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China Problems in Price Policy
The grain market was a typical example of a situation in which
the government was confronted with major problems whether it
allowed the irrational price structure to persist or carried out
price reform. State commercial agencies paid farmers a higher price
for grain than the state received from the urban residents to whom
they sold it. In 1985 state commercial agencies paid farmers an
average price of -Y416.4 per ton of grain and then sold it in the
cities at an average price of
-Y383.3 a ton, for a loss of -Y33.1 per ton. Ninety million tons
were sold under this arrangement, causing the government to lose
nearly -Y3 billion. If the state reduced the procurement price,
farmers would reduce their grain production. Because grain was the
staple Chinese diet, this result was unacceptable. If the state
increased the urban retail price to equal the procurement price,
the cost of the main food item for Chinese families would rise 9
percent, generating enormous resentment. But even this alternative
would probably not entirely resolve the problem, as the average
free-market price of grain---Y510.5 a ton in 1987--indicated that
its true value was well above the state procurement price.
There was no clear solution to the price policy dilemma. The
approach of the government was to encourage the growth of
nonplanned economic activity and thereby expand the proportion of
prices determined by market forces. These market prices could then
serve as a guide for more accurate pricing of planned items. It was
likely that the Chinese economy would continue to operate with a
dual price system for some years to come.
Data as of July 1987
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