Counterfeit Rice Spells Trouble for China's Economic Transformation

For years, authorities in an obscure corner of northeastern China have been trying to crack down on counterfeits of their region's premium rice. Selling expensive food is a popular strategy for promoting prosperity for farmers, but the failure of local authorities to protect their rice trademark--and the proposed solutions--is a sign of trouble for China's economic transformation.

China's Xinhua News Service estimated earlier this year that 90 percent of rice sold in China under the high-quality "Wuchang" geographic trademark was fake. On November 3, a crackdown on fraudulent rice commerce was announced by authorities in Heilongjiang Province, the region where authentic Wuchang rice and most of the fakes originate. 

Wuchang rice is a prized type of short-grain rice grown in a fertile region of northeastern China. The soils, weather conditions and the particular varieties grown in the Wuchang region of Heilongjiang Province are believed to give the rice unique taste, fragrance, and health benefits. In 2003, Chinese authorities awarded Wuchang rice a "geographic indication protected product" recognition as a special product unique to that region. 

According to the Wuchang agricultural bureau, the region produces only 1 million metric tons of rice, but nationwide 10 million tons of rice labeled as "Wuchang" are sold each year. Thus, nearly 90 percent of "Wuchang" rice must be counterfeit.

In a supermarket in Harbin City, the Xinhua reporter found dozens of bags of rice labeled as "high-quality rice produced in Heilongjiang's Wuchang City." The bags also had text indicating the rice was manufactured by a local mill and the bags were priced at 3.5 yuan per 500g, much lower than the 5-6 yuan price of authentic rice in Wuchang. 

According to the Wuchang Technical Supervision Bureau, each of the 40 varieties of rice grown in 24 townships of Wuchang are eligible for the "Wuchang rice" geographic indicator designation. The local agricultural bureau estimates that 1.5 million metric tons of paddy rice are grown in the region, which leaves 1 million tons of rice after removing husks and milling. The total production capacity of 292 rice mills in Wuchang is 4 million tons.

The reporter found that entrepreneurs from Wuchang buy rice from outside the region to mix with local rice. It is estimated that a steady stream of trucks bring 10 tons of outside rice to Wuchang mills each day. Another technique is to add chemical fragrances, wax, and other substances to simulate local rice. The practices were summarized in a report from the local technical supervision bureau last year. Some neighboring regions in Mudanjiang City and nearby Jilin Province that produce similar quality rice sell under the "Wuchang" name to take advantage of its widespread recognition. 

The crackdown will check for fake Wuchang rice in supermarkets, wholesale markets, and production areas, and false advertising on web sites. The campaign will focus on the Wuchang and Harbin areas, surrounding areas, as well as far-flung locations like Beijing, Shanghai, Guangdong, Jiangsu and Zhejiang Provinces. 

Cracking down on counterfeit rice is not that simple. In fact, there have been multiple crackdowns over the years. In 2010, China's Central Television made a similar revelation that factories added chemicals to give rice the fragrance of Wuchang rice, and reported nearly identical statistics on the huge discrepancy between sales and production of Wuchang rice.  

The Xinhua reporter recounted the difficulties in enforcing regulations. Managers of some rice mills the reporter visited argued that they offer different products for different consumer segments. Most consumers are unwilling to pay the high price needed to recover the high costs of producing and marketing pure Wuchang rice, so they offer "mixed rice" products that are more affordable. One rice mill boss said, "You tell me what price you want to pay, and I will give you a product at that price."

Wuchang City authorities have encountered difficulty in previous crackdowns. Last year they sent investigative teams to Shenyang, Beijing, Tianjin, and Shanghai. They brought a lawsuit against a company and two private merchants in a court in Beijing, but the court's findings were inconclusive. The practice of mixing Wuchang rice with other rice is widespread--even mills in southern provinces like Jiangxi and Fujian are engaged in it. Wuchang's vice mayor, who led last year's enforcement action, said the cost of enforcing their local trademark nationwide is prohibitive, and they lack jurisdiction in other localities. 

The Xinhua reporter learned that a company in Shenzhen is developing a testing technology to verify the authenticity of Wuchang rice. However, some people question the practicality of testing rice in view of the cost and potential disputes over the samples tested. Industry insiders told the Xinhua reporter that the government needs to set up a strict oversight system and enforce strict traceability throughout the supply chain. 

This case is representative of the bottlenecks to China's new economic growth model. The Chinese system of anonymous small-scale factories and individual traders has been extraordinarily efficient at making generic foods and products and getting them to consumers. The system quickly breaks down when there are quality differences among products. A price premium for high-end products quickly attracts counterfeits. Consumers lose confidence in the authenticity of any premium product, especially when attributes like organic methods or production at a particular location are not easily verifiable. This leaves consumers in a fog of uncertainty and undermines the incentives for producers to supply quality products. 

The solutions--strict government oversight, hermetically-sealed chains of suppliers, and endless testing--are costly. To achieve traceability and regulation, China is trying to shut down small producers and traders. This essentially is a retreat from the fierce competition and flexibility that was China's competitive advantage over the past four decades. In place of chaotic workshops and traders, China plans to construct big, monopolistic companies and rigid chains of suppliers that will be coddled by officials and handed bank loans and investment. 

Most observers expect China to continue its breathtaking growth just because it's China. But why would you expect spectacular growth from an economy that is abandoning its core competitive advantage and replacing it with something that looks a lot like the bad old days of socialism?