Outlook for China's food economy
April 01, 1998
by Teresa Acklin
A Chinese agricultural policy expert predicts increasing grain imports in the next decade for the world's most populous country.
By Jikun Huang
China will neither empty the world grain markets nor become a major grain exporter, but the country will become a more important player in world grain markets as an importer. Although food self-sufficiency has been and will continue to be one of China's central goals, grain imports, under the most plausible assumptions, will increase steadily in the next decade before stabilizing at 20 million to 30 million tonnes (annually).
Two decades have passed since the late 1970s when China began adopting institutional and economic reforms to shift from a socialist to a more open, market-oriented economy. Since then, remarkable progress has been achieved in the performance of agriculture and the economy as a whole.
Indeed, China's performance over the past two decades is impressive by world standards. The annual average growth rate of gross domestic product was nearly 10%, about three times the world average. Economic growth has accelerated as the full impact of current reforms is felt throughout the economy and new reform measures are adopted (see Table 1).
That acceleration, however, was not observed in the agricultural sector. Because one-time efficiency gains from the shift to the household responsibility system were essentially reaped by the mid-1980s, agricultural growth has slowed. The decline is most pronounced for grains; in contrast, livestock and other crop production growth rates generally increased.
The nexus of China's growth, the declining role of agriculture in the economy and China's potential impact on world agricultural product markets illustrate the delicate balance facing policy makers. Unfortunately, human understanding of future trends and the ability to evaluate socio-economic tradeoffs and sort through policy options is limited. Predictions are notoriously sensitive to fundamental assumptions, creating a wide range of forecasts. Such inadequate understanding was exposed by the outrageous pronouncements of (Lester) Brown, who projected massive food shortfalls in China by 2030.
China's long-term food security is an issue of both national and international significance. The sheer size of China's economy and its rapid growth, gradual progress toward market orientation and global integration, urbanization, the shift of comparative advantage from agriculture to other sectors, dietary diversification and diminishing agricultural land and water resources combine to make China a crucial player in the development of world markets for inputs and outputs of food and agricultural products, agribusiness and industry. Small adjustments to China's food supply and demand, agricultural input demand shifts and the Chinese government's selection of food security policy will each have large effects on world agricultural trade.
Improved Food Security.
Food self-sufficiency has been and will continue to be one of the central goals of China's agricultural policy. China's ability to feed over one-fifth of the world's population with approximately 7% of the world's arable land is widely acclaimed.
China, home to more than 1.2 billion people, is the world's most populous nation. Its experience demonstrates the importance of technological development, institutional change, improved incentives and rural development among other policies in improving food security with limited natural resources.
Technology is the driving force behind China's agricultural economic growth. China's technological base grew rapidly during the reform and pre-reform periods. Shorter growth season photosensitive crop varieties, for example, increased intensive land cultivation, raised the multiple cropping index and increased grain yields in the 1960s and 1970s. Hybrid rice, pioneered by Chinese scientists in the 1970s, increased yields in many parts of the country and spread to almost one-half of the rice growing area by 1990. Other grain crops have experienced similar technological transformations.
Institutional arrangements and government food policies are also important determinants of China's food production and availability. Prior to the economic reform of 1979, the centralized planned economy was solely responsible for both, at the expense of economic efficiency. Procurement practices tied rural household food consumption to local production. Low economic growth, caused by economic inefficiency, sustained rural poverty and blocked rural income growth. In 1978, one-third of China's total population lived under the poverty line.
After 1979, China adopted institutional and economic reforms to shift from a socialist to a more open, market-oriented economy. Agricultural production jumped as reforms liberalized production and consumption institutions and markets.
China's reform policies recognized that, given limited natural resources (especially arable land), agricultural production growth is a necessary, but not sufficient, condition for creating a booming rural economy and raising rural incomes. Institutional reform created rural labor surpluses. Recent evidence from many developing countries highlights the importance of expanding industry in rural areas to generate employment. China is one of the most successful examples of this development strategy.
Official policy targets two important aspects of national food security: stability of food supply and access for the poor. To date, the government has developed a disaster relief program and large scale food-for-work schemes. China has adequate capacity to weather natural disasters. The major constraints to food supply stabilization are poor market infrastructure and internal transportation.
Future Grain Imports.
Predictive frameworks are not easy to construct. The following conclusions are based on a supply and demand projection model, which includes a series of important structural factors and policy variables, including urbanization and market development on the demand side; and technology, agricultural investment, environmental trends and institutional innovations on the supply side.
Results from the baseline scenario, which incorporates our best assessment of future growth in the factors affecting China's food demand, supply and trade, indicate that under the most plausible assumptions, China's grain imports will rise steadily throughout the next decade but will stabilize between 20 million and 30 million tonnes.
Under the baseline scenario, total grain consumption rises at 1.47% per year, with 0.77% of that gain stemming from the rise in population and 0.70% from rising per capita grain demand in 1996-2020. By the end of the forecast period, aggregate grain demand will reach 594 million tonnes, more than 40% higher than the base year level (see Table 2). Total grain production (with an annual average growth rate of 1.41%) gradually falls behind the increases in demand.
The gap between the forecast annual growth rate of production and demand implies a rising deficit. Imports are expected to surge to 24 million tonnes by 2005 and remain at a 25 million to 27 million tonne level through 2020.
Nearly all of the higher grain demand is from the increased demand for coarse grains. Demand for coarse grains will increase from a base-year level of 90 million tonnes to 232 million tonnes by 2020. This implies that coarse grain as a proportion of total grain utilization will move from 22% in the mid-1990s to nearly 40% in 2020.
The process of moving from an agricultural economy that produces grain primarily for food to one that becomes increasingly animal feed-oriented typifies rapidly developing economies. Income growth, urbanization, market development and population growth are major factors driving rapid growth of demand for meat products and therefore coarse grains. China's consumers will more than double their red meat consumption by 2020, to 43 kilograms per capita from 20 kg (see Figure 1).
Rural demand will grow more slowly than overall demand, but urbanization trends will shift more people into the higher-consuming urban areas (in the mid-1990s an urban resident consumed about 50% more red meat than his/her rural counterpart). While starting from a lower level, per capita demand for poultry and fish increase proportionally more.
Per capita food grain consumption in China will peak in the late 1990s. From the baseline level of 224 kg, food grain consumption per capita rises slightly until 2000 and declines over the remaining forecast period.
To test the sensitivity of the results to changes in the underlying forces driving supply and demand balances, we ran a number of alternate scenarios, altering the baseline growth rates of the key variables, including income, population, price, investment in technology and natural resources. Figure 2 shows the impact of alternative projections on China's net grain imports by 2020. The results indicate that high population growth would raise net grain imports to 52 million tonnes by 2020. Low income growth causes a decline in projected grain demand, resulting in moderate exports of grain in 2020, while rapid income growth causes projected imports to nearly triple to 78 million tonnes.
Figure 2 also illustrates the large impact of investment in agricultural research and irrigation on production and trade balances, a result that is hardly surprising given the large contribution to food supply of agricultural research and the technology it produces. Increases in the growth rate of agricultural research and irrigation investment to 4.5% from 3.5% per year transform China from an importer to exporter by the late projection period. If, instead, growth in annual investment in the agricultural research system and irrigation fell only moderately, from 3.5% per year (as forecast under the baseline projections) to 2.5%, by 2020 imports under such a scenario would reach a level of 76 million tonnes.
This high level of grain imports is plausible only if agricultural investment declined continuously and the government did not use countervailing policy measures to stimulate food production growth as imports rose. Agricultural research and irrigation investments, however, have recovered in recent years, and in the mid-1990s when grain prices rose in response to short-term tightening of grain supplies, policy makers promised and have begun to deliver greater agricultural investments. While most of the investments have been targeted at irrigation, improvements in the operations of research institutes have also been announced.
Production, demand and imports, however, are insensitive to small changes in price trends, a characteristic that will effect projections of how China's entry into, or exclusion from, the World Trade Organization (W.T.O.) will impact food balances. Output price trends do effect China's grain balances, but the effects are small.
At the baseline level, for every 0.5% increase (decline) in the annual projected grain price trend, imports fall (rise) by 7 million tonnes in 2020. If China gains admittance to W.T.O., it politically cannot support prices at the level maintained by its East Asian neighbors. Even without W.T.O. membership, fiscal problems in China may keep it from using high price supports. In the event that China decides to adopt a protectionist policy and prices rise in real terms at 0.5% (l.0%) annually during the next three decades, China will import (export) about 5 million tonnes (7 million tonnes) in 2020.
The projections show that under the most plausible assumptions of expected growth rates, China's imports will rise steadily throughout the next decade. Imports rise primarily in response to the accelerating demand for meat and coarse grains and the continued slowing of grain supply.
However, after 2010, grain imports are expected to stabilize, as demand growth slows because of increasing urbanization and declining population growth rates and as supply growth is sustained by the on-going recovery of investment in agricultural research and irrigation.
The projections are sensitive to baseline assumption changes. Different rates of agricultural investment and income growth create some of the largest differences in expected imports. Although a few scenarios predict fairly large import levels, China will not become too large a player in the world market in view of its own domestic needs and the relative size of current world market trade.
First, world grain prices would certainly rise in the face of large Chinese imports, a tendency that would dampen Chinese grain demand and stimulate domestic supply.
Second, there may be major foreign exchange constraints to importing such large volumes of grain either government policy makers will not allocate foreign exchange for additional grain imports, or exchange rate movements will discourage imports.
Third, limitations on the ability of China's ports and other parts of the nation's transportation and marketing infrastructure to handle large quantities of grains may constrain import levels.
Finally, and perhaps most importantly, many political economy influences may make China's leaders react to increasing grain shortages. Regardless of China's comparative advantage, government leaders historically have, and continue to be, concerned with maintaining near self-sufficient domestic agricultural production capacity. National defense, pride, ideology and the central goal of food self-sufficiency in agricultural policy will necessarily put a premium on maintaining a rough balance between domestic demand and supply.
Jikun Huang is professor and director of the Centre for Chinese Agricultural Policy at the Chinese Academy of Agricultural Sciences, an executive member of the Academic Committee of Chinese Agricultural Sciences and a consultant for the World Bank and Food and Agriculture Organization. He specializes in agricultural policy analysis, consumption, production and marketing, statistics, rural development and agricultural resources. This article is based on his presentation at the 52nd Oxford Farming Conference in the United Kingdom.Table 1 China's annual economic growth rates, 1970-96
Table 2 Projection of China's grain demand, supply and trade under baseline scenario
| in percent|
|Pre-reform ||Reform period|
|Gross domestic product a||4.9||8.5||9.7|
|G.D.P. per capita growth||3.1||7.1||8.3|
|a Figure for 1970-78 G.D.P. is the growth rate of national income in real terms.|
|Note: growth rates are computed using regression method. G.D.P. and per capita consumption growth rates refer to the value in real terms.|
Figure 1 Projected annual per capita meat demand under baseline scenarios
|in million tonnes|
|Total grain demand||412||479||513||594|
|Other uses b||51||55||58||62|
|Net grain imports||9||24||27||25 |
|a Figures in parentheses are the amount of grain in unprocessed grain form|
|(rice measured in paddy form).|
|b includes seed, waste and industry uses|
|Source: S.S.B., Statistical Yearbook of China, various issues|
Figure 2 China's projected net grain imports under alternative scenarios in
| in kilograms|
| million tonnes|
|High population growth||50-70|
|Low income growth||-10 to -30|
|High Income growth||70-90|
|Low agricultural investment||(2.5% annually)||70-90|
|High agricultural investment ||(4.5% annually)||-10 to -30|