In Japan, Agricultural Policy Research Committee, Inc. held the sixth meeting of Agricultural Market Study Group on October 23, and Journalist Ms. Ryoko Yamaguchi explained the present situation of the futures market in China, etc. whose main theme was China and agriculture titled “Rice market－especially necessity of futures market and futures market in Dalian”. Also, following Ms. Yamaguchi, as a suggestion from the field of domestic rice, from Niigata prefecture rice producers association, Mr. Tsubotani Toshiyuki, the representative director of Kizu Mizuho Productive Cooperation and journalist Mr. Takafumi Kumano, the former reporter of Beikoku Newspaper pointed out problems in the rice field in Japan. In the following article, although it focuses on China futures market with the content of the lecture by Ms. Yamaguchi mainly, it looks back the history of Chinese financial economy at first.
Building a financial system and systemic reform in China
The third general meeting of the 11th Central Committee by Communist Party of China held in December 1978 was the turning point in economic reform in China. At the general meeting, the policy based on the planned economy until then was changed, domestic economic reforms and openness to foreign countries were launched and aiming for modernization was decided in four fields of agriculture, industry, national defense and science technology. At the time, the financial system, that had been functioning in tandem with the national finances centering on the People’s Bank of China, was successively added to the systemic reform that moves in an adaptive manner.
To begin with, Bank of China, Agricultural Bank of China and China Construction Bank were reorganized in 1979. In 1983, the business that had been in charge of commercial banks and central banks in the People’s Bank of China until then was divided and Industrial and Commercial Bank of China was established. These four banks were positioned the state-owned specialized banks, and of them, Bank of China was in charge of foreign exchange operations and trade finance.
Due to the systemic reform, bank deposits centering on urban families grew steadily in China during 1980s, and the subsequent money supply was at its highest level as a developing country.
However, the market mechanism didn’t work on the funds raised in this way and there was no efficient turnover of funds. The reason was that China’s interest rates were not liberalized. In China during 1980s, in addition to persistently low interest rates, there was almost no interest rate spread between deposit interest rate and loan interest rate, and as a result, competition between financial institutions didn’t arise.
In this situation, even if the bank collected deposits, most of the deposits were concentrated in the four state-owned banks, so active trading and competitive principle by various financial institutions didn’t work.
Although Chinese government planned the formation of a call market, development of bill payment system was delayed, and as the complexity of procedures for settlement of transactions between remote locations especially affected, credibility didn’t improve. Also, for inter-company payments at that time, cash was widely preferred over bills. The call market itself was not sufficiently regulated and legalized, so the national market had to wait until 1996. It was pointed out that this lack of development of the interbank market greatly restricted the movement of funds between regions.
In a situation where the market mechanism was not fully functioning, there was an increasing tendency for financial systems to be completed within a region. Direct finance such as the stock market was not fully developed and companies relied on borrowing from banks to raise funds. Especially, branches of state-owned banks had more influence over lending decisions than the head office.
Many local governments approached local financial institutions for the sole purpose of promoting the local economy, and after drawing out loans, they repeated excessive capital investments that ignored efficiency. These movements gained momentum since a policy was announced to switch corporate financing from mainly financial funds to bank loans in 1985. Its original policy purpose was to encourage companies to manage their businesses with an awareness of capital costs by converting subsidies of free resources into paid loans. However, as a result, at the time of establishment of companies, the cases with high management risks－a company with 100 percent debt, that was no own funds, was established－started to be seen in many places. As a result, they later developed into a serious problem of bad debts.
The delay in the formation of the short-term money market had a major impact on macro control by Chinese government. From 1979 to 1984, the framework of “Mono-bank system” had remained in which the People’s Bank of China had a monopoly on accepting deposits and lending. The central bank, the People’s Bank of China developed a plan for accepting deposits and making loans, and entrusted its operations and management to its local branches of the People’s Bank. The goal there was to place in the local branches in which the deposit difference was definitely achieved and the difference in loan amounts was always kept within the plan. If the deposit target was not achieved, there was a rule that cash would be issued, and as a result, this led to an accommodative monetary situation.
Strengthening the independence of state-owned banks was the trigger for the Tiananmen incident
However, the limits of these direct credit controls gradually became apparent, so Chinese government introduced indirect credit controls since 1984. The four state-owned specialized banks each managed deposits to adopt an independent accounting system, and they changed their position from “Distribution within the same corporation” to “Loan relationships between different corporations” regarding fund transfers between the central bank and the dedicated banks. The People’s Bank attempted to control the money supply through measures such as adjusting deposit reserve ratios and interest rate adjustment, but they were not effective enough because the market system was incomplete.
In addition to indirect controls, Chinese government responded by coexisting with direct controls through loan amount management. Linking loan amount by the dedicated banks with deposits and giving the right to decide on the loan limit according to the amount of deposit on hand regarding liquid funds, the deregulation was a policy consistent with the goal that encouraged the acquisition of deposits by increasing the loan amount in accordance with the expansion of deposits. However, as a result, this prompted inflation, and in turn, it became one of the factors that led to the Tiananmen Incident in 1989. Although Chinese government suppressed the democracy movement by force and put an end to it, Tiananmen Incident was a major turning point towards reform and opening-up policy.
Chinese government’s armed oppression of citizens aroused strong opposition in Europe, America and Japan, and economic sanctions were imposed one after another. Martial law imposed throughout Beijing was lifted in January 1990, and at the same time, economic sanctions were also lifted. However, as there were many doubts about steering the reform and opening-up policy, foreign investment in China shrank.
Furthermore, this time, forces opposing the reform and opening-up in the communist government became more active, and a movement to change the route began. The government leadership was forced to manifest its reform and opening-up policy in a concrete manner, and from January to February 1992, Deng Xiaoping visited Wuhan, Hubei province, Shenzhen, a special economic zone in Guangdong province, then Shanghai, etc. and continued to advocate the need for reform and opening-up. As a result, China’s opening to the outside world progressed rapidly and acceptance of foreign capital began in earnest.
Fiscal and financial reforms also progressed centering on strengthening financial macro controls. In the foreign exchange system implemented on January 1, 1994, dual exchange rate between the official rate and the adjusted market rate was unified to the level of 8.7 yuan per dollar, and this had a great influence later.
Listing before regulation－Chinese national character: thinking while moving
Below is the content of Ms. Yamaguchi’s lecture.
As the situations surrounding rice in Japan and China basically have a lot in common, that includes the small size of the farm and the price, there are many aspects of the rice futures market in Dalian that can be helpful for Japan. When Chinese people conduct futures trading, they are characterized by the combination of futures trading and insurance. Therefore, more participants are being attracted to the futures market.
When the rice futures market was abolished in Japan, several million tons per month were traded in the rice futures market in Dalian, and it is still going well. In the most recent month of September, the trading volume exceeded 2.69 million tons. As annual demand for rice in Japan is less than 7 million tons, the scale of it can be understood. Trading volume since the beginning of this year in the rice futures market in Dalian is 29.4 million tons, about 4 times the annual rice production of Japan. Total transaction amount this year so far is 125 billion yuan, more than 2 trillion yen converted to yen.
In 1993 in China, rice was listed as a futures transaction on Shanghai Oil Commodity Exchange (Shanghai Futures Exchange at present), but ended up being a huge failure. In China, various crops are subject to control and this system still exists. Reform and opening-up began in China in 1993, and at the time, the Communist Party was trying to break away from socialism. It was also a time when active trading was encouraged by leaving trading to the market and when people were looking for ways to increase farmers’ incomes. That time, commodity futures exchanges were established experimentally in various places and various products had been expanded there. Rice was listed in Shanghai. In China, people often think while running. Therefore, trying it anyway and making corrections or abolishing it if it fails is more typical than creating regulations first. That time, it seems that the regulations were lenient. As rice price skyrocketed several times, rice futures trading was ultimately determined to be dangerous, so it was abolished. In addition to rice, various other products were listed on the futures market. However, because rice is a staple food, the abolition of rice futures trading seems to have become a memorable event among investors.
Then, as to rice, three products of indica rice and japonica rice were listed on Zhengzhou Commodity Exchange (ZCE) in Henan province from 2009 to 2014.
At first, an early variety of indica rice, that is quality decrease but early in growth and large amount handled, was listed. The next one to be listed was japonica rice. The third one was indica rice again, that is late-growing but high quality. Difference between the japonica rice listed on ZCE and the japonica rice listed on Dalian Commodity Exchange (DCE) was product specification: The transaction unit of DCE rice is 10 tons and it of ZCE rice is 20 tons. Also, the trading contract months between the exchanges are different too.
（Futures Tribune・issued October 24, 2023 ・no.3247）
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