State Farms as World-Beating Companies?

To Chinese leaders, a "market economy" does not mean a privatized economy. Rather, they view dysfunctional state-owned institutions as the core of their market economy. Relics of central planning will somehow coexist and intermingle with private firms and act as models of reform that will pull along the rest of the economy. Understanding their obsession with state ownership and bigness explains why China's leaders are plowing billions of dollars into these capital-eaters.

This mindset is evident in the State Council's directive to reform the network of state farms set up during the 1950s. An outsider might expect these anachronistic dinosaurs to be broken up and privatized, but Chinese officials have no intention of abandoning the state farm system. They envision this sprawling system on China's remote frontiers as "models" for its initiatives to "modernize" agriculture, maintain food security, increase external "openness," and create world-beating agribusinesses.

The State Council's document describes the state farm system as "the backbone and representative of the agricultural economy." The document explains that state farms are an "indispensible" component of a distinctively Chinese rural system that also includes rural collectives, household family farms, farming cooperatives. The objective is an amalgam of state, collective, and private ownership with state ownership as the main component. Officials plan to establish a "multi-channel investment mechanism with government investment at the core."

The support for state farms also reflects a mindset among Chinese leaders that equates size with power. The state farms are located in remote areas where land is relatively abundant, so they are larger and more mechanized than most Chinese farms. Leaders think the larger size of state farms gives them a leg up in modernizing agriculture that will pull along the rest of the country's farms.

The State Farm system itself is a confusing amalgam of huge Soviet-style farms, family farms operated by former employees or their descendants who lease land from the state farm, agribusiness companies, and residential communities. To make it more confusing, some are run by the central government, others by provincial and local governments. The plan for reform is far-reaching and bewildering in its scope, but the core ideas are to be the vanguard in modernizing agriculture by mechanizing farms, improving infrastructure, and adopting new technology; creating conglomerates of farming, processing, trading businesses; and reforming the division of responsibilities between the state farms and local governments regarding housing and welfare of their employees.

A core strategy of the reform is to form groups or conglomerates of "large, internationally competitive agricultural businesses." Various state farms, processing companies, and auxiliaries like seed and breeding operations are expected to band together in conglomerates as joint ventures or through merger and acquisition. Officials call for new approaches to raising capital and shareholding. The conglomerates will get help listing on stock markets. State ownership of companies is supposed to form a strong core for the company that will attract private investment, ultimately creating companies with dual public and private ownership.

State farms have geopolitical importance because they are concentrated in remote border areas. In explaining why the state farm system is so important the State Council document points to the "increasingly complex" challenge of "maintaining harmony and stability on the frontier." They were set up during the 1950s to supply army units protecting outposts of Chinese colonialism w in contested regions of Manchuria, Central Asia, and Southeast Asia. Their formal name is "reclamation farms" because they were established in remote, barren parts of the country with harsh climates that would remain uncultivated in other countries. The state farms began as military outposts and later became islands of ethnic Han Chinese settlement in regions that were historically populated by other nationalities.

With land gobbled up by development in the core regions of China, these colonial outposts are now viewed as key suppliers of grain, cotton, sugar, natural rubber, and dairy. They are also the main recipients of China's giant farm subsidies. The lion's share of massive corn and rice stockpiles procured to support prices are held in Heilongjiang Province--the main bastion of the state farm system on the Russian border. On the troubled Central Asian border, the Xinjiang Production corps is the main producer of cotton. Xinjiang holds most of the massive cotton stockpile and is the only region where the generous "target price" subsidy for cotton operates. Similarly, the sugar industry associated with state farms on the border with Southeast Asia has accumulated stockpiles and subsidies.

The government subsidizes or otherwise orchestrates the shipment of commodities out of these border regions to the core regions of China, but there is campaign to create grain processing and livestock industries to utilize the grain glut in Heilongjiang and a textile industry to use up Xinjiang's cotton--subsidized industries to process subsidized commodities. Developing agricultural processing is another thrust of the state farm reform program.

The state farms are now expected to take the lead in moving outside China's borders. The reform document explains that state farms will take leadership in China's new strategy of greater external openness. Their proximity to the border makes the state farms key players in the "going out" and "one belt, one road" strategies. Farmers from Heilongjiang Province's state farms have been growing crops across the border in Russia for a number of years. Beidahuang, a company associated with the province's state farms, has invested in Latin America. The Tianjin state farm company is engaged in investment in Bulgarian corn and oilseeds. Several years ago, a deal was announced for the Xinjiang Production Corps to install high-tech water-saving irrigation technology in Ukraine. State farm entities have been operating rubber plantations in Indonesia for years.

With intensive cultivation on China's side and mostly barren land 

on the Russian side, state farms are taking the initiative to grow crops in Russia.

Like all large organizations in China, the state farm system is riddled with inefficiency and dysfunction. In an interview, China's Minister of Agriculture acknowledged that reform of the state farm system is a complex systemic project and a heavy task with great challenges. In view of the "great difficulties," said the Minister, the state farm system cannot carry out the reform on their own. The Minister exhorted all levels of communist party organization and government to put a priority on state farm reforms. There will be a blizzard of plans formulated, and the Minister calls for more organization, coordination and implementation.  Notably, the Minister calls for Financial departments at each level of government to spend more money to meet the needs of state farms.