By Qin Zhongchun, Research Department of Rural Economy, the DRC

Research Report No 116, 2009

Grain reserves, as the key strategic materials of China, have played an important role in safeguarding the grain market and social stability, protecting the interests of farmers and ensuring the national security. The Chinese government has always paid special attention to the management of the grain reserves as an important economic task. Through years of construction, especially with the efforts made in recent years, a new grain reserve system with Chinese characteristics and suited to the market economy system has been set up completely on the whole.

I. Evolution of China's Grain Reserve System

Established in the 1950s since the founding of the People's Republic of China, China's grain reserve system has been constantly advanced, reformed and improved, with the reserve categories being constantly increased, the structure and scale of reserves being gradually rationalized and the management of reserves being constantly enhanced, thus forming the present complete new grain reserve system of the government. The development of the system is characterized by the following four important stages.

First stage: The national emergency capacity system was set up to prepare against natural disasters and war. During the early days since the establishment of the People's Republic, China was facing a food shortage. In order to respond to natural disasters and wars, China gradually set up two types of the most fundamental safety grain reserves. In 1955, the state set apart a fraction of grains from the food reserve stock as the grain reserves, designated storage warehouses, set aside fund reserve and built up the state grain reserves to prepare against natural disasters. The right to the grain reserves belonged to the State Council and the departments concerned, such as the State Planning Commission, would give relevant plans for proper usage. In 1962, according to the then political and military situations, China built up the "506" grain reserves for military purpose to prepare against the war. The right to the grain reserves belonged to the Military Commission of the CPC Central Committee and the grain reserves were jointly administered by the army and the government. The establishment of those reserve systems played a positive role in surmounting the difficulties in grain supply, guaranteeing people's living standard and supporting China's economic construction. However, because of the single nature of the reserve systems and owing to the features of the grain distribution under the planned economy system and, as a result of the reserves in small scale and the extensive management of the reserves which were mainly stored and held by local grain departments in trust, over a long period of time (until 1990) after the establishment of those systems, China's grain reserves only implied strategic reserves and reserves to prepare against natural disasters. Meanwhile, during that period of time, the grain reserve system and the grain management system were combined into a single unit to be under the jurisdiction of the exclusive main body——the state grain department, and the reserve systems were an integral part of the entire grain sector.

Second stage: The state backup reserve system was set up to regulate grain supply and demand in terms of crop failures or bumper harvests. Since the reform and opening up, China's grain yields grew by leaps and bounds, gradually easing the long-term food shortage and giving rise to the phenomenon of supply exceeding demand. Meanwhile, significant changes took place in grain distribution system. By early 1990s, the crop harvests were accomplished in three consecutive years of 1988, 1989 and 1990, making it hard for farmers to sell their foodstuffs, thus seriously hindering the development of the rural economy. In order to overcome the difficulty for farmers in selling their foodstuffs, the central government decided to set up the special state grain reserve system aimed at "purchasing surplus food grains, stabilizing grain production, alleviating crop failures with bumper harvests and stabilizing the market", which was the first time to set up the backup reserve system specialized in adjusting market supply and demand and controlling the yearly grain supply fluctuations. At the end of 1990, China set up the State Grain Reserves Bureau to be in charge of the management of the grain industry and the central grain reserves. The central government entrusted local grain departments to control and purchase food grains on its behalf, thus forming the special state grain reserve system. However, malpractices existed in such a reserve system during that period: the system was not well made and the management was not properly conducted; warehouses were scattered, making it inconvenient for supervision; the grain handling mechanism was nonflexible and obsolete. It turned out that the amount of the grain reserves was not recorded accurately and the quality was not guaranteed, the foodstuffs got lost or went bad or were not enough to distribute or could not be distributed as need arose and the foodstuffs did not sell well, thus incurring huge losses and bad debts.

Third stage: The central grain reserve system was set up and was put under the vertical management of China Grain Reserves Corporation, and the construction and development of the local grain reserve systems were pushed forward. During 1990-1998, the problems existing in the management of the special state grain reserves not only hampered the operation and management of the central grain reserves, but also straightly lowered the efficiency of the state macro-control over the food grains. In May, 1998, the CPC Central Committee and the State Council made great strategic decisions to carry out a significant reform of the established state grain reserve system and to set up a new system characterized by vertical management. At the same time, after 1998, the state injected a fund of 34.7 billion yuan by three installments for the construction of the grain depots, with 1109 depots being built and the total reserve capacity reaching more than 100 billion jin (two jin make one kilo). In 2000, the State Council set up China Grain Reserves Corporation (Sinograin for short). Sinograin, on the basis of taking over the large-scale grain depots invested by the central government and practicing the framework of the Corporation and its directly subordinate depots being as independent legal entities and the management exercised respectively by the Corporation, its branches and its directly subordinate depots, carried out the vertical management of the manpower, financial and material resources under the central grain reserve management system. In the course of establishing the Sinograin, the relevant central departments made strict examinations and evaluations of Sinograin's personnel, assets and depots taken over by it, properly handled Sinograin's irregular accounting treatment and old grains and formulated financial and tax support policies. The reserve plans for central grain reserves were mapped out by the Ministry of Finance, the National Development and Reform Commission and the State Grain Administration and the specific affairs were handled by Sinograin. The establishment of Sinograin marked the change of the management of the central grain reserves mainly by local grain departments to the management directly exercised by Sinograin at different levels. In August 2003, China promulgated Regulations on Administration of Central Grain Reserves, clarifying the plans, storage, use, supervision, inspection and legal responsibilities of the central grain reserves and bringing the operation of the grain reserves onto the legal track, which played an important part in guaranteeing the effective operation of the central grain reserve management mechanism, ensuring the superior quality, the genuine amount and the safe storage of the grain reserves, bringing the roles of the central grain reserves in serving the state macro-control into effective play and facilitating the local legislation work on grain reserves.

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