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CCTV News: US Stocks and China’s Farm Economy

December 28, 2010

Last Thursday I was on CCTV News BizAsia offering my regular commentary.  Due to the holiday weekend (Christmas isn’t an official holiday in China, but it’s become a big night to go out), there was a delay in posting the video onto their website, and only the full show is available, rather than smaller clips.  You can access it here.

In my first Q&A session, at the 4:02 mark, I talk about the recent rally in U.S. stocks, as well as oil and other commodities.  I note the market’s performance reflects a widespread feeling of confidence among investors that the recovery is finally and solidly on track.  However, a minority of critics argue that the Fed’s quantitative easing policy, which has injected new money into the economy, is fueling a bubble.

Anyone who has been following the inflation story in China might want to check out the second interview segment, at the 20:55 mark, which concerns a recent high-level government meeting on China’s rural economy.  Chinese policymakers, I point out, are in a big of a bind here.  On the one hand, they want to ease mounting food inflation by expanding the supply of agricultural goods.  The problem is, absent productivity increases, that means squeezing farmers — keeping their incomes flat in the face of  rising prices for other goods.  On the other hand, the government wants to boost farmer’s incomes.  Usually that’s done by restricting supply.  The two goals are at odds with one another.  Perhaps China can square the circle by boosting production and paying farmers subsidies to make up the difference, but that’s not a long-term solution.

The real solution, I point out, is to increase productivity in the farm sector, by allowing larger scale of operation and greater mechanization.  Traditionally, the Chinese government has been reluctant to push in this direction.  Partly its reluctance stems from ideological reasons — the regime’s roots in Mao’s peasant-based revolution that broke up large landholdings.  Partly it’s due to practical concerns about employment.  Half of China’s population still works on the farm, often in subsistence agriculture.  Modernizing the farm sector, many worry, would leave many farmers without a job, flooding the urban labor market (that’s why I’ve always maintained, by the way, that China is nowhere near running out of cheap labor, at least not on the low-skill end of the market).  Nevertheless, policymakers are increasingly coming around to the view that modernizing China’s farm sector needs to be a priority, if food supply is going to keep up with ever-rising demand.

7 Comments leave one →
  1. William Madden permalink
    December 28, 2010 11:05 pm

    I really worry about the small villages that rely on agriculture, and contributions by their overseas relatives, for their survival. The last time I was in China I saw a demonstration of a large tractor plowing a rice field on television and thought that this may be the end of the small farming villages in Guangdong, similar to the way most of the family farms in the States have disappeared. Maybe this is progress, but with many farms still using water buffalo and rototillers to plow I would hope there would be a way to improve village farm production and profitability without destroying the lifestyle, rather then letting it evolve.

  2. December 29, 2010 2:39 am

    Check out Chaoda Modern, a Hong Kong listed Chinese company. I think they offer China their best way forward on the agriculture front. Outside the government, they are China’s largest holder of land use rights and farmers that “throw in” (i.e. lease their land rights to Chaoda) with them are reputed to double or triple their income.

  3. December 29, 2010 8:20 am

    “The real solution, I point out, is to increase productivity in the farm sector, by allowing larger scale of operation and greater mechanization”

    The reason that works is because you’re massively driving down costs/unit. It would basically put the farmers out of work (most, not all) and drive them into the urban centers looking for a new job. Remember this is basically the opposite of the Great Leap Forward, where China tried to replace machines with people.

    So farmers are hanging up their bamboo hats, and pouring the cities looking for work. But they can’t get a job with out Education, so China woud really have to put some kind of “if you’re a farmer, we’ll subsidize your education at this appointed training school” in the top 5 2nd tier cities.

    Sounds like a plan.

    Again, in general I don’t think higher food prices is THAT bad, especially if part of it can be attributed to higher quality standards. Since the Govt has more money than God, it’s kinda baffling that they don’t subsidize food prices. Eg. If they really wanted to lower the cost of Apples, they could.

  4. Tom permalink
    December 29, 2010 8:50 am

    This is a huge issue, thanks for bringing it more into the light.
    Sadly throughout China’s history, the govt. has almost always opted to squeeze the farmer for the comfort of the city residents (peasant based revolutionary parties included).
    I worked in a couple of small schools in rural Guangxi and saw the students eyes grow big as I talked about this very problem. As farms grow, the produce prices fall, and that farmers don’t really become rich from it since there is so much equipment that must be purchased and maintained.
    Also given the current state of the American Midwest, do you really think commercial farming, or large scale operations are the best for the farmers? Even with subsidies American farmers are struggling.

    One final thought is that people are leaving the countryside as it is, farming just isn’t an attractive profession. Income for farmers is going to have increase 10-20 fold just to make it interesting. I had students whose parents made less than $.30 a day working on the land, a student holding an advertisement in a county level town makes that much per hour.

    http://seeingredinchina.wordpress.com/

  5. Hua Qiao permalink
    December 29, 2010 11:02 pm

    This is a reflection of the imbalance in China’s economy. China’s agricultural production is principally domestic focused and highly fragmented. I would submit that it goes further than just agricultural production. The entire wholesale and retail domestic distribution system and the service industry is highly fragmented and terribly inefficient.

    I was in a grocery store in Beijing where there were 5 to 6 employees assigned to each aisle (the aisles were only about 60 feet long). How many restaurants do you go into where you are greeted with half a dozen hostessess?

    There is significant inefficiency that adds to the cost all along the distribution chain not to mention corruption of officials who take their skim, adding to retail prices.

    Same dilemma faces China’s retail industry that agriculture faces.

  6. llisa2u2 permalink
    January 15, 2011 2:08 am

    With strategic regional re-development , community and transportation planning, it is possible to overcome the drastic disparities with minimum social disruptions.

  7. bandsma permalink
    February 2, 2011 11:49 pm

    I’m a little late to the post here but it seems that they other obvious solution would be to start allowing greater imports of agricultural products.

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