Overview of recent ABARES China research

China is one of the world's largest consumers of many agricultural commodities, giving it the power to affect world markets. Because China is Australia's top agricultural export destination (Figure 2), prices received by Australian farmers are influenced by China's demand. Consequently, the way that China adjusts its agricultural policies in the future, and the way that agricultural productivity may change as a result, are of importance to Australia.

ABARES modelling and analyses of China's agricultural sector were conducted against a backdrop of fundamental drivers that support long term agrifood demand growth in China. In particular, over the longer term, income growth and urbanisation are expected to underpin the country's growing demand for a wider variety of agricultural products.

Insights about China's agrifood demand to 2050 were presented in the ABARES publication What China Wants (Hamshere et al. 2014). Long term demand for agrifood products was modelled by developing a base case and several scenarios. The model split the population into urban and rural groups and considered how demand for different agrifood products would change across households from different income strata within these groups. Improving the welfare of the rural population has been a strong influence in Chinese policy documents over the past decade (Fell 2019). The importance of understanding the economic outlook for rural populations has also been incorporated, where possible, into the ABARES work described above.

China's agrifood consumption is expected to more than double by 2050. While imports of many agrifood commodities are expected to increase to 2050 (Figure 3), China's own agricultural production is also projected to rise in response to the increase in demand. This will require ongoing investment and innovation. Not only must productivity increase, but more advanced approaches to contend with the challenges of a deteriorating resource base will need to be adopted (Hamshere et al. 2014, Sheng et al. 2020).

Food security and the wellbeing of China's rural populations are of paramount importance to the Chinese government, underpinning the state's interventions in agricultural markets.

In order to understand the implications of China's policy changes on Australia's agricultural exports, it is important to first understand the Chinese government's future reforms for the agricultural sector. These reforms primarily stem from the 2017 No. 1 Document—the country's main annual agricultural policy document—and the Rural Revitalisation Strategy 2018–2022. ABARES analysed how these policy initiatives could shape Australian exports into the future.

The 2017 No. 1 Document was unique because it set a clear directional change for Chinese agricultural policy. The emphasis in the document was on supply side reforms. Of particular importance for Australia is China’s focus on utilising international markets, and improving food safety and quality (Figure 4). The policy changes in the No. 1 Document clearly present opportunities for Australia’s beef and dairy exports, while those for grains are mixed. Further details are available in The future of Chinese agricultural policy (Fell 2019).

Many of the announced reforms are associated with productivity improvements, e.g. bigger farms, increasing investment in capital, developing livestock industries of scale and an emphasis on specialisation (Figure 4). Productivity growth provides a pathway for the future viability of producers, avoiding the need for costly government support programs. It also strengthens producers' international competitiveness, supports food security and reduces food prices for consumers.

Understanding the future path of productivity in China can be aided by understanding the potential drivers of its growth (such as public R&D investment, removal of market support and improvements in market access). To better inform decision making, ABARES asked an important question: "How have institutional reform and openness to trade policies affected agricultural productivity growth over the past four decades?" ABARES investigated this question collaboratively with Chinese research institutes by analysing patterns of agricultural productivity growth in China.

Agricultural productivity in China grew rapidly between 1978 and 1984 during the initial period of economic reform. However, the growth rate dropped and was variable in the two subsequent periods (Figure 5). In the most recent period (2009 to 2016), productivity growth fell to 0.9%, which is less than half of its long term growth rate. This slowdown was partly attributed to distortionary policies affecting the markets of agricultural commodities, capital and land. These findings highlighted the need for further institutional reform. Further details are available in Sheng et al. (2020).

The future of agriculture in China depends on sustained growth in productivity. However improving productivity has proved to be an extremely complex process  (Huang et al.2020), in which structural changes played a critical role. New government policy initiatives are also likely to influence or reshape the future of Chinese agriculture, as well as the long term demand for products from Australia and other countries that export agricultural commodities. Against this backdrop, ABARES' research has focused on the changes in the structure of China's agricultural industry, its productivity and government policies, and their interactions.  

The research described above provided a broad overview of China's supply-side structural adjustment policies and the potential drivers of its productivity growth. Changes to policies and the direction and magnitude of productivity growth have implications for food security and for the welfare of rural households, both of which Chinese policymakers are committed to. They also have implications for China's import demand, which is of interest to Australian policymakers.

The Chinese government has policies aimed at supporting the welfare of the rural population. ABARES and China's National Food and Strategic Reserves Administration explored future policy options for supporting the rural population against a backdrop of changing prices (Cao et al. 2020). The research examined two key points:

• equity mix between rural and urban populations
• overall economic welfare.

Further, the work assessed:

• food security in China
• implications for Australian grain exports.

Alternative policies were modelled to investigate these issues under hypothetical price change scenarios for China's staple grains (Figure 6). A baseline scenario was developed that incorporated productivity growth consistent with projected Chinese GDP growth. It also incorporated reasonable projections for long term demand growth (see below). The modelling of the reform and other scenarios were focused on China's coarse grains, rice and wheat markets.

What were the results?

The removal of all policies brought the greatest gains for the Chinese economy. However, income disparity between agricultural and non-agricultural households increased.

A good alternative set of actions for the Chinese government was to remove all policies but at the same time introduce direct welfare payments to agricultural households. This prevents rising income disparities between agricultural and non-agricultural households.

Australian exports changed little no matter what policy was chosen by China because there was little change in world prices and a limited ability of Australian farmers to increase production, and thereby exports.

Extending the modelling of China's agricultural policies, ABARES modelled the impact of changes in Chinese trade policy. Specifically, this involved simulations of changes to tariffs on barley and bottled wine China’s imports from Australia.

Cao & Greenville (2020) found that by 2025 the loss to Australian agriculture from the imposition of higher tariffs by China was limited to around $250 million. This was because Australian producers were able to respond flexibly, by reducing production of barley and increasing production of alternatives, such as wheat and livestock. In contrast, for China, the fall in agricultural production was estimated at around $3.6 billion, largely reflecting the higher price of barley as an intermediate input, arising from the imposition of these tariffs.

Gleeson, Addai & Cao (2021) found that by 2025, substantial diversion of Australia's bottled wine exports was likely to occur, with 60% of the value of wine otherwise sent to China diverted to alternative markets. A modelled drop in export value of $480 million was likely to occur through a combination of lower prices and an overall drop in export volume, despite the partial diversion to alternative markets. Prior to the tariffs, China accounted for 24% of the volume of Australia’s bottled wine exports and 40% of the value.

ABS 2020, International Trade in Goods and Services, Australia, November 2019, cat. no. 5368.0, Australian Bureau of Statistics, Canberra, accessed 5 February 2020.

Cao, L & Greenville, J 2020, Understanding how China's tariff on Australian barley exports will affect the agricultural sector, ABARES Research Report 20.14, Australian Bureau of Agricultural and Resource Economics and Sciences, Canberra, June.

Cao, L, Thorpe, S & Fell, J 2020, Simulating effects of agricultural support policies under price volatility – a China case study, ABARES Conference Paper 20.2, for the 2020 Global Trade Analysis Project (GTAP) Conference, Canberra, April.

CCCPC 2018, Rural vitalisation strategy 2018-2022, Central Committee of the Communist Party of China, Beijing.

Fell, J 2019. The future of Chinese agricultural policy, ABARES research report 19.2, Canberra; February.

Gleeson, T, Addai, D & Cao, L 2021, Australian wine in China—Impact of China’s anti-dumping duties, ABARES Research Report 21.10, Australian Bureau of Agricultural Resource Economics and Sciences, Canberra, July.

Hamshere, P, Sheng, Y, Moir, B, Syed, F & Gunning-Trant, C 2014, What China wants – Analysis of China's food demand to 2050, ABARES conference paper 14.3, Canberra.

Huang, J, Rozelle S, Zhu, X, Zhao, S and Sheng, Y 2020, Agricultural and Rural Development in China during the past four decades: an introduction, Australian Journal of Agricultural and Resource Economics, volume 64, pp1–13.

OECD 2019, “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), Organisation for Economic Cooperation and Development, Paris.

Sheng, Y, Tian, X, Qiao, W and Peng, C 2020, Measuring agricultural total factor productivity in China: pattern and drivers over the period of 1978‐2016, Australian Journal of Agricultural and Resource Economics, volume 64, pp82–103.

Xi, J 2017, Full text of Xi Jinping's report at 19th CPC National Congress, China Daily, 4 November, accessed 4 February 2020.