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Market realities hit - even in China.

- Friday, February 05, 2016

The Chinese Government has maintained very significant agricultural market intervention policies over recent years, with the express purpose of trying to limit the income disparities between urban and rural China. A new policy document released by the Chinese Government seems to indicate that it has learnt some lessons, and will in future directly support rural incomes, rather than attempt to manipulate agricultural markets.

Successive Chinese Governments have been grappling with the problem of the increasing income disparity between urban and rural people in China for several decades, and in particular since the Chinese accession to the WTO in 2001. At that stage, China decided to become part of the WTO in order to avoid other nations imposing high tariffs on imports of Chinese manufactured goods. Under the WTO rules, all member nations must adhere to most-favoured nation tariffs for all trading partners, and are generally prevented from imposing discriminatory tariffs on one specific trading partner. A side-effect of WTO entry for China was the requirement that China adopt these same rules for imports, which meant that China had to drop the very high import tariffs it imposed on agricultural imports at that time. The result has been the very dramatic growth in agricultural imports into China since that time.

This created a challenge for the Chinese Government, which has maintained a strong focus on ensuring that urban and rural incomes do not drift too farm apart. Cheap agricultural imports had the potential to undermine the prices received by Chinese farmers. The approach that has been taken by the Chinese Government to maintain rural incomes has been to intervene in agricultural markets, and actively purchase products like corn and cotton when prices fell below specific levels. The result over many years has been growing government-owned stockpiles in China, which have created major concerns for international commodity markets due to the uncertainty surrounding the policy the Chinese Government will adopt to dispose of those stocks.

Media reports this week are suggesting that the most recent Chinese Government Policy Statement released has again signaled a move away from market intervention (in this case for the corn sector) and instead the adoption of direct income support measures for farmers when prices are low. This is similar to an announcement made in January 2014 relating to the cotton industry

As the above graph shows, this does not mean that the spectre of Chinese Government-owned stocks will immediately be removed from global agricultural commodity markets. The Chinese Government announcement relating to Cotton in 2014 has meant that the rate of growth in stocks held by China has slowed, but there is still a significant overhang of Chinese cotton stocks overhanging the market. The announcement does, however, signal a welcome change and the promise of less distorted markets in the future. 

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