Grain Corruption and "Air" in the Granaries

China's disciplinary inspectors are cracking down on corruption in the grain marketing system--a long-time target of corruption probes. It's unclear what's really going on here but reports of phony transactions and fake reporting raise questions about the true state of China's grain reserves.

Earlier this week China's Central Commission for Discipline and Inspection  (CCDI) celebrated its take-down of so-called "tiger" Xu Baoyi who is a former deputy director of Sinograin, the state-owned company that manages China's grain reserve. Three deputy directors of Sichuan, Liaoning and Hunan Provincial branches of Sinograin were also caught in the dragnet. The CCDI's annual work meeting identified corruption in grain procurement and sales as one of its priorities. 

Testing rice at a granary in Jiangxi Province. Source: Xinhua.

Highlights from 8 cases reported yesterday by the Liaoning Province discipline commission:

• The party secretary of a granary in Anshan City sold 363 tons of soybean oil without authorization in December 2019, emptying out the city's reserve. He falsely reported that the oil was still in the tanks and continued collecting subsidies for managing it. 
• In December 2020, the manager of a rural granary in Huludao shifted grain reserves without authorization, and his deputy presented two conflicting sets of documents to investigators. 
• In 2019, the director of a granary in Fushun City reclassified rice in his reserves as "mildly unsuitable for storage" and sold it without approval from upper levels. 
• In April 2020, the manager of a Panjin City granary decided the transfer 1,000 tons of grain from city to provincial reserves without approval. This grain was subsequently double-counted as both city and provincial reserves. 
• The other cases involved mainly financial corruption by misappropriating funds for grain purchases, making unauthorized loans, and using their positions to pressure companies to sign leases for commercial space.

A TV series "Zero Tolerance", produced by the CCDI's propaganda department and China Central TV, was said to "shock" the public by revealing brazen grain corruption shenanigans. CCDI said their investigation of grain storage stations in Jiangsu Province's Yizheng City discovered grain stations and grain trading companies had transactions with directors' personal accounts. It was common to pay farmers for "grade 3" grain that turned out to be "grade 2" after testing. The higher grade raises the price by a few pennies per kilogram, but it turns out to be a lot of money for thousands of tons. The grain station director pocketed the price difference. The "circular grain" scam takes advantage of the government's price support program by fraudulently declaring grain they had already purchased at market prices to be "market intervention grain" and repurchasing it at the support price. The grain station collects the higher support price and gets a management fee from the government. In some grain stations, they loaded a truck with grain at another warehouse, brought it to the front door pretending to be farmers with fake id cards, and resold the grain at the support price. 

Illustration of how granaries purchase grain at market prices, declare it to be "market intervention grain" valued at a higher support price, collect the price premium and a government management fee. 

In an October 2021 summary of grain corruption tactics, CCDI labeled corrupt grain officials as "big rats" who "rely on grain as their food". One tactic is to illegally sell grain from reserves, then use the funds to speculate on the futures market with the hope of buying back the grain later. "Air grain" is when granaries agree with a grain trader to fabricate a transaction, issue a forged invoice and fake accounting records, then create another phantom transaction selling it back to the trader. CCDI said a common tactic is to falsely claim grain has excess moisture, mold or foreign material to downgrade its value.

The grain reserve system is a fat target for corruption. The Agricultural Development Bank of China (ADBC) had an outstanding balance of 1.78 trillion yuan (about $274 billion) in loans for buying and storing reserves of grain, edible oils and cotton reserves at the end of 2020. Billions have quietly disappeared into the maw of the semi-official grain marketing system over the decades. The ADBC has actually cut back on commodity lending over the past decade after disastrous grain and cotton price support and stockpiling programs became a giant money-suck. The bank still claims to finance half the grain procured in major production regions and most of the cotton procured in Xinjiang. Grain stations often advertise they have "money waiting for grain" in the procurement season. ADBC allocated 300 billion yuan to purchase last fall's grain crop. 

A reform in 2001 supposedly separated government procurement functions from commercial grain business to address chaos and corruption in the system. But the "Zero Tolerance" TV investigation reported this reform was never truly carried out in many areas. In Yizheng City, CCDI said local grain bureaus and commercial grain trading companies were actually one and the same entity, and there was no oversight of grain business.

Grain officials are not the only "tigers" being punished. Some speculate that the corruption sweep is a new effort to eliminate opposition to Xi Jinping, purge associates of Xi's erstwhile rival Bo Xilai, and/or forestall a coup. The grain corruption campaign against low-level officials could be a smokescreen to distract attention from factional warfare at upper levels.

The grain corruption campaign began last year. There were hints in March 2021 when the Food and Commodity Reserve Administration scolded unnamed grain officials for failing to fulfill their responsibilities. A retired official of the national grain reserve administration was expelled from the party this week but anti-corruption goons began investigating him in July 2021. The grain corruption investigations began in earnest last August, and announcements of arrests began appearing in October-December 2021. This week announcements of corruption investigations of grain officials in various cities and counties have appeared nearly every. 

The CCDI fretted that grain corruption had continued after Xi Jinping launched his anti-corruption campaign nine years ago. Cases involve conniving between state-owned grain enterprises and supervisory departments, CCDI said, and the cases are big and "serious."

The surge in grain corruption cases coincides with a freak-out on food security by top-level Chinese officials that has been escalating since the onset of the pandemic in 2020. That was also the year a purportedly massive excess corn reserve was depleted and corn prices were climbing rapidly. In April 2020 there were reports that a meeting was held calling for a boost imports of grain and cotton to restock reserves. Corn and wheat imports promptly accelerated.

In 2021, there were constant reminders about keeping rice bowls firmly in Chinese hands and a new Party-Government responsibility program that grades officials on their food security bona fides was launched. This month provincial officials dutifully recited objectives for increasing grain production this year. 

Is it possible that China's top officials discovered that their granaries were filled with more "air grain" than they thought? Did thousands of phony transactions trick top officials into complacency about grain reserves?

There have been several occasions over the past decade when grain procurement reports claimed to have purchased impossible amounts: nearly the entire wheat crop in Henan Province one year, the entire national cotton crop several years, and all the corn grown in northeastern provinces during 2015. In parallel, there were implausible auctions of 100 million tons of corn during 2019 that sold out every week--these were probably fake transactions to take nonexistent grain off the books. 

One thing that's becoming clear is that the more we learn about China, the less we know.