COFCO's Golfing Sins

China National Oils Cereals and Foodstuffs Corporation (COFCO) has been fingered by the Communist Party's Central Discipline Commission as one of several corrupt government/business units in its 2014 report. The terse report accused COFCO of spending public funds on golf and other luxury items, a violation of Secretary Xi Jinping's "eight rules" which ordered government officials to cut back on excessive banqueting, travel, and car purchases. COFCO is China's largest agribusiness company and the largest importer of corn, so the agricultural implications of the censure of COFCO may be worth speculating about.

Over the last two years, the discipline commission has singled out local officials in a number of provinces, a mining company in Inner Mongolia, Fudan University, and the Ministry of Science and Technology for censure and possible legal action. COFCO seems to be this year's example of profligacy and lack of oversight over state-owned enterprises.  Other officials are accused of manipulating land auctions, skimming money from fake research projects, improper promotions, and other sins.

The corruption crackdown seems to echo Mao-era rectification campaigns with rhetoric railing against "formalism, hedonism, bureaucracy-ism", "ill winds," "mass lines," and posters plastered on every available wall reminding communist party cadres to follow 12 virtues, increase the party's value and achieve the "China Dream." The crackdown also seems to be calculated to address the Chinese public's fermenting anger over the privileges granted to officials and their abuses.

The COFCO censure reveals a fallacy of China's trade and industrial policy which assume that a Chinese company has the interests of China in mind. The government grants preferential trading rights, access to capital and other benefits to large state-owned companies on the presumption that such companies will do the State's bidding. These companies are helped as a means of preventing multinationals from gaining a dominant market share since they are presumed to be threat to China's interests.

For example, a recent book, Agricultural Trade Research 2009-2013 (农业贸易研究2009-2013), explains that China's WTO negotiators insisted on awarding most of the tariff rate quota to state-owned companies--like COFCO--as a means of controlling imports. COFCO has 60% of China's corn import quota and 90% of the wheat quota.  But does COFCO really pursue the interests of its owner--the State?

The presumption that COFCO is more reliable than multinational companies is based on the fallacy that a State-owned company pursues the interests of the State. In reality, managers of both COFCO and multinationals pursue their own interests. Managers of state-owned companies avoid paying dividends to the State and take advantage of their position to enrich themselves. Chinese consumers would probably be better off with multinationals competing for the market than if the market is handed to COFCO.

A prime example of corrupt managers pursuing their self-interest is Sinograin--China's grain reserve monopoly--where grain depot managers fled the country with millions of dollars, suspicious fires destroyed granaries, and grain was misused.

The scolding of COFCO could have another hidden motivation deriving from the company's favored position as designated dominant grain importer. Chinese officials are desperate to whittle down their massive corn stockpile before this fall's grain harvest--3 months away. They don't want cheap imported corn competing with the expensive domestic corn being sold from stockpiles, so they are doing whatever they can to keep a lid on imports. However, with U.S. prices dropping further and the import margin widening to 400-500 yuan per tonne, there are riches to be made by importing corn. COFCO is also a processor of corn, a feed miller and a pig and dairy farmer whose margins are shrunk by high corn prices. The temptation to sin by importing corn is strong.

The disciplinary commission's inclusion of COFCO on its bad boy list may be an implicit threat of prison if officials are caught importing or smuggling corn, with exoneration promised if they follow the party line on corn imports.