China Market

by Teresa Acklin
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China 's unparalleled economic growth is likely to continue, creating opportunity for agrbusiness.

   When Jeff Brown, director of China operations for the U.S . Feed Grains Council, returned to his Beijing of five after a recent trip to the United States, he was amazed. A 30-story skyscraper had materialized across the street during his five-week absence.

   The speed of that construction project symbolizes the pace of economic growth and change in China today, Mr. Brown said. "China is one of the last great market frontiers. What' s going on is breathtaking."

   China's economy and the implications for agribusiness and world agricultural trade were highlighted at the Council's 34th membership meeting held recently in Scottsdale, Arizona, U.S. The consensus at the U.S. feed grains market development group' s meeting was that rapid economic growth was likely through the next decade, offering continued market opportunities.

   In 1992 and 1993, China's G.D.P. grew by 14.4% and 13%, respectively, a much higher growth rate than any other country. And in 1993, China' s G.D.P. represented 6.9% of world G.D.P., the third-largest share behind the U.S. and Japan.

   Meanwhile, China's 1.2-billion population has enjoyed an astounding increase in income. From 1982 through 1993, real per capita income expanded by 36% per year in urban areas and 16% annually in rural areas.

   As measured by purchasing power parities, Chinese consumers' buying power has surpassed that of their Japanese counterparts, according to Mr. Brown. Other reports indicate China already has 100 million consumers affluent enough to buy Western goods, China has moved into a "money economy," where apopulation with an increasing amount of money to spend is driving demand.

   China' s rapid economic growth is expected to continue in the next decade, although the growth rate is likely to slow some from the recent double digit pace. A demand model forecast prepared for the Council estimated China's annual growth rate would slow to 8% by 1997 and then remain at that level through the early 2000s.

   In addition to economic statistics, other indicators reflecting economic change are present in China, according to William Jorgenson, managing principal for the U.S. consulting company Senechal, Jorgenson, Hale & Co. The company conducted an analysis of the Council' s market development program in China, and Mr. Jorgenson discussed the findings.

   The indicators of change included:

   • consumption of fast food;

   • poultry growth;

   • movement of labor;

   • telecommunications;

   • power shift to provincial areas from central control; and

   • modernization of the food sector.

   Mr. Jorgenson noted numerous examples of these indicators in China. More and more supermarkets, mini-marts and convenience food stores are appearing in China, he said, and the growth alone in China' s poultry industry in 1992-93 was equal to the size of the entire South Korean poultry industry.

   Heavy foreign investment in China is building a modern telecommunications system and providing other technological and infrastructure improvements, Mr. Jorgenson said. In fact, foreign investment has been critical to China' s economic performance.

   In the first half of 1993, $44 billion in direct foreign investment was committed to China; foreign investment during all of 1993 was expected to exceed the total for the entire previous decade.

   This investment and the influence it brings has brought about liberalizations in commerce and rapid industrial modernization. China is moving "from backwater to digital in one-easy-step," Mr. Jorgenson said.

   Despite the progress and the promise of the China market, the Chinese government has several concerns, Mr. Jorgenson said. These issues, as well as how the government addresses them, could affect the pace of economic reform and future growth, adding a cautionary note to enthusiasm over the market.

   Not surprisingly, China' s spectacular economic growth has been accompanied by inflation, estimated to be as high as 15% in 1993, and by speculative fever in real estate. An austerity program implemented last year tightened credit and should help to cool these pressures over time, but inflation remains a concern.

   The government also is worried about maintaining food security as the private sector increasingly moves into the agricultural and food industries. A loss of food security raises the specter of social unrest, if not starvation.

   Regional disparities also are an issue. The majority of investment and economic attention already has shifted from a rural to an urban focus, which could foster resentments and political power struggles. Hand in hand with regional disparities come worries over industrialization as an employment policy and the ramifications of a labor force moving away from farms to urban areas.

   Foreign exchange, corruption and loss of central control over vital functions also are concerns.

   Mr. Jorgenson said these issues were not likely to halt economic progress, nor do analysts predict a significant reversal of reforms made to date. But he said future economic and political developments were likely to follow a "two steps forward, one step back" pattern as the government dealt with these issues.

   Implications for agriculture

   As China continues to reform its economy, liberalization of its grain trading should continue, Mr. Jorgenson and Mr. Brown agreed. Substantial changes already have occurred, ranging from the development of viable domestic cash and futures markets to the lessening influence of Ceroilfoods, the state's central agency formerly in control of all agricultural commodities.

   Ceroilfoods already has ceded authority over some commodities to the private sector. In other cases, the agency acts as a purchasing agent and has no substantive control, a situation that eventually may apply to more commodities, Mr. Jorgenson said. Prices of most grains also are expected to be decontrolled over time, as the government phases out costly subsidies and as the cash and futures markets continue to mature.

   Expectations for a continuing rise in incomes and living standards point toward burgeoning demand for animal proteins, with concurrent growth in the swine and poultry industries. Indeed, although China's poultry industry already has experienced explosive growth, current per capita consumption represents only 4% of U.S. consumption and 7% of consumption in Taiwan.

   Growth in China's feed industry and in its demand for feed grains is expected eventually to outstrip China' s production capacity. Mr. Brown noted that China was home to only 8% of the world' s tillable land; by contrast, the U.S. has 25%.

   Although China in recent years has become an exporter of maize, most studies predict exports will decline through the end of the century, with China eventually becoming a net importer. The only point of debate is the timing.

   The Council' s demand model indicates China will not become a net feed grains importeruntil after2002 (see chart on page 7). Northern China probably will export smaller and smaller amounts of maize to its neighbors in South and North Korea and Japan, and the southern part of China is expected to import increasing amounts to support its expanding livestock industry.

   Seizing the opportunity

   How does agribusiness take advantage of the opportunities in the China market? Some answers may lie in the strategies proposed for the Council.

   The first priority, trade servicing, consists of training China's future buyers, including teaching the use of markets and raising buyers' self-confidence. Trade servicing also includes working toward a gradual removal of quotas and monopolies.

   The second priority for the Council is to reposition its technical programs, Mr. Jorgenson said. China' s geography is too vast and its animal and feed industries are too large for traditional technical programs to be effective. Further, the Council should work with the private sector because private foreign agribusiness is the engine driving change, he said.

   The last priority includes taking an active role in trade policy issues and initiatives.

   Mr. Jorgenson recommended that the Council' s overall strategy should be targeted to the Shanghai and the Yangtze River delta provinces and Guangzhou and continguous provinces. These regions have experienced rapid growth in consumer incomes, have access to infrastructure and contain urban areas near to the food supply.

   China's future

   When looking at opportunities in the China market, the key is to think long term. Mr. Brown noted that many of the U.S. companies now investing in China expected to sustain losses for the first five to 10 years, and Mr. Jorgenson repeated that progress was likely to follow a "two steps forward, one back" pace.

   But decentralization, rising incomes and higher living standards will continue-fueled by private enterprise, the engine of change in China.