of agricultural insurance: "low insured amount, low premiums, low protection; high cost, high risk, high indemnity."

The new regulations are supposed to clear up these problems. But a professor quoted in Henan article observes a fundamental conflict in Chinese policies, most of which are implemented by giving subsidies to companies. Agricultural insurance is fundamentally a policy tool that loses money, but insurance companies are private profit-seeking entities. Without subsidies and tax incentives agricultural insurance can't exist. Says the professor, "If you're looking for short-term profit, it's not in accord with the company's social responsibility."

Another insurance company official says, "We have to do this based on our feelings to do a good job on agricultural insurance with a long-term perspective; the hope of the fields is to build an agricultural insurance stage with commercial insurance companies singing."

This gets at the heart of China's approach to policy. Government and companies have an implicit bargain: we'll help you make money if you help us achieve our policy goals. Problems often arise when companies looking for profit recite the slogans but don't keep up their side of the bargain by putting their money where their mouth is.

Tuesday, May 22, 2012

Roller Coaster Food Prices

The May 21 Peoples Daily attempted to comfort citizens troubled by continual fluctuations in food prices. Pork prices have been in free-fall since January of this year. This follows a big build-up of hog inventories last fall when pork prices soared to record highs--prices are falling as the new pigs come on the market. At the same time vegetable prices have been on the upswing due to unusually cool weather in the north, drought in the southwest and cloudy weather in the southeast that has slowed the usual surge in spring vegetable supplies. With falling pork prices and rising vegetable prices, citizens are talking about the unusual situation where, in some places it's cheaper to eat pork than vegetables.

Fluctuations in agricultural and food prices have been a subject of public attention in recent years. Since 2010, prices of garlic, ginger, mung beans, apples and sugar all soared to historical highs only to crash later. Early this year onions rose to 10 yuan per jin.

Chinese agricultural economists explain that price fluctuations result from changes in supply and demand. The article blames the fluctuation on "blind" expansion of production by small-scale farmers when prices are high. This leads to a surge in supply that leads to a crash in prices during the following season.

Professor Li Guoxiang of the Chinese Academy of Social Sciences explains that cyclical fluctuations are a common feature of agricultural prices everywhere. You can anticipate them but you can't completely eliminate the fluctuations.

Nevertheless, the Chinese government is determined to stop fluctuations in pork prices. Earlier this month multiple government departments announced a "new" program for stabilizing pork prices which is actually a slightly revised version of a document that was issued three years ago in 2009. An article last week announced that "each locality will undertake work to build pork reserves at the appropriate time," suggesting that the government is starting to buy up pork to support prices. However, the article gives no indication that such work has begun. The article mainly consists of the director of the National Development and Reform Commission's Price Bureau explaining the "new" program--which has been in place 3 years during which China's pork prices have fluctuated more than ever before. The article notes that the hog-corn price ratio has fallen below 6:1--the breakeven point specified in the hog price program--and farms are starting to lose money.

Hog farmers are starting to lose money even though price are still at a historically high level. The Peoples Daily article notes that agricultural prices have been on an upward trend due to rising costs of energy, chemicals, labor, and land. Even chicken manure used for fertilizer has shot up in price from 50 yuan to 150 yuan. The article also explains that costs of marketing farm products is rising. The article says traders generally add 0.2 to 0.3 yuan to the price of each 500g of vegetables. It gives the example of a retail pork vendor in Henan Province. He has to pay 20,000 yuan annually in stall rent and 1000 yuan per month for electricity to run his freezer and refrigerator. Moreover, he has to rent living space near the market which has doubled in cost, and he says his food cost is over 1000 yuan per month. There are 30 to 40 vendors like him in the market, each one having a hard time making money with costs rising like this.

The Peoples Daily article explains that rising food prices are normal in a period of industrialization and urbanization. Peoples' demand for food is rising since the income elasticity is relatively high. The article says the urbanization rate is expected to rise 1 percentage point a year, pushing food prices steadily upward.

Peoples Daily proposes solutions for price fluctuations that include more planning and coordination between producing and consuming regions. Form cooperatives and other economic organizations to increase scale and reduce unit costs. Encourage direct links between cooperatives and supermarkets and community food markets. Crack down on speculative hoarding and issue more information to guide producers.

The article also calls for giving out food subsidies to low income consumers. Good luck with that. The other day, the Wall Street Journal printed an opinion piece on $41 cakes and other absurdities and abuse in the U.S. food subsidy program.

Thursday, May 10, 2012

Lots of Grain Held on Farms

In April every  year local price bureaus conduct surveys of grain inventories on farms and sales over the past year. The surveys are based on small samples of farm households--about a dozen per county--who keep records of expenses, production and sales. Reports from a few random provinces and counties are published online.

A review of a handful of these reports shows that it is virtually impossible to draw any general conclusions about what's going on in Chinese grain production. Average grain inventories held by Chinese farms ranged from under 400 kg in Changping (Shandong) to 2837 kg in Baoji (Henan). These are inventories held as of April 1, before the summer harvest. If we take a rough median of 500 kg per farm and multiply it by 200 million rural households, the total would be 100 million metric tons held on farms.

Inventories went up overall but there was a lot of variation. In Anhui Province rice inventories went up but wheat and corn inventories went down. In Nanyang, Henan, wheat inventories went down 13% but corn inventories went up 10%.

Average grain inventory per farm, April 2012   Inventory Change from last year
kg percent
Anhui Province 541 -5.8
Jiangxi Province 1119 16.0
Henan Nanyang 653 5.4
Henan Baoji 2837 6.8
Shandong Changping 397 55.0

Several of the reports reflect major changes in rural China. Large numbers of rural household members have left the village while elderly parents and children stay in the village. In most cases the outmigration does not mean that fields are abandoned. Several reports say elderly people want to keep tending crops. In Anhui, the migrants return for the grain harvest work. However, the report from Baoji in Henan says the area is heavily populated, transportation is poor and few people leave for work elsewhere.

Most of the reports say grain consumption by rural households is going down and they are selling more. The first reason is because many household members have left to work elsewhere. Another reason is diversification of diets. In Changping, Shandong Province, home consumption of grain fell 47% this year. The Changping report says that there are few farmers raising pigs and chickens now so the use of grain for feed on-farm is decreasing.

In contrast, a growing grain deficit is reported in Aksu, a region populated by Uighur minority people in far western Xinjiang. A detailed report on grain production and stocks says in this area is seriously short of grain. Households are accustomed to growing and consuming wheat. Aksu's wheat production fell 27% in 2012 and corn output fell 45%. The decline is entirely due to decreased area planted. The report says the relative profitability of grain is still low despite government subsidies for production and marketing. The report says most Aksu households are short of grain but a table shows they hold 28% of the grain inventories in the region. Statistics reported that grain consumption by rural households in Aksu increased 7% last year. Wheat inventories in Aksu fell from 41,000 metric tons to 27,000 metric tons last year while rice inventories remained stable at about 25,000 mt. The report's supply-demand balance shows that Aksu had a large corn deficit of 58,500 mt bought from other regions.

There are contradicting stories reported about the effect of rising living standards on grain-selling patterns. A couple of reports say farmers are not very concerned about selling grain and sell it all at one time. Others report that farmers have other sources of cash and don't need to sell in a hurry, so they hold on to their grain waiting for the price to go higher.

Most of the reports say farmers prefer to sell to private traders who come to their door to buy grain, pay promptly and have no complicated procedures. This more convenient for farmers, saving them time, work and transportation costs.

Wednesday, May 9, 2012

Sowing Fear of U.S. Pork

AQSIQ, China's border inspection and quarantine agency, announced that four shipments of U.S. pork were rejected during March because ractopamine was detected in the meat. The shipments totaled 103 metric tons of frozen pork, pig feet, and hindquarters. They arrived at ports of Zhuhai, Xiamen, and Tianjin. The timing of the announcement is interesting, coming at a time when authorities have been looking for ways to pull Chinese pork prices out of their downward trend. Articles in the Chinese news media describe the rejections in a manner that sows fears of imported pork in the minds of Chinese consumers.

Pigs flying into China. Their capes read "lean meat powder." 
The person drops a flag reading "welcome." (Source: Xinhua)

First, some background: The catch-all term "lean meat powder" (瘦肉精) is commonly used in Chinese to refer to about half-dozen different pharmaceutical beta agonists that can be given to pigs to channel the energy from feed into building muscle instead of fat, thus using feed more efficiently to produce what consumers want. The drugs conserve feed since it takes more kilograms of feed to create a kilogram of fat than a kilogram of muscle. “Lean meat powders” include clenbuterol, ractopamine, salbutamol and several other substances. All of them were declared illegal for use in animals in China over 10 years ago (although production of the drugs was not outlawed until last December). Clenbuterol is the one most often used in China and it can cause symptoms like heart palpitations and headaches. Ractopamine is a safer alternative that is expelled from a pig’s body in a matter of hours. Ractopamine is approved for use in the U.S. but is banned in China. (Clenbuterol is also used by humans as a drug for weight loss, asthma treatment and body-building; ractopamine was developed strictly for animal use.) 

The Xinhua News Service article identified ractopamine by its Chinese name (莱克多巴胺) and in parentheses added "commonly called 'lean meat powder,'" subtly planting the notion that ractopamine and "lean meat powder" are one and the same. Other articles appear to quote from Xinhua using similar language.
This photo appeared with an article about rejected pork shipments. 
The sign reads, "Just want the lean, not the powder." (Source: Securities News)

The Xinhua article then repeats the official argument used by Chinese officials for banning ractopamine. The article explains that "lean meat powder" residues accumulate in the internal organs of animals which are not generally eaten by people in western countries [by implication Chinese officials say it is appropriate for China to ban ractopamine since Chinese eating habits differ]. So, the article says, the use of "lean meat powders" is legal in the United States and Canada. This is not true. Ractopamine is legal in the U.S. but clenbuterol is not.

The article then states that ingesting "lean meat powders" as food can cause muscle tremors, headaches, nausea and in serious cases, death. These symptoms have resulted from eating pork organs containing clenbuterol in China. But no incidents of human sickness due to ractopamine in meat have been reported anywhere to this blogger's knowledge.

An article from the Business News Net accurately describes ractopamine as a kind of "lean meat powder," supplies accurate facts about ractopamine and distinguishes it from clenbuterol. However, this one also subtly plants fears of imported pork.

This article reports that AQSIQ's list of rejected shipments included 33 shipments of "foreign pork" rejected for testing positive for ractopamine. The total volume rejected was nearly 1000 metric tons and half was from the United States.

The Business News article cleverly stokes fears about imported pork while appearing to allay consumer concerns. The reporter assures readers that the rejected pork had not been purchased for distribution to supermarkets. A Beijing subsidiary of COFCO that imported one of the rejected shipments said the pork was to be supplied directly to food service establishments. The COFCO spokesman said that all of his company's pork that goes to dinner tables of the common people is raised by the company itself according to national standards and can be eaten with assurance.

"Foreign pork" and "imports" occupy the "market", leaving the native pig out. 
(Source: Daily Manhua net)

The reporter pushes the knife in and twists it: "In fact, this is not the first time imported pork has tested positive for ractopamine. A list on the AQSIQ web site for January 2011 to March 2012 contained 33 shipments of pork rejected for ractopamine residue."

The Business News reporter does distinguish between ractopamine and clenbuterol. He quotes an animal nutrition researcher at the Guangdong Academy of Agricultural Sciences who explains that the United States has strict limits on dosage for ractopamine and a withdrawal period before slaughter to ensure that residues are expelled from the animal. An official of the China Livestock Association says, "Ractopamine is not as potent as clenbuterol but if it is used there are some residues and you have to conduct strict tests."

The reporter raises the question, "If China and the U.S. have differing standards, why does China import U.S. pork?"

The livestock association official has an idea: "The foreign pork quality problem is exposed not only due to differing standards but also because the price of Chinese pork is higher. Some bad traders took the opportunity to peddle problem pork to China."

The official has an axe to grind: "China should maintain its self-sufficiency; we are fully capable of doing this!"

The Business News article reports that the U.S. FDA and the UN permit ractopamine residues up to certain limits. Science has demonstrated that ractopamine is safe when used properly. However, in the land supposedly guided by the "scientific outlook on development," science is only used as a guide when convenient. "Old hundred names" still makes his decisions based on cartoons of flying pigs.

Monday, May 7, 2012

China's Era of High Costs, Prices, and Subsidies

China's agriculture has entered a  period of "three highs": high costs, high prices, high subsidies, according to a policy advisor interviewed by the 21st Century Business Herald.

The advisor, Huang Shouhong, vice chairman of the State Council Research Office, warned that China's agriculture risks being marginalized during the current rapid urbanization and industrialization. The process is pushing the costs of land and labor higher and prices of raw materials are rising too. This raises the price of agricultural products and leads to rising subsidies.

A recent report from the Chinese Academy of Social Sciences examined the pressure from rising raw materials prices and projected a 13-percent increase in prices this year. The report said upward cost pressure and rising living costs for rural people create a vicious cycle of rising costs and prices.

Huang is alarmed by the growing trade deficit in agricultural products. In 2004, China's agricultural exports still exceeded agricultural imports. Domestic agricultural prices have risen above international prices, attracting more imports. In 2008, the deficit in agricultural trade reached $10 billion. The deficit expanded to $20 billion in 2010. The Ministry of Agriculture reported the agricultural trade deficit at $34 billion for 2011, up 43 percent from the previous year. Agricultural imports even exceeded ag exports for the first time in Shandong, the leading agricultural-exporting province.

Huang Shouhong worries about China's food security. He said China's agriculture faces a big problem if it just relies on the market without adopting effective measures. He said the central government's financial ability to spend on subsidies is limited. Therefore, subsidies have to be concentrated in key production regions in central and western China.

Without strong measures, Huang said, China's urbanization could create a polarized society with Latin American-style rural destitution and poverty. He said big differences between rural and urban incomes not seen before have emerged in all of China's regions.

Tuesday, May 1, 2012

Collective Property Rights Reform

The Farmers Daily published an essay calling for faster and broader reform of the collective ownership of rural assets. The author is a researcher at the Beijing Municipal Rural Economy Research Center. The essay is similar to Premier Wen Jiabao's promise at last December's rural work meeting that rural peoples' property rights will be protected.

Since the 1950s China has been divided up into urban and rural territory. The article explains that rural assets include farmland, forests, land occupied by houses, land for construction use, village-owned enterprises, and public facilities. These assets are owned by village collective organizations. The essay describes the ambiguous ownership as joint ownership in which shares are not assigned to individuals. The essay cites the "household responsibility system" established in the early 1980s as a significant first-round reform of the collective system. Individual members of collectives were given rights to operate land and derive benefits from it. The Farmers' Daily article asserts that a new round of rural property reform is urgently needed that will clarify ownership, allow villagers to dispose of their collective property and utilize other derivative rights of property like mortgaging, inheriting and reassigning ownership.

The "first round" of reform worked well during the first two-or-three decades. However, now China is in a period of rapid urbanization in which people and land are being incorporated into growing cities. The fixed boundary between rural and urban land and people is no longer fixed. People are moving around the country and village people are moving into cities. What happens to their share in collective property when people leave the village? Cities are expropriating rural land, deriving large value from it, but giving the village collective members little or no compensation. Although it's not spelled out like this, the Farmers' Daily essay seems to be referring to these problems when it refers to "fast urbanization" and "urban-rural integration" over and over. The essay says farmers collective property rights are incomplete, constraining their ability to participate in the urbanization and integration process.

The essay acknowledges that there are many local explorations of reforms of rural property rights, mainly in developed regions like Guangdong, Zhejiang, Beijing, and Shanghai. In many of these areas village collective members are given shares in collective assets which clarifies what each member owns, entitles them to dividends and allows inheritance and transfer of shares.

As an example, a document from a town in Beijing's Fangshan County on reform of collective property sets forth guidelines for establishing shares in companies or businesses based on collective assets, paying out profits as dividends, and setting up supervisory boards to ensure everything is done legally.

The essay calls for a broader reform of rural property ownership that covers all types of property and is nationwide in scope.  Many of the reform areas only include certain types of assets like village enterprises or housing land but exclude others. In some places the rights can be inherited but not reassigned. In others reassignment is only allowed to other members of the collective. The Farmers Daily essay cites Tianhe District of Guangzhou's stipulation of full ownership rights to individual shares as a significant breakthrough.

The Farmers Daily essay asserts that reform of the rural property rights system has lagged behind. The reforms in some areas have provided a demonstration effect, but in most places reform has been slow. In place of chaotic regional reform experiments the author calls for a top-down national design of a standardized program. The author calls for each level of government to put reform of collective property on its policy agenda and setting up a national network of property exchanges to serve as a platform for farmers moving to the city to voluntarily exchange their collective property rights.