China to put tax on grain exports to ease high food prices

China's Ministry of Finance announced on Sunday that it would levy export taxes on wheat, corn, rice, soybeans and various processed grains in 2008. The move is aimed at limiting grain exports and to reign in surging domestic prices, which have driven up the inflation rate. The measures come just a week after China scrapped tax rebates for grain exports. Those rebates, together with high international grain prices and a bumper harvest, have boosted Chinese grain exports this year. But the benefits of incomes from exports are now outweighed by the threats of social unrest as a result of high domestic prices.

The chinese government is therefor intervening with the following actions, is keeping earlier ones in place and hopes the expected bumper harvest next year will help ease the burden:

• export taxes on 57 types of grain and grain products, with rates ranging from 5 to 25 percent The rates for wheat and wheat products are 20 percent and 25 percent, respectively. The rate for corn, rice and soybean is 5 percent, while that for processed corn, rice and soybean products is 10 percent.
• quintupling the tax on arable land used for non-farm purposes, a measure taken on December 1; the tax system is playing a larger role in protecting the area of land under cultivation, which has shrunk to about 122.6 million hectares, only slightly above the baseline of 120 million ha that has been designated by the government as necessary to provide sufficient food. South-east coastal regions, which used to be major grain producers, have become major consumers as that region of the country has industrialized.
• China also began to charge foreign-invested companies, which had been exempt from the land use tax, as much as their domestic peers
• an end the no-fee policy for the construction of railways, airport runways and parking lots and a charge of 2 yuan per square meter on such projects.
• water supply, which affects the harvest, has risen high on the agenda of Chinese leaders, especially with drought affecting more of the country. Last week, workers began tunneling beneath the Yellow River in eastern Shandong Province as part of the massive south-to-north water diversion project. The 7,870-meter tunnel was designed to annually divert 442 million cubic meters of water from the Yangtze River to the northern banks of the Yellow River. Upon completion, the northern areas, which produce one-third of the country's grain output and gross domestic product, with about 20 percent of the country's average per capita water resource, would benefit.
• China's top legislature on Saturday adopted an amendment to raise the individual income tax threshold from 1,600 yuan (about 220 U.S. dollars) a month to 2,000 yuan, because lower income household are hit hardest by rising food prices.
• also on Saturday, the Ministry of Finance announced that it would offer provisional meal subsidies totaling 50.76 million yuan to college students to help stabilize school canteen prices.

According to Cheng Guoqiang, a senior researcher with the Institute of Market Economy, a State Council think tank under the Development Research Center of China's cabinet the grain export taxes "will contribute to preventing the country from importing high international grain prices and will lower price expectations in the domestic market".

Several factors have driven up global grain prices this year: rising demand, adverse weather in key growing nations and increased use of grains for first generation biofuels:
energy :: sustainability :: biomass :: bioenergy :: biofuels :: food :: inflation :: export tax :: commodities :: China ::

On the prospect of rising global demand, soybean prices have surged by about 75 percent since the beginning of the year. Wheat prices hit a record high in Chicago on strong global demand and shrunken output after bad weather hit the world's major producers such as Australia and Canada.

Buoyed by demand from the ethanol industry, prices of corn have also risen. By Friday on the Chicago Board of Trade, the price of corn for March delivery rose to 4.55 U.S. dollars a bushel from 4.43 dollars the previous week.

A week ago, the ministry said that it would scrap a 13 percent export tax rebate on 84 categories of grain and grain products, effective Dec. 20. Those rebates, together with high international grain prices, have boosted Chinese grain exports this year.

The nation exported 4.87 million tons of corn and 400,000 tons of soybeans in the first 11 months of 2007, up 85.3 percent and 23.8 percent, respectively, from the previous year. Exports of rice rose 5.8 percent to 1.13 million tons and exports of wheat soared 206.51 percent to 1.85 million tons.

Bumper grain crops this year, however, offer hope of slower price hikes in the world's most populous nation. Grain production, which has increased continuously since 2004, is expected to exceed500 million tons this year.

Analysts said discouraging grain exports would be a new option to limit domestic grain prices since the lengthy grain production cycle could not be changed.

Soaring food prices drove the consumer price index (CPI) to an 11-year high of 6.9 percent in November. The prices of food, which has a 33 percent weighting in the CPI, soared 18.2 percent last month.

The high inflation rate, well above the target of 3 percent set by the government for 2007, has become a major issue for the government, which is concerned about its impact on low- and medium-income households.

Image: Wheat farmers in Huaibei area, east China's Anhui Province, dry wheat after a bumper harvest. Credit: ChinaDaily.

References:
Xinhua: China to slap export taxes on grains - December 30, 2007.