Experts close to the decision-makers revealed that the market-oriented reform could be implemented early next year.

Headed by the General Office of the State Council, a working team composed of a series of government departments and think-tanks - including the State Development Planning Commission and the State Economic and Trade Commission - has put together a market-oriented report.

"The report has been submitted to top policy-makers for final reviews, though there are still some controversies around it," confirmed Xu Xiaoqing, deputy director of the Agricultural Development Department at the Development Research Centre, which is involved in drafting the report.

However, Xu said before the nationwide research was launched early this year, policy-makers have been asked to make a more thorough market-driven reform plan.

Based on the principle, insiders say the report suggested abolishment of the grain purchase task, which is designated by the State to farmers and circulation enterprises.

It would allow for all grain transportation and transaction licences, including the government's purchase, to be totally market-driven.

Also, according to the report, the five-year practice of protective pricing for farmers to sell their grain would be abolished and direct subsidies introduced to assist farmers.

The State monopoly on grain circulation would be broken and different types of dealers, including private ones, would be able to buy grain directly from farmers.

State-owned enterprises (SOEs) would not enjoy policy loans.

Except for capital used for the State's strategic grain reserve, all grain dealers could obtain commercial loans.

The report suggests a series of measures to improve the competitiveness of China's agricultural enterprises and promotes the organization of rural co-operatives by farmers.

The proposed market-oriented reform is fundamentally different from the grain circulation practice adopted in 1998.

In the late 1990s, the central government required SOEs engaged in the grain circulation business to purchase all products from farmers at a set price.

Private grain dealers were not able to directly buy grain.

State enterprises were asked to sell their grain at higher prices, which allowed the government to control the market and avoid losses potentially caused by the protective price.

However, the policy has not achieved its expected goal.

Market prices have remained lower than the price State grain enterprises pay - a result of the difficulty government authorities have faced in stopping private dealers from trading directly with farmers.

Many State enterprises had to sell their grain at below-cost prices to reduce their stocks.

As a result, State grain circulation enterprises nationwide have accumulated losses that have to be covered by the government.

Losses hit 200 billion yuan (US$24 billion) by 2000, according to Lu Feng, an economist specializing in agriculture at Peking University.

Farmers' income has not been remarkably improved either. Many State enterprises have to decrease the quality of farmers' grains, which depresses the price. SOEs could then reduce their losses.

The heavy losses of State-owned grain enterprises is both a stimulus to reform the circulation system and a barrier to adopt reform.

With market-driven reform, which could lead to the abolishment of the protective price, the State's financial burden used to subsidize its grain companies could be lowered.

However, "if a truly market-oriented reform on the grain circulation is adopted, it would be impossible to reclaim the losses as many State grain enterprises would go bankrupt due to the severe market competitions," said Li Chenggui, a senior researcher with the Institute of Rural Development at the Chinese Academy of Social Sciences.

Yet Dou Ming, president of Beijing Orient Agribusiness Consultants, said the losses could be considered as a State subsidy for farmers and that the interests of the State grain enterprise should not impede market oriented reform.

Xu said technically, old losses could be gradually off-set by the State, while new losses under a free grain market could be absorbed by individual enterprises.

Abolishing the protective price would reduce the grain output as a result of a lower market price.

Following a 9 per cent shrinkage in 2000, China's grain output further decreased by 1.9 per cent to 450 million tons last year, despite the protective price floor.

But a low output could push the grain price higher, according to experts who favour a more liberalized market.

However, to accept decreased output under a market-oriented reform requires policy-makers to change their thinking about grain safety, said Zhao Xiao, an economist with Peking University.

(Business Weekly August 31, 2002)