Battling graft, China to overhaul grains import quota system

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China plans to revamp the scheme it uses to allocate quotas for agricultural imports, as part of efforts to stamp out corruption and to rein in record state grain stockpiles, according to government and industry sources.

The low-tariff quotas, which are sanctioned under China's membership of the World Trade Organisation, are allocated to state-owned and private firms in the world's top grain consumer.

With Chinese grain prices among the highest in the world, these import allocations have become a cash cow for well-connected companies.

Fang Yan, a deputy director of the National Development and Reform Commission's (NDRC) rural economy department, told Reuters this month that there would be changes to the import quota allocation system but declined to elaborate.

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But industry sources say proposed changes include bringing in a more transparent tender process for quotas, while Beijing is also looking into awarding quotas only to companies that agree to buy grains from state reserves.

"The system allows officials to trade their power for money. Companies are able to pay bribes to obtain quotas, while mills and other end-users that are in need of cheaper imports are shut out," said Ma Wenfeng, an analyst at Beijing Orient Agri-business Consultant Co Ltd.

Experts say the process of obtaining quota allocations is opaque and complex. The NDRC, which issues the quotas, does not publish the names of firms receiving import allowances or volumes.

Ma's firm, which consults the government, has proposed the current scheme be replaced by a public tender process that allows firms to bid for quotas.

Delays issuing import quotas

Plans to overhaul the quota system have already led to delays in issuing 2015 grains and cotton import quotas, which are typically announced by the end of September each year.

"The process is definitely going to be changed," said Li Qiang, chief analyst with Shanghai JC Intelligence Co Ltd, a private consulting firm, adding that a series of corruption scandals surrounding the NDRC underscored the need for change.

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The NDRC, the nation's top economic planner, has been a target of investigations since President Xi Jinping launched an anti-graft campaign in late 2012. The body's former deputy head Liu Tienan was sacked in September for taking 35.6 million yuan ($5.81 million) in bribes.

An investigation also found 11 officials in various departments of the NDRC taking huge bribes, China's Supreme People's Procuratorate told state media last month.

According to Beijing's WTO pledge, annual wheat import quotas are capped at 9.6 million tonnes, corn at 7.2 million tonnes, rice at 5.30 million tonnes and cotton at 894,00 tonnes. State-owned companies are given the bulk of the allowances, with the rest distributed amongst private traders.

Imports under the WTO quota have low tariffs of just 1 percent, while to protect its farmers China places higher duties on shipments above that fixed volume. In the case of wheat, firms without import quotas could end up paying tariffs as high as 180 percent.

The gap between the global price of agricultural commodities - with Chinese cotton prices for example 40 percent more expensive than imports - has encouraged a black market where companies sell their quotas for a profit.

Companies with cotton import quotas were selling their allocation to other processing firms for as much as 4,000 yuan ($654) per tonne, according to a Chinese media report in March, citing the China Federation of Industry and Commerce.

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Struggling with huge grain stocks, Beijing is also considering linking the WTO import quotas to purchases from the state reserves, said a manager at an animal-feed mill, which was allocated import quotas this year.

The manager said discussions were under way for feed mills to buy 10 tonnes of grains from the state reserve in exchange for a tonne of import allowances.

"That means private feed mills will need to buy a total of 28.8 million tonnes of expensive state corn in exchange for the import quotas. That will help to cut state reserves," said the manager, who declined to be identified as he was not authorized to speak to the media.

China does not publish its grain reserves, but corn stockpiles over the past two years are estimated by traders to have increased to nearly 100 million tonnes, or more than half of the country's annual consumption.