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.

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