china's grain imports: an empirical study

~ U T T E R W O R T H E I N E M A N N

0306-9192(95)00029-1

Food Policy, Vol. 20, No. 4, pp. 323-338, 1995 Copyright © 1995 Elsevier Science Ltd

Printed in Great Britain. All rights reserved 0306-9192/95 $10.00 + 0.00

China's grain imports: an empirical study

Xiao-yuan D o n g Department of Economics, University of Winnipeg, Winnipeg, Manitoba, Canada

Terrence S. V e e m a n Department of Economics and Rural Economy, University of Alberta, Edmonton, Alberta, Canada

Michele M. V e e m a n Department of Rural Economy, University of Alberta, Edmonton, Alberta, Canada

China is a major importer of grains, primarily wheat. However, the relative importance of economic and policy factors underlying the increase in imports into this centrally planned, but reforming, economy is not that well understood. An econometric model is developed to analyze Chinese grain import behaviour over the past three decades and assess the relative importance of respective import determinants. It is concluded that major factors influencing imports have been changes in state grain procurement policy (and associated aspects of China's grain distribution system), income-related improvements in diet (manifest primarily as a shift from inferior cereals and potatoes to wheat and rice rather than as feed-grain based increases in meat consumption), and shortfalls in domestic grain production.

Keywords: grain imports, import demand model, China

China has b e c o m e an increas ingly i m p o r t a n t , but unce r t a in , i m p o r t m a r k e t for gra ins since the 1960s. To ta l ce rea l impor t s , d o m i n a t e d by whea t , g rew at an ave rage annua l ra te of 4.3 pe r cen t ove r the pas t th ree decades , r each ing some 6.1 p e r c e n t of to ta l wor ld cerea l impor t s and 11.5 pe rcen t of wor ld whea t impor t s dur ing the 1980s. A s the gra in t r a d e da ta in Tab le 1 d e m o n s t r a t e s , pu rchases have been highly vola t i le , ranging f rom a low of 2.3 mi l l ion tonnes in 1975/76 to a high of 17 mi l l ion tonnes in 1988/89.

IIn this paper, grain includes all cereals (wheat, rice and the major coarse grains) but excludes oilseeds. Except where explicitly indicated, the data series, largely from USDA sources, also excludes potatoes. This USDA-based data is not fully consistent with Chinese official data for two primary reasons: differences in specification and differences in annual reporting period. Potatoes and oilseeds, for example, are included in Chinese-based data on 'foodgrains'. Hence, the USDA figure for China's annual cereal production reported in Table 1 is lower than the Chinese official figure, on average, by 41

323

China's grain imports: Xiao-yuan Dong et al.

The growing importance of China's grain import programme and uncertainty about purchase intentions have prompted a number of competing arguments to explain grain trade behaviour. Chief among these have been the consideration of price arbitrage, involving the sale of expensive rice and purchase of cheaper wheat; the increase in income and the associated pressure for a better diet; the shortage of domestic grain production; the availability of foreign exchange; and, finally, policy changes and/or difficulties concerning grain procurement and distribution. The study of Chinese grain imports is complicated in that import behaviour is not only subject to various demand and supply-side pressures, but also represents policy decisions in an economy which is evolving from central planning to more reliance on market mechanisms. Nonetheless, it is important to develop a better under- standing of grain import behaviour in China which has typically ranked, after the former USSR, as the world's second largest grain import market.

The main objective of this paper is to examine and assess the major arguments proposed to explain China's grain import programme. For this purpose, a dynamic, partial adjustment model of grain import demand, following the general structure used by Borsody (1987) in studying the USSR, is developed for China. The analytical framework also permits the development of a decomposition methodolo- gy whereby the relative importance of the various arguments can be assessed.

The major determinants of China's grain imports China's grain import programme has long been a controversial topic among China scholars. One of the first explanations of China's grain importation was a price-related argument which was first proposed by the Chinese central government. It was claimed that China's grain import programme was operated to take advantage of "food arbitrage" based on the importation of wheat and export of rice because the price for rice was higher than that for wheat in the international market (Wilson, 1964). These price differences are appreciable; during the period of 1961-1990, the international rice price was, on average, 2.26 times China's wheat import price. 2 This structure of prices implies that, on average, China's export earnings on rice covered 32.7 percent of its wheat import bill, although the quantity of rice exports was only 14.5 percent that of wheat imports.

However, the price argument does not furnish a complete explanation of China's grain import programme, even in earlier years, because the earnings from rice exports have been far from sufficient to pay for wheat imports (Mah, 1971). Moreover, the composition of China's cereal exports has changed dramatically since 1984. The share of rice in China's total cereal exports fell from an average of 87.6 percent in the period from 1961/62 to 1983/84 to an average of 12.7 percent since then. Corn has replaced rice as the dominant component of China's cereal exports, constituting some 87.3 percent of China's grain exports since 1984/85. The international price of corn averaged only 81.4 percent of China's wheat import

million metric tonnes. The annual rate of growth in total grain production was 3.5% according to Chinese official sources, but 4.1% according to the U S D A data. There are also reporting period differences between Chinese official data and U S D A data on grain production, imports and exports. The U S D A reports grain data on a crop year basis, e.g. for 1976/77. Data from official Chinese publications are compiled on a calendar year basis. Despite the differences, the U S D A data were derived from Chinese official sources. Further , the series of "grain" production from the two sources are highly correlated, with 99.9 percent of the variations in the U S D A cereal figures being associated with changes in the total grain production variable provided by China ' s Statistical Bureau. ZCalculation based on the price data used in this study.

324 Food Policy 1995 Volume 20 Number 4


Table 1 China's cereal production and trade (million tonnes)

Production Imports Exports Coarse

Year Cereal Cereal Wheat Cereal Rice grain

1961/62 i 11.40 6.08 4.89 0.46 0.46 0.00 1962/63 12 I. 73 5.23 4.89 0.70 0.68 0.02 1963/64 133.68 5.99 5.20 0.86 0.76 0.10 1964/65 150.37 5.36 5.03 1.27 0.99 0.28 1965/66 159.98 6.34 6.28 1.72 1.49 0.23 1966/67 174.16 5.09 5.03 1.70 1.58 0.12 1967/68 178.33 4.27 4.16 1.33 1.30 0.03 1968/69 171.16 3.54 3.54 1.22 1.18 0.04 1969/70 172.57 5.13 5.12 1.28 1.28 0.00 1970/71 197.52 3.67 3.66 1.32 1.29 0.03 1971/72 209.40 3.40 2.97 1.80 1.43 0.38 1972/73 203.47 6.25 5.29 2.91 2.63 0.28 1973/74 219.06 7.81 5.65 2.31 2.06 0.25 1974/75 233.03 6.27 5.75 1.96 1.63 0.33 1975/76 242.87 2.31 2.20 1.23 0.88 0.35 1976/77 246.39 3.16 3.16 1.26 1.03 0.23 1977/78 239.87 8.66 8.60 1.56 1.44 0.13 1978/79 269.42 11.22 8.05 1.15 1.05 0.10 1979/80 288.88 10.92 8.87 1.22 1.12 0.10 1980/81 277.49 14.75 13.79 0.79 0.59 0.20 1981/82 283.06 14.77 13.20 0.67 0.47 0.20 1982/83 311.84 15.78 13.00 0.68 0.58 0.10 1983/84 341.88 9.93 9.60 1.55 1.17 0.38 1984/85 362.30 7.64 7.40 6.75 1.01 5.74 1985/86 336.71 7.36 6.60 8.12 1.00 7.12 1986/87 350.07 11.45 8.50 5.03 0.95 4.08 1987/88 356.86 15.91 15.00 5.27 1.02 4.25 1988/89 348.71 17.00 15.50 5.60 0.70 4.90 1989/90 364.43 14.16 13.00 3.81 0.31 3.50 1990/91 401.03 10.45 9.50 7.30 0.30 7.00 Growth rate 4.1 4.3 4.1 5.8 -2 .1 20.8

Sources: United States Department of Agriculture, Foreign Agricultural Service, World Grain Situation and Outlook, various issues.

price. It seems that relative grain prices may have influenced China's grain trade decisions, but the food-arbitrage motive does not appear to have played a major role in China's grain imports in recent years. 3

The production argument, initially proposed by Mah (1971), attributes grain imports primarily to the inadequacy of domestic cereal production. He contended that China could not meet basic subsistence requirements because of the agricultural crisis in the early 1960s and the subsequent faster rate of increase of population than food production, concluding that imports of grain "provide the vital margin in keeping the food supply to the Chinese population above the subsistence level" (Mah, 1971). In more recent years China's per capita grain production has generally exceeded subsistence requirements (Wong, 1980). This has certainly been

3A second price-related explanation of grain imports is that increased importation could have been due to decreases in the real price of grain, particularly wheat. As the price of grain fell over time, relative to the general price level, the quantity of grain imports demanded would be expected to increase, as long as the price elasticity of import demand was greater than zero.

Food Policy 1995 Volume 20 Number 4 325


the case since 1982. In the past decade, shortfalls in domestic cereal production below the rising trend in food consumption may be related to production inadequacy.

Shigeru Ishikawa (1977) identified diet improvement as one of the important elements in China's demand for grain imports. He noted: "with the gradual increase in per capita disposable income, the demand of both urban and rural population for a considerable upgrading of their consumption standard may be increasing" (Ishikawa, 1977). China has seen a substantial increase in consumers' income since the late 1970s. Based on the data used in this study, from 1976 to 1990 Chinese per capita real disposable income grew at an annual rate of 6 percent. As a result, Chinese diet standards improved considerably.

The continuing improvement of Chinese food consumption with economic growth involves two important shifts in the demand for grains. First, the demand for fine or superior grain (rice and wheat), a substitute for coarse grain in direct cereal consumption, grows. Second, the demand for feed grain can be expected to rise as a result of increases in consumption of animal protein. Given the structure of domestic cereal production, such changes in the pattern of food consumption can be expected to alter the composition of China's cereal imports and exports. Other things being equal, changes in direct grain consumption will raise wheat imports and coarse grain exports, but reduce rice exports. On the other hand, increasing consumption of animal protein may reduce coarse gain exports and stimulate import demand for coarse grain.

Some economists have focussed on the second of these effects in predicting that Chinese diet improvement would lead to a major shift in China's future grain imports from wheat to feed grain (Sicular, 1985; Carter and Zhong, 1988; Anderson, 1990). One reason for this belief is that animal protein accounts for a fairly small proportion of calories in the current Chinese diet and increases in this share are anticipated. Ishikawa suggested that a saturation level for direct food grain consumption, at least in western countries, may apply at about 140 kilograms of food grain per year (2 200 calories per day) (Ishikawa, 1977). China exceeds that level; it has been officially estimated that the total food consumed per head of the Chinese population in 1983 was 2 877 calories per day, and that 92 percent of the calories were derived from direct grain consumption (China's Statistical Yearbook , 1984). One view of future Chinese cereal demand is that any increase in this will be, in large part, from growth in the indirect demand for grain in the form of animal feed.

However, the predicted trade pattern has not yet emerged despite more than a decade of rapid economic growth in China. What we have observed instead is that China's grain exports have shifted substantially from rice to coarse grain since 1978, but the marginal status of coarse grain in China's total grain imports has, by and large, stayed the same (see Table 2). For instance, the share of rice exports in total cereal exports fell from an annual average of 88.4% during 1961/62-1976/77 to 12.7% in the period 184/85-1990/91, while the share of coarse grain exports increased from 11.6% to 87.3%. From 1984/85 to 1990/91, China's sale of coarse grain in world markets averaged 5.2 million tons each year, accounting for 6.4% of total world coarse grain exports. Meanwhile, the import share of coarse grain increased from 8.6% during 1961/62-1976/77 to 12% in the period 1977/78-1983/84, then fell to 7.0% during 1984/85-1990/91. In the period from 1984/85 to 1990/91, China's average annual imports of coarse grain did not exceed one million tons. Even more striking, as exports of coarse grain grew, the share of coarse grain in China's domestic cereal production continued to fall slowly, while the proportion of



Table 2 China's average annual grain production, exports and imports, various periods (million tonnes)

1961/62-76/77 1977/78-83/84 1984/85-90/91 Quantity Share Quantity Share Quantity Share mt % mt % mt %

Production: 182.84 100.0 287.49 100.0 360.01 100.0 Rice 98.46 53.9 146.22 5[). 9 173.88 48.0 Wheat 29.59 16.1 60.33 21.0 89.16 25.0 Coarse grain 57.49 30.0 80.94 28.1 96.97 27.0

Exports: 1.46 100.0 1.09 100.0 5.98 100.0 Rice 1.29 88.4 0.92 84.5 0.76 12.7 Coarse grain 0.17 11.6 0.17 15.5 5.22 87.3

Imports: 4.99 100.0 12.99 100.0 12.00 100.0 Wheat 4.55 91.1 10.73 87.3 10.79 90.0 Coarse grain 0.43 8.6 1.47 12.0 0.88 7.0 Rice 0.01 0.2 0.09 0.7 0.33 3.0

Sources: United States Department of Agriculture, Foreign Agricultural Service, World Grain Situation and Outlook, various issues.

wheat production rose gradually. The evidence indicates that, to date, the upgrading of direct cereal food consumption has overriden increased animal protein consumption as the major force in the adjustment of China's cereal production and trade. Three factors help to explain this emerging pattern.

First, until the late 1970s, coarse grains and potatoes had accounted for a large proportion of total food grain consumption in China, especially for rural residents. In 1978, for example, the consumption of coarse grains (including potatoes) in the rural areas accounted for 50.4 per cent of total direct grain consumption (see Table 3). As peasants' income improved through the rural reform that began in the late 1970s, per capita grain consumption increased from 248 kilograms in 1978 to 262 kilograms in 1990. The per capita consumption of coarse grain (including potatoes) in China's rural areas, however, fell from 125 kilograms in 1978 to 47 kilograms in 1990. As a result, the proportion of coarse gain to total food grain consumption decreased to 17.9 percent in 1990. Although demand for feed grain increased, China's underdeveloped feed processing and commercial livestock industry was unable to absorb fully coarse grain released by this dramatic reduction in direct consumption of coarse grains.

Secondly, while Chinese consumption of most non-grain foodstuffs rose following a substantial increase in Chinese per capita income since 1977, as shown in Table 4, the rates of increase differed for different foods. Between 1978 and 1991, China's per capita consumption of grain grew at an annual rate of 1.8%, pork grew at 5.9%, beef and lamb at 7.2%, poultry at 12.9%, and fresh eggs at 10.9%.

Table 3 Per capita grain consumption in China's rural areas (kilograms)

1978 1980 1983 1984 1985 1986 1988 1989 1990

Total grain a 248 257 260 267 257 259 260 262 262 Fine grain I~ 123 163 196 209 209 212 211 213 215 Coarse grain a 125 94 64 58 48 47 49 49 47

Sources: State Statistical Bureau, The People's Republic of China, China Statistical Yearbook, various issues. Notes: aPotatoes are included in these figures for total (food) grain and for coarse grain, bFine grain refers to rice and wheat.



Table 4 Per capita food consumption in China (kilograms)

Grain Pork Beef & lamb Poultry Eggs

1976 190.28 7.38 0.66 0.35 1.76 1977 192.07 7.25 0.71 0.36 1.85 1978 195.46 7.67 0.75 0.44 1.97 1979 207.03 9.66 0.82 0.57 2.08 1980 213.81 11.16 0.83 0.80 2.27 1981 219.18 11.08 0.85 0.84 2.44 1982 225.36 11.75 1.03 1.02 2,52 1983 231.52 12.31 1.10 1.18 2.95 1984 249.65 12.93 1.23 1.35 3.88 1985 251.69 13.84 1.31 1.56 4.93 1986 252.67 14.22 1.32 1.72 5.20 1987 248.88 14.39 1.43 1.71 5.50 1988 246.10 14.73 1.58 1.75 5.74 1989 239.12 15.36 1.58 1.79 5.88 1990 238.80 16.64 1.73 1.73 6.27 1991 234.50 17.44 1.79 1.98 7.10 Annual growth 1.8% 5.9% 7.2% 12.9% 10.9%

Sources: State Statistical Bureau, The People's Republic of China, China Statistical Yearbook, 1989, p. 723, and 1992, p. 279.

Animal protein consumption grew faster than food grain consumption, but the growth in consumption of poultry and eggs, for which the conversion rates from grain to protein are relatively low, was much faster than for pork and beef.

Thirdly, the main source of animal protein in China is the side-line production of hogs, ruminants and poultry by individual rural households. In such enterprises, animal feed includes a traditional mix of non-grain materials, such as weeds, vegetables, and brewery waste, as well as a variety of grains and oilseed meals. It is estimated that in Sichuan, one of the largest hog producing provinces in China, about 50 percent of feed mass is composed of non-grain materials (Colby, 1991). The traditional feed structure of China's livestock sector dampens the pressure of demand for feed grain. All three factors have modified the impact of increasing animal protein consumption on China's pattern of grain trade.

Foreign exchange availability is a further factor that may affect China's grain imports (Surls, 1978). As in any developing country, scarce foreign currency must be used to pay for foreign capital goods and new technologies as well as for foodstuffs. The availability of foreign exchange, then, is a possible constraining influence on Chinese grain imports.

A final explanation of China's grain importation that has often been proposed is based on the problems of internal procurement and distribution of cereals. 4 Dwight Perkins (1975) considered China's grain procurement system to lie at the heart of the problem of distribution. Control of the distribution of surplus grain through a compulsory delivery system was instituted by the Chinese central government in the early 1950s. Conflict between the state and peasants, and between grain surplus

4A simple version of this argument stressed the importance of relative transportation costs. Donnithorne (1970) pointed out that, in China, most grain surplus regions are located in the Northeast and Southwest, while most grain deficit regions are situated on the southeast coast. Donnithorne argued that transport costs were high relative to the costs of shipping imported grain; thus, foreign grain was imported into China to supply urban dwellers in the southeastern coastal regions.


China's grain imports: Xiao-yuan Dong e ta | .

and deficit regions, was inherent in this system. Perkins argued that annual grain imports were equivalent to only a small proportion of domestic grain production, but were a significant percentage of the quantities compulsorily procured by the state. With importation of foreign grain, the central government was able to reduce its requirements for grain delivery and thus improve peasants' incentives and ease tensions between grain surplus and deficit regions.

The relaxation of state control over surplus grain clearly was one of the factors leading to a significant adjustment upward in China's grain imports after 1977. To stimulate agricultural production, the Chinese government raised state grain procurement prices, curtailed grain purchase quota, and reduced agricultural tax in kind in 1977. In consequence, state net grain procurement fell by 3.16 million tonnes in 1977, to a level nearly 8 percent below that in 1976. To accommodate such a reduction in grain procurement, grain imports increased from 3.16 to 8.66 million tonnes (see Table 1).

In 1985 the Chinese government decided to abolish the 30-year old sytem of compulsory grain delivery and shifted instead to a system of contracting with peasants for the purchase of a set amount of grain at fixed prices. Under the new contract purchase system, peasants were encouraged to sell grain on the open market after fulfilling their contracted sales to the state. The reform of the grain distribution system was, however, subject to various constraints. First, the Chinese government had long subsidized food consumption of urban dwellers by selling them rationed grain at prices far below state grain procurement prices. Such food subsidies contributed to severe budget deficits following the rural reforms. Secondly, grain procurement prices under the new contract purchase system continued to be administratively determined and did not reflect the scarcity of economic resources. Thirdly, the transportation system, grain storage facilities, food processing industries and market institutions in China are not highly developed. As a result, the Chinese grain distribution system has not been capable of effectively responding to changes in demand and the Chinese government has frequently had to rely on foreign trade to deal with imbalances in domestic grain distribution (Sicular, 1985).

Between 1982 and 1984, consecutive bumper harvests depressed grain prices in the open market. Peasants lined up to sell grain to the state. The sudden increase in state grain procurement strained the state budget, overloaded the transportation system and storage facilities, and led to soaring grain marketing costs (Carter and Zhong, 1988). In consequence, China's annual grain imports fell to an average of 8.4 million tonnes in the three year period between 1983/84 and 1985/86, down from an average of 13.5 million tonnes in the period 1978/79 to 1982/83, while average annual grain exports amounted to 5.47 million tonnes. However, the stagnation of grain production following a sharp decline in cereal output in 1985 forced the Chinese government to reimpose the grain purchase quota on peasants. To make up shortfalls in domestic grain procurement, China's grain imports rose to 11.45 million tonnes in 1986/87 and 17 million tonnes in 1988/89. China's grain production recovered in 1989. This recovery and a subsequent record harvest in 1990 stressed China's ill-functioning grain distribution system but enabled a major drop in grain imports in 1990/91.

The problems of China's grain distribution system appear to have added significant irregularity to China's grain importation. Indeed, during the period from 1961/62 to 1990/91, the coefficients of variation adjusted from the linear trend in China's total cereal and wheat imports, respectively, were 0.36 and 0.36. These indexes of instability were considerably higher than for China's domestic grain



production (0.05), or for direct cereal consumption (0.06). Consequently, during the period of rural economic reforms, China's grain imports fluctuated but more than doubled, rising from an annual average of 5 million tons between 1961/62 and 76/77 to 12.5 million tonnes in the period between 1977/78 and 1990/91.

There have been attempts to test empirically the validity of various explanations of China's grain import programme. Surls (1978) estimated demand for net wheat and coarse grain imports from 1961 to 1975 as functions of lagged domestic cereal production, the hard currency balance of trade surplus in the preceding year, and world market prices. Surls' study showed no significant correlation between imports and either production or prices for the period studied. Wong (1980) regressed China's wheat imports against such variables as unit prices of imported wheat, domestic grain output, per capita grain output, population, and domestic wheat output. No significant statistical relationship was found; this led to Wong's rejection of the production shortage explanation in favour of the distribution argument.

In a model of what policy for China featuring production, consumption and net trade equations, Halbrendt et al. (1990) estimated China's wheat import demand from 1960 to 1987 as a function of wheat production, the rice/wheat price ratio and foreign exchange earnings. It was concluded that these variables exert significant impact on China's wheat import demand. However, as in most other previous empirical studies, measures of grain distribution, grain stocks, and income were omitted as explanatory variables of China's grain import demand, a procedure that implicitly assumes that these variables are either not relevant or do not change appreciably over the period of investigation. The latter is not a plausible assumption, especially for the period from 1977 to 1990, when China undertook radical reform of the grain distribution system and experienced rapid growth of real income.

The preceding empirical studies involve static specifications that assume Chinese central planners are able to adjust import demand instantaneously in response to changes in exogenous variables, an unrealistic assumption as adjustment of import demand involves costs and requires time. It is not surprising, therefore, that such regression analyses usually face the problem of autocorrelation. Direct correlation of autocorrelation in the residuals may not be an appropriate solution in the presence of model misspecification. In assessing the various hypotheses advanced to explain China's grain import behaviour, we propose a particular model specification that accounts for lags in the adjustment of grain imports, an approach taken by Borsody (1987) in his study of grain imports into the former USSR, and a procedure that overcomes the problem of autocorrelation.

The model and data

A dynamic, partial adjustment model (Johnson, 1984) is developed to describe China's grain import behaviour. It is assumed that Chinese central planners are unable to make full adjustment in grain imports instantaneously in response to changes in exogenous variables, due to rigidities in institutions and inflexibilities arising from the marketing infrastructure. These may include bureaucratic lags, long-term grain trade agreements, and inflexibilities in the handling, transportation, and distribution of grain.

Let PGM~' represent the desired level of per capita grain import demand and hypothesize that:



PGM~ = 0¢o + O¢lPt + o¢2Yt + o~3Ft + o~4PGQt (1)

where, in period t, Pt is the relative price of China's grain imports to grain exports; Yt is per capita real income; Ft is the ratio of the total value of exports to the value of imports, a measure which is used as a proxy for foreign exchange availability; PGQt is per capita domestic grain production; and 0q, i = 0,1 . . . . 4, are coefficients to be estimated (Honma, 1982). The relationship between the actual and desired level of per capita grain import demand is specified, using the partial adjustment framework, as:

PGMt - PGMt_I = (1 - ~.)(PGM*t - PGMt-t) + ut (2)

where 0 < k < 1; 1 - k measures the rate of adjustment of PGM to PGM*; and u t is the random disturbance in period t. Substituting equation (1) into equation (2) and incorporating relevant dummy variables yields:

P G M t = [30 + [31Dlt + [32D2t + [33Pt + [33Yt + 135Ft + [36D3.Ft + 137PGQt + [38PGMt- l + ut (3)

where [3i, i = 0, 1,...7, is equal to o¢i(1-~); and [38, the coefficient of the lagged dependent variable term, is equal to ~.. Note that if ~. = 0, equation (3) is reduced to a static import demand equation.

Two dummy variables are included in equation (3) to measure the structural change in China's grain import demand caused by the adjustment of China's grain procurement policy. According to the distribution argument discussed in the previous section, the reduction of state grain procurement quotas since 1978 would lead to an upward adjustment of China's grain import demand, while the cumulative increase in the state grain purchases in the period 1983 to 1986 would cause a sudden decline in China's wheat and grain imports, other things being equal. Thus, D1 is a dummy variable which equals 0 for crop years before 1977/78 and 1 otherwise, while D2 is a dummy variable which equals 1 for 1983/84, 1984/85, 1985/86, 1990/91 and 0 otherwise. Thus, the coefficient of D1 is expected to be positive and that of D2 to be negative. Dummy variables, rather than grain procurement quantity figures, are used to proxy the adjustment of China's grain distribution system since collinearity problems arise in directly using procurement data.

A further variable is introduced to separate the effect of grain imports of a sudden increase in China's trade surplus arising from austerity programmes beginning in late 1989. This is the variable D3, a slope dummy variable on the ratio of the value of exports to imports, which is specified as equal to 1 for 1990/91 and 0 otherwise. The grain import model, equation (3), is also estimated in terms of wheat imports, by substituting per capita wheat imports (PWM) for PGM and per capita wheat production (PWQ) for PGQ. The basic grain import and wheat import models for China are estimated using the time series data for 1961/62 through 1990/91 reported in Table 5. 5

5The series for wheat imports, grain imports, domestic grain output, and domestic wheat output were obtained from USDA World Grain Situation and Outlook and converted to per capita figures using annual population statistics for China. The relative grain price series was derived as the ratio of the price of the dominant grain import, wheat, to a weighted average of the prices of the two main grain exports, rice and maize. The wheat import price series was calculated from wheat price data in International Wheat Council, World Wheat Statistics. In this calculation, China's wheat import price was derived as a

Food Policy 1995 Volume 20 Number 4 331l

China's grain imports." Xiao-yuan Dong et al.

Table 5 Data series used in the model

PGM PWM P F Y PGQ PWQ Year (kg) (kg) (%) (%) (yuan) (kg) (kg)

1961/62 9.23 7.43 86.11 108.58 76.63 169.14 21.64 1962/63 7.77 7.27 86.72 133.66 74.73 180.90 24.76 1963/64. 8.67 7.53 96.26 137.06 78.47 193.26 26.71 1964/65 7.60 7.14 113.24 130.33 84.78 213.29 29.56 1965/66 8.74 8.66 101.39 116.23 88.77 220.54 34.77 1966/67 6.82 6.74 79.18 110.75 94.68 233.64 33.91 1967/68 5.59 5.44 67.08 111.22 98.50 233.51 37.30 1968/69 4.51 4.50 64.25 113.77 95.15 218.46 34.96 1969/70 6.36 6.35 67.68 127.08 96.07 213.91 33.82 1970/71 4.42 4.41 82.12 102.24 100.12 237.99 35.17 1971/72 3.99 3.48 109.19 125.79 101.82 245.69 38.22 1972/73 7.16 6.07 84.08 126.76 105.06 233.40 41.28 1973/74 8.75 6.33 59.70 118.73 110.79 245.56 39.49 1974/75 6.90 6.32 80.25 95.97 110.62 256.48 44.97 1975/76 2.50 2.38 116.04 102.09 112.47 262.79 49.03 1976/77 3.37 3.37 133.65 109.65 114.56 262.91 53.76 1977/78 9.12 9.06 87.76 110.71 113.79 252.56 43.25 1978/79 11.65 8.36 69.29 94.14 120.11 279.89 55.93 1979/80 11.19 9.09 91.95 91.69 132.84 296.16 64.31 1980/81 14.94 13.97 95.12 98.34 142.07 281.13 55.93 1981/82 14.76 13.19 91.59 1 [)5.23 152.07 282.86 59.60 1982/83 15.54 12.80 117.66 121.98 159.66 307.10 67.38 1983/84 9.68 9.37 127.97 109.36 170.61 333.56 79.41 1984/85 7.38 7.15 205.34 100.35 188.89 350.13 84.87 1985/86 7.30 6.31 250.85 68.15 208.65 322.11 82.09 1986/87 10.80 8.02 264.05 75.79 216.47 33(I.23 85.18 1987/88 14.73 13.89 246.12 96.21 225.12 330.43 79.44 1988/89 15.51 14.14 233.37 90.58 233.70 318.17 77.92 1989/90 12.74 11.69 297.29 93.48 219.00 322.29 81.70 1990/91 9.14 8.31 261.48 122.41 227.85 342.72 85.89 Mean 8.90 7.96 128.89 108.28 135.14 265.69 62.74 St. Dev. 3.70 3.22 72.08 16.39 51.75 50.84 21.10

Note: PGM and PWM are, respectively, per capita imports of grain and wheat; P and F are indexes, respectively, of the relative grain price ratio and the export/import value ratio with 1960/61 as the base year; Y is real per capita consumption expenditure; PGO and PWQ are, respectively, per capita grain and wheat production.

The estimated results

As a first step, the static version of the import demand equation was estimated for both total grain and wheat using ordinary least squares (OLS). The estimated results are reported in the first two columns of Table 6. These regression results show systematic relationships between wheat and grain imports and the explana-

weighted average of the export prices of Argentinian Trigo Pan wheat, Australian standard white wheat, Canadian CWRS 3, EEC wheat and US soft red winter wheat. The changing shares of these major wheat exporters in total wheat exports to China were used as the respective annual weights. The grain export price series is the export share weighted average of the Thailand rice price and United States No. 3 yellow maize price, which are obtained from the FAO Production Yearbook. The series of per capita real income and the exports/imports value ratio are reported by China's Statistics Bureau in China Statistical Yearbook. Per capita real disposable income was derived by dividing the part of China's national income used as individual consumption by China's population and deflating this by the official index of consumer prices with 1950 as the base year.



Table 6 The regression results, estimated coefficients of the grain and wheat import demand equations, China, 1961/62 to 1990/91

Static equation Static equation Dynamic equation (OLS) (GLS) (OLS)

Grain Wheat Grain Wheat Grain Wheat

Constant 5.74 - 3 . 6 4 5.71 - 2 . 3 9 3.66 - 3 . 4 6 (1.061 ( -0 .92 ) (1.16) (-(I .60) (0.71) ( - 0 . 90 )

D1, 6.82 -6 .21 4.79 4.76 5.47 5.12 (5.31)" (4.95) ~ (3.12) ~' (3.27) ~ (5.13) ~' (4.41)"

D2 t - 3 . 2 8 - 1.89 - 3 . 9 4 - 1.83 -3 .51 - 2 . 1 9 ( -2 .62 ) ~ ( - 1.52) ~ ( -3 .16 ) ~' ( - 1.44) ~ ( -3 .49 ) ~' ( - 1.98) b

Pt - 0 . 0 3 -0 .01 - 0 . 0 3 -I).02 - 0 . 0 2 -0 .01 ( -2 .23 ) h ( - 1.34)" ( - 2 . 8 7 ) ~' ( - 1.68) ~ ( - 1.93) b ( - 1.08)

Y~ O. 10 O. 10 O. 11 (I. 10 0.07 0.08 (3.38) ~ (3.36) a (3.52) ~' (3.30) ~' (2.86) ~ (2.83) a

F~ 0.06 0.07 0.04 0.05 0.05 0.05 (2.25) b (2.52) '~ (1.50) ~ (1.99) b (1.92) b (2.10) t'

D3.F~ - 0 . 0 2 - 0 . 0 3 -0 .01 - 0 . 0 3 - 0 . 0 2 -0.113 ( -1 .10 ) ( -1 .61)" ( - 0 . 76 ) ( - 1 . 58 ) ~ ( -1 .21 ) ( - 1 . 68 ) ~

PGQt - 0 . 0 6 -1). 19 -0.115 - 0 . 1 6 - 0 . 0 5 -11.15 ( -3 .10 ) ~ ( -3 .00 ) ~' ( -2 .36)" ( -2 .65)" ( - 2 . 48 ) ~ ( -2 .55)"

PGMt i 0.35 0.31 (3.62) ~ (2.74)"

Adj. R 2 0.79 0.75 0.83 0.78 0.87 0.82 D W 1.23 1.44 2.01 2.07 D H 0.51 - 0 . 6 2

Notes: In the wheat equations, per capita wheat quantity and per capita wheat imports are substituted for the corresponding per capita grain figures; t-statistics are reported in parentheses; ", b, and c denote, respectively, that the test is significant at the level of 1%, 5%, and 10% for a one tail test.

tory variables. All the estimated coefficients except the constant terms have the predicted sign and are statistically significant at the 10% level or higher. However, the Durbin Watson statistics are low, indicating a problem of autocorrelation. The consequence of autocorrelation is that the OLS estimates are inefficient, and test statistics are biased.

One possible reason for the problem of autocorrelation is that the error term may follow a first order autoregressive scheme. The generalized least squares estimation procedure (GLS) was applied to correct this problem. The GLS results, shown in the middle columns of Table 6, are consistent with the OLS estimates of the static model. When the serial dependence in the residuals has been corrected, the explanatory power of the model is also improved.

Another likely cause of serial dependence in the residuals could be model misspecification, such as omission of relevant variables. If China's grain import demand follows a partial adjustment process, the lagged dependent variable is appropriately included in the import demand equation. The partial adjustment model was estimated by the OLS method, and the results are shown in the last two columns of Table 6.

The partial adjustment models, for both grain and wheat imports, yield estimated equations with considerably greater explanatory power; the value of adjusted R 2 increases from 0.79 to 0.87, for example, in the case of grain imports. The value of Durbin's H-statistic (DH) in these two dynamic equations indicate that the error terms are not serially dependent. Ramsey RESET tests also provide no evidence that either estimating equation faces the problem of missing variables


China's grain imports." Xiao-yuan Dong et al.

1 7 . 5

15,0

t 2 . 5

~o,o

~z

7.5

5.0

2.5

A c t u a l

Fo recas t . . . . /~

/ i i

f \ x \ / / ] x x. t

1962 1965 1968 1971 1974 1977 1980 1983 1986 19B9

Y e a r

Figure 1 Actual and predicted per capita grain imports

or incorrect functional form. Hence, the OLS estimates of the partial adjustment equation appear to be consistent and asymptotically efficient, although they may be biased in the small sample regression. The coefficients of 0.35 and 0.31 for the lagged dependent variables, which are statistically significant at the 1% level, imply a point estimate of 0.65 for the coefficient of adjustment in the grain import equation and 0.69 for the wheat import equation. The dynamic model appears to be a more accurate specification of China's import behaviour for both grain and wheat then the static model. Plotting actual and predicted grain imports, as shown in Fig. 1, also reveals that the dynamic specification performs relatively well in forecasting grain imports in China, especially since the mid-1970s.

The estimated results show that per capita wheat imports and grain imports vary inversely with domestic production and directly with real per capita consumption expenditure, the income proxy; these coefficients are statistically significant at the level of 1% for a one tail test. The coefficient on the proxy of foreign exchange availability, the ratio of export to import value, has the expected sign and is significant at the 5% level in each equation. The slope dummy on the trade ratio variable has a negative sign, suggesting that the state austerity programme dampened the effect of the trade balance on China's cereal imports. This impact is significant at the 10% level only for wheat imports. The coefficients on the relative price variable have the expected signs, but only for grain imports in this statistically



Table 7 Short-run and long-run import elasticities indicating the responsiveness of grain and wheat imports to key explanatory variables

Grain imports Wheat imports Variable Symbol Short-run Long-run Short-run Long-run

Relative price P -0.28 -0.43 -0.18 -0.26 Income proxy Y 1.11 1.71 1.33 1.92 Foreign exchange F 0.58 0.89 0.74 1.04 Domestic production PGQ or - 1.40 -2.15 - 1.03 - 1.49

of grains or wheat PWQ

significant at the level of 5% .6 The coefficients on the dummy variables D1 and D2 in both equations indicate that autonomous per capita grain and wheat import demand shifted up by 5.5 kg and 5.1 kg, respectively, since 1977/78, but declined by 3.51 kg and 2.19 kg during the period encompassing 1983/84 to 1985/86 and 1990/91. These variables, proposed to capture the impact of the adjustment of the domestic grain procurement system on import demand for grain and wheat, are statistically significant at the 5% level or higher.

From the estimated coefficients, short-run average import elasticities are calculated at the means of the relevant data series. These are converted to long-run elasticities by dividing by the corresponding partial adjustment coefficient and reported in Table 7. The least response of China's grain imports is shown for changes in the relative price of grain imports to grain exports. This short-run import elasticity estimate is -0 .28 and the long-run estimate is -0.43. Estimates of the elasticities of wheat import demand with respect to changes in relative grain prices are even lower but the coefficients on which these estimates are based are not significant. China's grain (wheat) imports are somewhat more responsive to changes in foreign exchange availability than to changes in relative grain prices; the estimates of these short-run elasticities are 0.58 (0.74), increasing to 0.89 (1.07) for the long-term.

The results suggest that China's imports of grain and wheat are more responsive to changes in income than to changes in foreign exchange availability and relative price and that wheat imports respond more to income growth than do grain imports. For example, the estimated short-run income elasticity of grain import demand is 1.11 (rising to 1.71 in the long-run) whereas the corresponding income elasticity of wheat import demand is 1.33 (increasing to 1.92 in the long-run). Defining the income elasticity of total grain imports as a weighted average of the respective elasticities for wheat and non-what grain imports, the short-run income elasticity of non-wheat grain imports is derived as -0.85, given average shares of wheat and non-wheat imports of 89.9% and 10.1%. Since rice accounted for an insignificant proportion of China's grain imports, it can be concluded that China's coarse grain imports have a negative response to changes in real income. This could occur if the reduction of direct coarse grain consumption resulting from an increase in income was more rapid than the growth of the demand for feed grain, other things being equal. This result is consistent with our conjecture and other evidence 7

6Estimated equations in which the real price of wheat is substituted for the relative grain price ratio (price of wheat/weighted price of rice and corn exports) produce estimated coefficients for the price variable which have the expected negative sign, but which are not statistically significant. 7Between 1978 and 1987, the feed use of grains in China increased by 48 million tonnes (Crook, 1988). However, direct coarse grain consumption by rural residents can be estimated to have declined by nearly 61 million tonnes (derived by applying per capita coarse grain usage figures in 1978 and 1987, as shown in Table 3, to the 1979 rural population base of 790 million).



that upgraded standards of direct grain consumption, rather than increased animal protein consumption, has so far been the dominant force driving China's cereal importation.

The highest response of China's grain imports to changes in the non-dummy explanatory variables is seen for domestic grain production. The estimates of these elasticity coefficients for grain (wheat) are -1.40 (-1.03) for the short-run; they increase to -2.15 (-1.49) for the long-run. This finding is in sharp contrast to the view that "the continuation of grain imports (by China) reflects the existence of problems involving distribution rather than production" (Wong, 1980). Factors relating to grain production appear to have played an important part in explaining China's grain import programme.

The relative importance of each explanatory variable in explaining China's grain imports can be estimated using the standardization and decomposition process summarized in Yamane (1964) and followed by Borsody (1987). The standardized partial regression coefficients and the respective relative weights in long-run equilibrium are shown in Table 8. The two dummy variables that proxy the adjustment of China's food procurement and distribution system, D1 and D2, together account for 33.1 (27.7)% of the explained variation in China's grain (wheat) imports during the period under consideration. The remaining 66.9 (72.3)% of the variation is contributed by the other economic variables. Of those economic factors, real disposable income explains 30.3 (32.6)% of the change in grain (wheat) imports; domestic grain (wheat) production accounts for 18.4 (25.8)%; and the relative price ratio and the foreign exchange proxy contribute to 11.6 (6.4)% and 6.6 (7.5)% of the variation, respectively.

Conclusions and implications for the future

The data and analysis presented in this paper show that China's grain import programme embodies complicated forces which defy explanation by any single factor. China's grain distribution system, the situation of domestic cereal production, increasing demand for a better diet as income has increased, the availability of foreign exchanged and the relative cost of grain imports all play parts in explaining China's grain imports. These factors do not each have an equal weight in the determination of China's trade behaviour. The distribution argument, diet improvement considerations and the need to make up shortfalls in domestic cereal production appear to have been more dominant influences on China's grain import decisions than relative cost (arbitrage) and foreign exchange considerations.

Using dummy variables, we identify changes in state procurement policy and the

Table 8 Relative importance of variables explaning Cbina's grain and wheat imports

Grain imports Wheat imports Standardized Relative Standardized Relative

Variable coefficient weight (%) coefficient weight (%)

Policy adjustment D1 0.740 22.9 0.795 21.4 Policy adjustment D2 -0.330 10.2 -0.234 6.3 Relative price -0.375 11.6 -0.239 6.4 Income proxy 0.980 30.3 1.212 32.6 Foreign exchange 0.212 6.6 0.277 7.5 Domestic production -0.594 18.4 -0.956 25.8 Total 100.0 100.0



ill-functioning grain distribution system as significant factors that explain the fluctuations in China's cereal imports. The distribution issue is expected to continue to play a part in China's grain import decisions in order to accommodate the delicate transition from a strictly centrally planned economy to one in which market forces are increasingly brought to play and local economic agents enjoy more autonomy. However, with success in the implementation of economic reform, China should eventually be able to establish a more efficient resource allocation system. With such a system, China's grain trade behaviour could adjust more in line with economic forces and comparative advantage rather than serve merely as a buffer against domestic agricultural shortage and surplus associated with procurement policy and distribution problems. Hence, the importance of grain procurement and distribution considerations to China's grain imports may gradually wane over time.

China's grain production is expected to grow as long as the Chinese government upholds economic reform and maintains a high priority for investment in agriculture. But the growth rate of China's cereal production may moderate due to deterioration in the arable land-labour ratio and barriers to increases in grain yields. Thus, the need to make up the shortfall of domestic grain production is likely to continue to be a crucial motive in China's grain importation.

The inclusion of real income in this analysis sheds light on the impact of improvement in diet on China's grain imports. Economists have predicted that China may emerge as a major importer of feed grain as the trend of diet improvement proceeds. The issue, in part, is one of timing. The results of this paper suggest that despite a steady increase in the demand for meat, upgrading of direct cereal consumption standards through an ongoing shift away from inferior cereals and potatoes toward wheat and rice has been the factor in diet improvement that has had the most important implications for China's trade in grains to date. As a result, China has become an increasingly significant coarse grain exporter, instead of a sizeable feed grain importer, as Chinese real income has risen.

The demand for a better diet will continue to be an important driving force for China's grain importation as a result of China's economic reform and moderniza- tion efforts. However, the upgrading of food consumption standards is expected to be in line with the traditional oriental pattern of diet, which is dominated by direct consumption of cereals and vegetables. Animal protein consumption will experi- ence steady growth; yet emphasis can be expected to be on increased consumption of commodities such as poultry and eggs which have a low rate of grain-protein conversion. As a result, pressure on feed grain demand from a rapid growth in national income is expected to be moderate. China's demand for wheat and rice imports is expected to continue to increase, while its coarse grain exports may fall gradually. We conclude that a dramatic shift in China's cereal imports from wheat to feed grain is unlikely to occur in the immediate future.

References Anderson, K. (1990), Changing Comparative Advantage in China, OECD, Development Centre

Studies, Paris. Borsody, L. (1987), Forecasting USSR grain imports, Food Policy 12 (2), 94-105. Carter, C. and Zhong, F. (1988), China' Grain Production and Trade. Westview Special Studies on

China. Westview Press, Boulder. Chinese State Statistics Bureau, China's Statistical Yearbook, various issues, Statistical Publishing

House, Beijing. Colby, W. (1991), China's livestock feed industry. China: Agriculture and Trade Report, Situation and

Outlook Series. Economic Research Service, United States Department of Agriculture.



Crook, F.W. (1988), China's Grain Supply and Use Balance Sheets. Economic Research Service, United States Department of Agriculture.

Donnithorne, A. (1970), China's Grain: Output, procurement, transfers and trade. Occasional Paper, No. 2 Economic Research Centre, Chinese University of Hong Kong.

Food and Agricultural Organization of the United Nations, FAO Production Yearbook. Various issues, Rome.

Halbrendt, C. and Gempesaw II, C. (1990), A policy analysis of China's wheat economy, American Journal of Agricultural Economics 72, 268-278.

Honma, M. (1982), An econometric analysis of world wheat trade: A trade flow approach. PhD thesis, Iowa State University, University Microfilms International.

International Wheat Council, World Wheat Statistics. Various issues, London. Ishikawa, S. (1977), China's food and agriculture: A turning point, Food Policy 3 (2), 90-102. Johnston, J. (1984), Econometric Methods (3rd ed.). McGraw-Hill, New York. Lardy, N.R. (1985), Price, markets and the Chinese peasants in C.K. Echer and J.M. Staatz (eds),

Agricultural Development in The Third World, Johns Hopkins University Press, Baltimore. Mah, F. (1971), Why China imports wheat? China Quarterly 45, 128-129. Oi, J.C. (1986), Peasant grain marketing and state procurement: China's grain contracting system,

China Quarterly 106, 272-305. Perkins, D. (1975), Constraints influencing China's agricultural performance in China: A Reassessment

of the Economy, Washington DC. Surls, F.M. (1978), China's grain trade Chinese Economy Post-Mao. A compendium of papers for the

Joint Ecnomic Committee Congress of the USA, 9 November, 1978, US Government Printing Office, Washington DC.

Sicular, T. (1985), China's grain and meat economy: recent developments and implications for trade, American Journal of Agricultural Economics 65 (5), 1055-1066.

United States Department of Agriculture, Foreign Agricultural Service, World Grain Situation and Outlook, various issues.

Wilson, D. (1964), Interview with Chen Ming, Far Eastern Economic Review, Hong Kong, May 21, p. 367.

Wong, J. (1980), China's wheat import programme, Food Policy 5 (2), 117-131. Yamane, T. (1964), Statistics, An Introductory Analysis. Harper & Row, New York.


china's grain imports: an empirical study

Documents