China to spend $26 billion on commodity reserves

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Friday, 06 March 2009

China unveiled plans to boost farm support spending by 20 percent this year and allot $26 billion to bulk up its reserves of commodities from wheat to oil to steel in order to maintain production and smooth out prices. In statements at the start of the National People’s Congress, key government bodies outlined their strategies for improving rural income and keeping major industries afloat during a global recession, measures that may stoke commodity markets that are watching intently for any signs of improved Chinese demand.
The National Reform and Development Commission pledged to increase spending on agriculture, rural areas and farmers by 120.6 billion yuan to 716.1 billion yuan ($104.6 billion) and raise minimum wheat and rice prices by 0.22 and 0.26 yuan per kilogram respectively, or about 13 to 14 percent.
It also promised to continue with a host of measures to keep agricultural prices steady, including the use of price floors, actively managing state stockpiles and trade policies.
“After five years of bumper harvests, it will be very difficult to keep grain production growing steadily,” the NDRC said. It pledged that grain acreage would be no less than last year and overall output would be kept at 500 million tonnes.
The Finance Ministry said it will raise spending on reserves of grain, edible oils and materials by 61 percent to 178.045 billion yuan ($26.0 billion), or 4.1 percent of its budget.
That includes 78.341 billion yuan ($11.5 billion) to stimulate domestic demand by expanding reserves of important materials, such as grain, edible oils, crude oil, non-ferrous metals and speciality steel, and developing storage facilities.
Direct subsidies to grain producers will also rise 25.8 percent to 19 billion yuan, the ministry said.
China has already launched a 4 trillion yuan economic stimulus plan, including funds to improve agricultural infrastructure. The NDRC said grain production capacity would be increased by 50 million tonnes and plans to create national bases for commercial grain production would be sped up.
“We will stabilise the prices of major agricultural products, such as grain, edible vegetable oil, cotton, sugar and hogs, through a combination of control policies, including raising price floors, manipulating reserves, temporary purchasing and stockpiling, shipping to other regions and exporting and importing,” the NDRC said in its annual economic plan.
But with the economy facing great uncertainty, it said: “We cannot be optimistic about the prospects of people’s incomes, particularly those of rural residents, rising this year.”
China has for years imposed measures to protect the more than 750 million people living on farms and to ensure food self-sufficiency, but the rapid rate of urbanisation and increasingly sophisticated tastes have raised the risk of it importing corn or wheat.
“They are worried about the impact of low world prices on the income of their farmers. I expect to see that intervention continuing. I expect the Chinese government will keep that policy,” said Toby Hassall, an analyst with Commodity Warrants Australia.
POWER
The wide-ranging plan from the NDRC, which oversees China’s pricing and resource policies, also vowed to increase efficiency in the power sector and to push through more fuel price reforms, while closing down inefficient enterprises, echoing similar policies that have been in place for years.
“We will deepen reform of electricity prices, and gradually improve the mechanism for setting the price of electricity supplied to power grids, the price for its transmission and distribution, and the price for its sale to end-users,” it said.
It also pledged to work to make China greener, introducing regional climate change programmes, shutting small coal mines and power plants and continuing to experiment with cap and trade emissions programmes.
Its efforts to increase efficiency include plans to enable power trade between provinces and to upgrade urban power grids.
The NDRC said it would keep strengthening international cooperation on energy and resources, including overseas direct investment, which it said should rise by 13 percent from $40.65 billion last year, an increase of 64 percent over 2007.
China has used the downturn in commodity prices to buy up commodities and guarantee long-term oil supplies, with investments by state-owned firms and lending by state banks topping $50 billion in February alone.
Source: Reuters