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Cablegate: China's Food Security Concerns: Perception

VZCZCXRO4441
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3598/01 2610632
ZNR UUUUU ZZH
P 170632Z SEP 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 9968
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHGV/USMISSION GENEVA 2289

UNCLAS SECTION 01 OF 03 BEIJING 003598

SENSITIVE
SIPDIS

STATE PASS USDA/ERS
STATE PASS USDA/FAS/ITP CHINA DESK
STATE PASS USTR FOR STRATFORD/SCHWAB
TREASURY FOR OASIA
GENEVA PASS TO USTR

E.O. 12958: N/A
TAGS: ECON WTRO EAGR ETRD EINV CH
SUBJECT: China's Food Security Concerns: Perception
and Reality

Refs: A) Beijing 03519,
B) USDA/FAS GAIN Report Number: CH8062;
C) USDA/FAS GAIN Report Number: CH8063;
D) FBIS Number:Cpp20080725338011;
E) USDA/FAS GAIN Report Number CH8077
and 2007 China Statistical Yearbook;
F) USDA/FAS Beijing Mark Petry Email

(U) This cable contains business sensitive information.
Please protect accordingly.

1. (SBU) Summary: Although China is largely self-
sufficient in grain production, rising global and
domestic food prices have reinforced longstanding
Chinese concerns about food security. This has
sparked a debate in China over whether China's current
policies need to be adjusted to ensure China can
continue to meet its goal of food self-sufficiency.
In addition, Chinese government officials and press
have become increasingly vocal in recent months about
a perceived threat that foreign companies and trade
could pose to China's food self-sufficiency. China's
focus on the issue has also been sharpened as rising
incomes have led to growing Chinese food consumption,
while development and pollution have whittled away at
China's arable land. End Summary.

2. (SBU) The official Chinese press has recently
carried numerous articles penned by prominent policy
makers and economists hailing the importance of food
security (Ref A). Likewise, rural economy experts at
the Chinese Academy of Social Sciences (CASS), Chinese
Communist Party Central Policy Research Office
(CPC/CPRO), State Council Development Research Center
(DRC), Renmin University, and Henan Agriculture
University all emphasized the importance of food
security in recent meetings with Econoffs. Although
food security is not a new topic, and indeed has long
been an important theme in China's rural and
agricultural policies, the tempo of the discussion
seems to have increased.

--------------------------------------
Overkill?: China's Food Security Focus
--------------------------------------

3. (SBU) The Chinese government has traditionally
believed that domestic production--vice trade and
diversified sourcing--is the best means to guarantee
the country's food supply. The government most-
recently reiterated this goal at an early July 2008
State Council meeting on China's grain security plan
chaired by Premier Wen Jiabao (Ref B). The plan again
stated China's grain self-sufficiency target rate of
95 percent. In July Wen also announced an additional
$3 billion in state support for the development of
agricultural biotechnology over the next 15 years,
signaling China's intent to use biotechnology as a key
means to address food security (Ref C). Rural and
agriculture issues are also on the agenda to be
discussed at the upcoming Third Plenary Session of the
17th CPC Central Committee in October (Ref D).

4. (SBU) China exceeds the 95 percent self-sufficiency
target rate in rice, wheat and corn, and in recent
years has produced and exported a significant surplus
of most agricultural products, especially processed
products. However, China has become a large net
importer of oilseeds and edible oils, and according to
Chinese government statistics, domestically produced
soy beans held only 31.2 percent market share in 2007.
(Note: According to CPC/CPRO official Zheng Xinli 62
percent of edible oil is imported and 70 percent of
domestic production comes from foreign-invested
companies that imported oil crops from their home
countries. End Note.)

5. (SBU) Adding to the perception of decreased self-
sufficiency, in the first half of 2008 China became a
net food importer in cash terms, as soaring prices for
primary and intermediate commodities ate into its
surplus in value-added, processed agricultural exports.
(Note: While we do not yet have numbers for 2008

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agriculture production, the USD 7 billion food deficit
for the first half of 2008 is only about three percent
of China's 2006 total half-year farming and animal
husbandry production. Since agricultural production
has increased, the share should be even smaller now.
Ref E. In Ref A Ren Yifang, Secretary General f the
China Society for WTO Studies, cited a USD 10 billion
deficit in agriculture trade wit the United States.
According to USDA statstics the 2007 U.S.-China trade
deficit in th broader agricultural products category
was atually USD 5.4 billion. Ref F. End Note.)


--------------- --------------------------------------
Policymakers Balance Rural Development, Food Security
--------------------------- --------------------------

6. (SBU) Many rural economists are concerned that the
goals of increased rural incomes and grain self-
sufficiency are incompatible. Henan Agricultural
University economist Zhang Dongping asserted that
there is often an inverse relationship between
economic development and grain production.
Transitioning labor from farming to non-farm
activities is needed to increase agricultural
productivity and raise living standards, according to
Zhang, but local leaders also face a dilemma because
raising rural incomes often means de-emphasizing grain
production. While Henan and some other traditional
grain producing centers are trying hard to balance
industrialization with the central government's goal
of maintaining grain production, he thought a number
of breadbasket provinces such as Shandong, Zhejiang,
Jiangsu and Hunan are shirking their role in helping
China maintain grain self-sufficiency. (Note:
According to Chinese government statistics, Henan's
overall grain production by volume increased 17.8
percent between 2000 and 2006. Over the same period
production fell 14.5 percent in Jiangsu, 5.2 percent
in Shandong, 0.7 percent in Hunan, and 36.5 percent in
Zhejiang. End Note.)

7. (SBU) Gross rural incomes increased 10.3 percent in
the first half of 2008, and Embassy contacts at CASS
and Henan University agree higher income and benefits
for farmers combined with direct subsidies for grain
production have thus far helped maintain production
despite the loss of arable land (e.g. through
urbanization and desertification) and water shortages.
However, agriculture inputs prices rose at the same or
a higher rate as production, meaning that net farm
income actually may not have improved significantly.
Also, the Ministry of Agriculture recently announced
that the per capita urban-rural income gap expanded in
2007 to RMB 9,464 (USD 1,382), the largest in 30 years.
In meetings with Econoffs, Chinese scholars such as
Yang Tuan at CASS and Wen Tiejun at Renmin University
expressed reservations about the reach and
effectiveness of recent policy initiatives to improve
rural livelihoods and reduce poverty through direct
subsidies, encouraging specialized rural collectives,
eliminating the agriculture tax, and channeling funds
to improve the rural safety net. Wen, Yang and others
emphasize the central government's over-riding
concerns about social and political stability when
dealing with rural issues.

--------------------------------
Confidence in the Market Lacking
--------------------------------

8. (SBU) Market mechanisms and the private sector
clearly are playing an increasing role in developing
China's agriculture sector and meeting its food
security goals. Beijing University economists Lu Feng
and Xie Ya, writing in a December 2007 academic
working paper, even assert that food has ceased to be
a sensitive political issue and that the market
economy is now the predominant tool shaping solutions
to China's food security challenges.

9. (SBU) While most of our interlocutors agree that
market forces are playing a greater role, the majority

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believe that food policy, especially with regard to
price stabilization, will continue to be of critical
importance because food items are the second largest
part of the Chinese CPI after housing and are the most
variable. All expressed concern about allowing the
market too much of a role in agricultural policy and
the setting of prices. A Henan Provincial Development
and Reform Commission official recently cited the role
of foreign speculators in driving up grain prices, and
editorial comments in the PRC press raise concerns
about the vulnerability of China's agricultural sector
to foreign competition and the growing role of foreign
investors in China's grain storage industry. Recent
articles have criticized growing foreign investment in
pork production as well, noting the activities of a
subsidiary of Goldman Sachs in buying up small scale
producers. (Note. According to press reports a
Goldman Sachs-controlled fund is investing in Henan
Province-based Shuanghui Group and its subsidiary,
Henan Shuanghui Investment and Development Co.,
China's largest meat and poultry processor. But
Goldman Sachs apparently has not received final
approval for the deal. End Note.)

10. (SBU) A number of Embassy contacts emphasized that
such fears are not new. CASS Rural Development
Institute Director General Zhang Xiaoshan noted that
similar arguments were made around the time of China's
WTO accession in 2001. Cargill's Director of
Government Affairs in China told Econoffs that these
concerns also underlie criticism of large
multinational agricultural commodity firms in China
and that Cargill is lobbying Chinese policymakers to
avoid measures to protect domestic producers from the
perceived threat. China recently added new
restrictions on investments in the oil seed crushing
industry to the latest version of its foreign
investment guidance catalogue.

-------
Comment
-------

11. (SBU) Most scholars highlight the deep-seeded
historical and political concerns associated with food
security and rural development issues. These concerns
include: the national security implications of losing
grain self-sufficiency; rural instability resulting
from lost domestic markets; and inflation that could
eat away at Chinese citizens' savings. These analysts
emphasize that failure to tackle these challenges
could cripple the leadership's ability to govern, and
note that the leadership's interest in food security
at times affects its ability to engage constructively
with international partners.

12. (SBU) While compared to Japan or even the United
States, the volume of Chinese agricultural imports
remains low, the composition of these imports has
concerned Chinese policymakers. Oilseeds and edible
oils in particular touch many sensitive markets,
including cooking oil and animal feed. Edible oil is
an important inflation bellwether for many Chinese.
After seeing the impact of, in their view, unfettered
market access on edible oil and oil seed prices, it is
not surprising that many Chinese policymakers are not
anxious to throw open domestic agricultural markets.

13. (SBU) Faced with the multiple goals of improving
farmers' net incomes while also ensuring grain
security and price stability, Chinese rural
policymakers need assurances that they can control
outcomes before they open to imports.

RANDT

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