Since March, five research teams headed by the State Council's Policy Research Department have been organized to study the feasibility of such a reform nationwide, and preliminary research has been completed, sources said.

Officials were unavailable for comment, but according to Li Chenggui, a senior researcher with the Rural Development Institute under the Chinese Academy of Social Sciences (CASS), the reform will be aimed at abolishing the current monopoly of State-owned enterprises (SOEs) on grain circulation and cutting the State's subsidies to them.

"The research participants have called it a more thorough market-driven reform plan," Li told Business Weekly.

He was echoed by Xie Yang, deputy director of the rural research branch of the Rural Research Development Research Centre, a State Council think-tank.

"It is not a question of whether the timing is right for such a reform; it is a must," said Xie.

The proposed market-oriented reform is fundamentally different from the current grain circulation practice adopted in 1998, which is marked by the State's monopoly on grain circulation.

In 1998, the central government required SOEs engaged in grain circulation business to purchase all grain products from farmers at a set price. Private grain dealers were forbidden from buying grain directly from farmers.

State grain enterprises are asked to sell their grain at the higher price, thus allowing the State to control the market price.

Under this plan, the government hoped to meet its target of increasing farmers' income without spending much, said Chen Xiwen, director of the Research Development Centre.

However, the policy has not achieved its expected goal. Market prices have remained lower than the price State grain enterprises pay since 1999 - a result of the difficulty government authorities have had in prohibiting private dealers from trading grain directly with farmers. Many State grain enterprises have had to sell their grain at below-cost prices to reduce their inventory.

As a result, State grain circulation enterprises nationwide have piled up losses that have to be borne by the State. Losses have accumulated to 200 billion yuan (US$24 billion) by 2001, estimated Lu Feng, an economist specializing in agriculture at Peking University.

Experts have been calling for the abolishment of the policy, saying it should be replaced by a freely circulating grain system.

Despite the growing criticism, the policy has been largely maintained "because there is no other solution to protect the interests of both farmers and State-owned grain circulation enterprises without pain," said Xie during an interview with Business Weekly. The central government has constantly been adjusting the policy to make improvements. Last year, it allowed Zhejiang and other major grain consuming provinces and municipalities to set up a freely circulating market. In major grain producing provinces, the grain market has remained tightly controlled.

"We expect the ongoing massive research to lead to the establishment of a free grain market nationwide, which would benefit farmers in the long run," said Li of CASS.

However, reaching that goal is a challenge. A market where grain freely circulates could result in a lower market price, which would severely impact farmers whose annual income growth rate has already decreased to around 4 per cent, much lower than the urban level of 7 per cent.

But a low market price would reduce grain production, which could accordingly push the grain price higher in the following year, maintained experts who favour a more liberalized grain market.

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.

Distinct factors - such as natural disasters, a policy encouraging farmers to plant more cash crops and the refusal of some loss-making State grain enterprises to buy all the grain produced by farmers - have all contributed to the reduction.

Li also admitted other obstacles would keep a market-oriented grain circulation system from being adopted.

"Private grain dealers are much more competitive than SOEs, and a free circulation market would cause lots of State grain enterprises to go bankrupt," he said.

How to deal with the estimated 200 million tons of grains - nearly half of China's total output - stored by the State grain enterprises would be another problem. If released onto the market, the supply would immediately push down the market price of grain.

(Business Weekly July 2, 2002)