Year of the Horse could prove year of reforms

The year of the horse is shaping up to be a year of reforms that could have a big impact on China’s aquaculture output. Real changes in currency, financing and access to land are appearing as China puts detail and shape to a package of economic reforms sketched out at last November’s crunch plenum of the Communist Party leadership. That much-hyped meeting in Beijing produced a commitment to let the market (rather than state bureaucrats) have more say in setting prices for utilities. This is big news in China, where prices have long been set by bureaucrats in cooperation, with the state owned sector that still dominates much of China’s economy. 

Reforms means China will inevitably become a more expensive place for doing business like seafood production. Long-subsidized, water rates are about to get more expensive — in fact rates will be trebled for heavy users — in a gradual liberalization of pricing that’s vital to conservation and the building of water treatment infrastructure. Electricity rates may be next. Utilities are about to get more expensive here as Beijing seeks to cut back the role of the state in subsidizing and setting the price of energy.

Labor is set to become more expensive: wages will rise by at least 10 percent this year — with the figure more likely to be 12 percent judging by commitments to minimum wage hikes promised by provincial governments. This is part of the Chinese government’s efforts to hold onto public support while also creating the cash to ensure the economy rebalances through more emphasis on consumption. This is good news for restaurant chains and retailers serving up seafood but will mean that various players in the seafood value chain will be required to pay higher wages every year (given government wants to double average industrial wages by 2020 based on 2010 figures).

Another big reform central to aquaculture here is the trade in rural land, with government pursuing the eventual goal of allowing farmers to trade (and mortgage) their land use rights. This, goes conventional wisdom, will release cash that will fund farmers’ move to cities, or pay for enlargement and modernization of farms. The land reform will likely make land a lot harder — or easier — to come by, depending on how the reforms are enforced. But crucially it removes the ability for government to arbitrarily seize land for sale to developers and industry. There are many instances of major aquaculture firms and seafood processors getting land on very favorable terms from local governments keen for jobs and taxes. In the future, these firms will have to pay market rates.

Finally, there may be some real access to loans for private firms such as seafood processors. Small and medium sized enterprises (SMEs) have typically been ignored by state banks that have favored large state owned firms, seen as safer bets and guaranteed by government officials. With the liberalization of interest rates (which have long been fixed) banks are finally being forced to understand how to price risk, and become more competitive in seeking new clients in the private sector.

Forcing them to do so will be five new banks that have been licensed to set up as part of the reforms. These banks are being set up by some of the country’s most successful private companies, including online commerce giant Alibaba, a firm keenly attuned to the needs of China’s private economy (and a major platform for seafood traders).

Another reform to watch this year is currency liberalization that will make the CNY a globally convertible currency over the next five years. In the run-up to the full liberalization of its currency China is trying to create the conditions associated with a normally convertible currency –which rises as well as falls. Most speculators had bet that the CNY would only rise, but government here will be keen to engineer falls in the value of the CNY. Currency volatility will be a new variable to be taken into account by Chinese seafood exporters, who in recent years have complained that an ever-rising CNY has forced them to raise prices for overseas buyers.

There is also the prospect of more market-set food prices in China, where staples like grains and meat are reined in to control inflation. Much is made of the government each year devoting its first major policy document of the year to rural issues: the imaginatively titled ‘No.1 Central Document’ this year repeated much of last year’s similarly-titled document. It promised an increase in subsidies for agriculture, better banking for rural areas and continued vigilance over the 120 million hectares which Beijing guards as its minimum bank of arable land. In the document there was the intriguing pledge to “improve the pricing system for agricultural products.” It’s unclear what precisely this would mean but the Chinese government is clearly in the mood for reform. These reforms will have plenty of impact on seafood producers and buyers.


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