VZCZCXRO9488
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3052/01 3090542
ZNR UUUUU ZZH
O 050542Z NOV 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6715
INFO RHEHNSC/NSC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 04 BEIJING 003052 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USDA/ERS 
STATE PASS USDA/FAS/OSTA CHINA DESK 
STATE PASS USDA/OGA 
STATE PASS USTR FOR STRATFORD 
TREASURY FOR OASIA 
 
E.O. 12958:  N/A 
TAGS: ECON SENV EAGR CH
 
SUBJECT: FROM A TRICKLE TO A FLOOD: CHINA'S AGRICULTURAL SUBSIDIES 
MULTIPLY 
 
Refs: A. FBIS/OSC #CPP20081019045001 
 
(U) This cable is Sensitive But Unclassified.  Please protect 
accordingly. 
 
¶1. (SBU) Production and input subsidies have multiplied rapidly and 
the value of support has risen exponentially since the watershed 
moment in 2006 when China eliminated its centuries-old agricultural 
tax.  Agricultural subsidies now play an increasingly important role 
in guiding production decisions, and when combined with China's food 
security policy, subsidies determine competitiveness of crops within 
China and impact trade patterns.  Though subsidies will likely 
remain within China's international obligations, current trends 
suggest that subsidies will soon reach the limits of WTO 
agricultural subsidy commitments.  END SUMMARY AND COMMENT. 
 
ROLE OF AGRICULUTRAL SUBSIDIES EXPANDS 
-------------------------------------- 
 
¶2. (SBU)  In recent years, China has made the significant transition 
from taxing the rural sector to subsidizing it.  2006 marked a 
watershed as China's centuries-old agricultural tax was removed and 
the structure of rural taxation and payment for local services and 
infrastructure dramatically shifted.  Despite allowing farmers to 
keep more of their income, the central government feels compelled to 
do more to increase assistance to local governments for the loss of 
the tax, speed modernization and farm productivity increases, and 
close the rural-urban income gap by supplementing rural incomes with 
direct and indirect subsidies.  China's key public policy documents 
(e.g., The Decision of the Third Plenary Session of the 17th Central 
Committee of the Communist Party of China in October 2008, Ref A) 
confirm the rapid growth of input subsidies, direct payments, price 
controls, and subsidized loans.  Recent analysis shows that the 
largest subsidies are currently being given to the grain, pork, and 
dairy sectors, but that additional programs and recipient groups are 
being added yearly. 
 
¶3. (SBU).  Despite some Chinese government declarations about the 
size of Chinese subsidies, USDA research suggests that the actual 
scope and scale has not been included in the current official 
estimate.  A recent USDA Foreign Agricultural Service (FAS) report 
compiled available information on the scope of China's agricultural 
subsidies from 2005-2008 based primarily on FAS Global Agricultural 
Information Network (GAIN) reports on the primary agricultural 
commodities produced in China.  Additional information is taken from 
the USDA Economic Research Service (ERS), Chinese official press 
releases, and local press.  The full report, including data and 
tables, and all other GAIN reports mentioned in this cable can be 
found at www.fas.usda.gov or www.usdachina.cn as CH9028. 
 
OVERVIEW OF CHINA'S DOMESTIC SUPPORT 
------------------------------------ 
 
¶4. (SBU)  For the past 60 years, China has pushed strong economic 
growth through industrialization and developing urban areas.  As the 
income gap between urban and rural populations widened, policy 
makers began looking "backwards" to address rural development and 
resolve social issues that are considered potentially disruptive to 
stability.  The initial step towards improving rural farmers' 
lifestyles was to increase farm incomes by removing the 
centuries-old agricultural tax, which was removed completely in 
¶2006. At the same time that the agriculture tax was phased out, 
subsidies aimed at supplementing agricultural incomes began, 
including those for input subsidies, direct payment, loan subsidies, 
and price supports. 
 
¶5. (SBU)  On March 5, 2009 at the 11th National People's Conference, 
Premier Wen Jiabao addressed the government financial contribution 
to the sector by announcing that agriculture spending during 2008 
totaled US $87.3 billion (RMB 596 billion), an increase of 38 
percent from the previous year.  He noted that the spending 
including US $15.1 billion (RMB 103 billion) used for direct 
subsides, inputs, machinery, and improved crop varieties.  In 2009, 
these categories of subsidies are slated to increase to $18 billion 
(RMB 123 billion). 
 
SOMETHING FOR EVERYBODY 
----------------------- 
 
¶6. (SBU).  In January 2009, the Chinese Central Committee of the 
 
BEIJING 00003052  002 OF 004 
 
 
Communist Party issued 2009 Document No. 1 (GAIN CH9026), its annual 
summary of efforts planned to address the range of rural issues in 
the upcoming year.  This document is instructive in describing the 
basic objectives of the subsidies and the structures the Chinese 
Government intends to pursue.  Generally speaking, the priorities 
are 1) income support and 2) increased production. 
 
¶7. (SBU)  According to Document No. 1, the following specific goals 
are prominent on the list of activities China is encouraging: 
- Food Security - in particular grains 
- Farmer income support 
- Consolidation - especially livestock and agricultural processing 
sectors 
- Increased Productivity - in all sectors through the use of 
innovation, technology, more inputs, and mechanization 
- Creation of national champion enterprises 
- Increasing rural financial services 
- Rationalization and Conservation - encouraging concentration of 
certain industries in areas that have geographic or other 
comparative advantages and optimizing/conserving use of water and 
land resources 
 
¶8. (SBU).  Additionally, Document No. 1 lists the following as the 
preferred subsidy formats: 
- Price Supports 
- Subsidized Credit 
- Direct Payments 
- Preferential Tax Schemes 
 
LIVESTOCK AND GRAIN THE BIG WINNERS 
----------------------------------- 
 
¶9. (SBU)  China's subsidy policy can also be seen as a clear 
extension of a top national priority: food security.  As such, a 
clear majority of China's current subsidies go to grains and animal 
protein.  The grains sector receives about 95 percent (94 million 
RMB of the 103 million RMB) of the direct support reported by the 
government in 2008, with most of remainder going to the pork and 
dairy sector.  In 2009, the scope of the subsidies increased and the 
percentage going to non-grains sectors increased. 
 
¶10. (SBU)  As of 2009, the types of commodities/sectors that have 
been identified for subsidies are: grains, oilseeds, biofuels, 
dairy, pork, tomatoes, walnuts, canned fruit, asparagus, citrus, 
hides and skins, and cotton.  Many of these sectors compete with 
U.S. products in third countries, are exported to the United States, 
or compete with U.S. products imported into China.  In addition, 
China has also significantly increased non-product specific support 
that does not directly affect production decisions, programs that 
would generally fall in the WTO green box category. 
 
¶11. (SBU)  However, the hidden story is that there are many 
subsidies not contained in the government figures.  Two of the 
programs identified as providing the most benefit to the 
agricultural industry are the elimination of the corporate income 
tax (GAIN CH8078), the exemptions provided to agriculture under 
China's value-added tax (GAIN CH7018), periodic programs to 
subsidize exports (ERS Report Source WRS-01-02) and other programs. 
 
SUBSIDY RESEARCH LIMITATIONS 
---------------------------- 
 
¶12. (SBU)  Overviews of Chinese agricultural policies are an 
important source of information on the evolution of Chinese policy, 
with FAS commodity reports and ERS reports, such as the April 2009 
"China's Ongoing Agricultural Modernization: Challenges Remain After 
30 Years of Reform", playing a key role in English language 
research.  However, there have been very few comprehensive, current 
studies on Chinese subsidy policies because their history is fairly 
recent and their impact is only beginning to be felt. 
 
¶13. (SBU)  Researchers face several hurdles in this area and make 
any analysis of the scope and breadth of Chinese agricultural 
subsidies difficult.  The following issues should be taken into 
account by readers of subsidy research and be considered caveats 
relating to the fullness and accuracy of the data in the April 2009 
FAS report.  While all the programs listed in the FAS report are 
confirmed through government sources or government released 
information, the following issues are the most common reasons why 
certain information is not available or could not be confirmed: 
 
BEIJING 00003052  003 OF 004 
 
 
 
- Transparency:  Most Chinese subsidy program details are not public 
information.  While the program itself may be announced publically, 
implementing regulations are rarely public.  The type of information 
absent often includes the value of the program, participant 
eligibility, number of participants, or how the subsidy is 
distributed. 
- Uniformity of Eligibility:  Unlike many countries, most Chinese 
subsidies do not have universal eligibility.  There are simply too 
many farmers.  Unpublished criteria or eligibility differences 
between provinces make it difficult to ascertain the total number of 
participants or other fixed data points (Ha/animals/kg) to use in 
calculating the total subsidy amount. 
- Block Grants: Many subsidies are distributed to provinces for 
administration.  The province is responsible for developing 
eligibility and distribution criteria.  Depending on the program, it 
may be implemented in a different way in each province or even 
county. 
- Sub-national Subsidies:  This information is almost totally absent 
save local press releases and on-farm intelligence. 
- Loan/Insurance Programs Opaque:  Subsidized loans or insurance 
subsidies are particularly difficult to analyze due to the use 
unpublished loan rates or insurance premiums. 
 
OTHER ONGOING RESEARCH 
---------------------- 
 
¶14. (SBU)  As more attention is paid to this topic, research is 
expanding beyond the long-term work being done by USDA's FAS and ERS 
(ERS Report "China's New Farm Subsidies" - WRS-05-01).  Recent work 
by an International Food Policy Research Institute (IFPRI) "Shadow 
Notifications" project has resulted in the publication of a third 
party attempt to create a likely China WTO submission.  University 
academics that specialize in international agriculture, China, and 
WTO issues are also starting to follow China's subsidization policy 
more closely. 
 
¶15. (SBU)  U.S. industry is also becoming an active observer and 
critic of Chinese subsidy policy.  For example, the U.S. pork 
industry has stated that it believes that China's pork policies 
already provide support at or above WTO obligations.  Questions on 
pork subsidies have been asked by the United States in formal WTO 
submissions, without receiving a substantive Chinese reply.  The 
U.S. pork, dairy, and wheat industries have all commissioned reports 
about various parts of the Chinese subsidy and VAT programs that 
they suspect do not conform to China's commitments.  Since U.S. 
agricultural subsidy policy has long faced close observation, 
criticism, anti-dumping and safeguard cases, and WTO complaints, 
industry feels that close observance of WTO commitments is critical 
and has the same view for third countries. 
 
MUM'S THE WORD 
-------------- 
 
¶16. (SBU)  Though discussion of China's subsidies is beginning to 
heat up among researchers, third country governments, and industry, 
China has never formally addressed the issue at the WTO.  While 
China addresses some of its agriculture reporting commitments well, 
such as tariff rate quota administration, its adherence to others is 
spotty.  In the case of agricultural subsidies, China has never 
submitted anything about its subsidies to the WTO since it became a 
member.  While the growth of subsidies is clear to all observers, 
both domestic and foreign, few Chinese experts or officials seem to 
have a handle on the scope of the growth in subsidies.  [Note:  Some 
Ministry of Agriculture and Ministry of Commerce contacts are very 
curious about and can discuss subsidy policies of the United States 
and other countries, but they are reluctant or unable to grasp the 
scope of what is going on within China.  Several MOA contacts asked 
for copies of the April 2009 FAS report so they could read it. End 
Note.] 
 
TRADE IMPACTS UNCLEAR, BUT CONCERN GROWING 
------------------------------------------ 
 
¶17. (SBU)  The trade impacts of Chinese subsidies are far from 
clear.  Given that most subsidies are relatively new, it is unlikely 
that subsides have as much impact on U.S. trade as current SPS or 
TBT barriers.  Nonetheless, industry is very concerned about the 
trends in this area.  The U.S. industry has three inter-linked 
concerns: specialization, displacement of U.S. exports to Asia, and 
 
BEIJING 00003052  004 OF 004 
 
 
reduced access in China. 
 
¶18. (SBU)  The concern about specialization stems from information 
that China's provinces and localities focus resources in highly 
targeted international market segments.  As in industrial areas, 
there are several well known examples where Chinese localities have 
seen profitable domestic or international markets and encouraged or 
provided targeted investment.  Subsequently, Chinese producers 
monopolize a small segment in a short time and drive out foreign 
producers.  An example of this fear is the Chinese domination of the 
global garlic market.  Often, producers of U.S. horticultural crops 
or those that use significant manual labor are most concerned about 
the combination of cheap labor, targeted subsidies, and lax 
agro-chemical standards.  U.S. apple and stone fruit producers have 
this concern. 
 
¶19. (SBU)  Similarly, industry is concerned that preferential 
policies and subsidies will be used to more aggressively export 
domestic surplus or by-products.  Critics have long complained that 
the VAT refund rate is frequently used in China for domestic supply 
and price management.  As some Chinese researchers have suggested, 
industry is concerned that China will ignore its commitments to the 
WTO in pursuit of domestic food security.  Many in China argue that 
the zero subsidy commitment itself was a very bad deal and that it 
is not fair in comparison to the bound subsidy limits of more 
established WTO members.  The first to raise this alarm has been the 
U.S. pork industry.  In the wake of a deficit year that saw record 
pork exports from the U.S. to China, record subsidies and programs 
designed to build China's pork production capacity went into place, 
dampening U.S. market opportunities. 
 
¶20. (SBU)  As the U.S./China trade relationship grows in importance, 
discussion of domestic support payments will likely take on greater 
significance to both sides.  Since China's accession to the WTO, 
agricultural trade has exploded.  U.S. exports of agricultural, 
fishery, and forestry products to China grew from $2.2 billion in 
2001 to $13.2 billion in 2008.  Chinese exports to the United States 
of these categories of products went from $2.3 billion to $8.5 
billion.  The level of exports for the United States and China in 
the 2006 stood at $7.7 billion and $7.1 billion, respectively.  U.S. 
exports are primarily made up of bulk or semi-processed commodities, 
while China's exports are largely value-added processed products. 
 
COMMENT 
------- 
 
¶20. (SBU)  China's political leadership has signaled that 
agricultural subsidies will only get bigger.  It is important to 
increase monitoring of these subsidies to understand their domestic 
impact on food security, market access, and Chinese exports.  Given 
the increased spending, China will soon come to a point where it 
will find its WTO agricultural subsidy commitments constraining. 
When this happens, an important discussion inside China will be 
whether subsidies need to move toward a greater proportion of green 
box policies or China seeks ways to change its commitments or derail 
further negotiations.  This growing realization that its commitments 
constrain policy objectives may spark a true review of China's 
future us of agricultural subsidies. 
 
HUNTSMAN