Saturday, August 20, 2016

Chinese Subsidy Based on Fictitious Prices

China's soybean subsidy has been partly based on fictitious prices reported by idle factories, according to investigations by a Chinese journalist. 

Since 2014, China has been piloting a "target price" subsidy for soybeans which makes a payment to producers based on the difference between the average market price and a target price high enough to give farmers a reasonable return. The lower the market price, the bigger the subsidy payment. To determine the market price for calculating the subsidy, a sample of soybean processors were selected by authorities to report the prices they pay for soybeans twice a week during the six-month marketing season after the harvest. 

According to "Economy Half Hour" on China's Central Television network, a journalist called companies in Heilongjiang who reported soybean prices to authorities, and found that many of them did not actually purchase any soybeans because they were idle or out of business. For example, one such company chosen as a price collection point, Xiang River Fats and Oils, had been closed since 2014 when the target price pilot started. The company official asked around to find out what price he should report to the government. 

The journalist tried to contact all 53 price-reporters on the list for Heilongjiang Province with the help of the vice chairman of the provincial soybean association. They were able to contact 33, and found that over one-fourth of the names were "zombie companies" that were out of business one or both of the last two years when they were supposedly reporting prices. 

List of companies reporting soybean prices: those highlighted in yellow have been out of business for two years; pink ones have been idle for a year.

The reporter also found that the price-collection points did not reflect the geographic distribution of soybean production. Authorities chose three soybean price-reporters per county without regard to the volume of soybeans produced there. The top county that produces 17 percent of Heilongjiang's soybeans had three reporting companies, the same as small producing counties. The average price for the province was apparently calculated without weighting based on the counties' volume of production. This procedure tends to overstate the average price received by farmers, since prices are lowest in major production areas. 

Experts from the provincial soybean association, Ministry of Agriculture, and Academy of Social Sciences said the many "loopholes" in the procedure mean that the "official data" used to calculate the subsidy does not reflect the actual situation in the market. The amount of the soybean subsidy varied widely across the four provinces during its first year in 2014, and farmers appear unhappy with the amount of the subsidy. The journalist interviewed a farmer in China's leading soybean county who used to rent out his land for others to grow soybeans while he went to work in the county city. Now no one wants to rent his land because the subsidy is not enough to make soybeans profitable, he says. His equipment is in disrepair and he claims to have no cash to buy inputs to farm the land himself.

The TV report left some questions unanswered. The status of the 20 reporting companies they were unable to contact is unclear. Did the journalist find that one-fourth of the companies he contacted were idle, or did he find that one-fourth of the companies on the list were idle? Did the "zombie" companies actually report prices twice a week for six months? The investigation was apparently conducted in the spring but has been posted online four months later (it's unclear when the broadcast appeared on TV). 

The investigation was enabled and probably invited by the soybean association, which is dissatisfied with the size of the subsidy. The subsidy money provides the leverage for journalists to poke around in China's antiquated statistical system and expose flaws that may be pervasive throughout the statistical system. China's Price Bureau has used a similar reporting system to collect retail and wholesale food prices and farm production costs from three reporters in various locations for decades. The National Bureau of Statistics is more sophisticated, but its statisticians also need people looking over their shoulder to ensure that surveys are collected from representative samples, that data is properly weighted, and that numbers are reported truthfully and accurately. Nearly all of this work is conducted out of the public eye. Subsidy money could be the lever that finally brings transparency and improvements to China's statistics.

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