As would be expected, rapid changes have given rise to a new set of challenges: periods of macroeconomic instability stemming from partially complete reforms; increased insecurity in employment and incomes; mounting environmental pressures associated with population pressure, agricultural intensification and urbanization; rising cost of food self-sufficiency; growing inequality; pockets of stubborn poverty and an occasionally hostile world trading environment.

China has demonstrated remarkable capacity to meet these challenges. Based on China's strengths, it has projected annual per capita income growth in China up to year 2020 between 4 to 8 percent, with a strong likelihood of 7 percent growth annually. To realize such high economic growth rates, government policies and the pace of reforms will be critical in several areas: skilled economic management including particularly the management of the government budget and public expenditures, reform of the public enterprises and the banking system, deepening of the capital and other commodity markets. In addition, rapid economic growth in China could be hamstrung by environmental degradation, food insecurity, income and employment insecurity, domestic social instability and a possibly more hostile world economic environment.

A combination of rapid economic and income growth, population growth and urbanization is likely to result in major increases in food consumption expenditures, in part reflecting a shift in the consumption from cereals, root crops and tubers to meats, poultry, chicken, marine products, fruits, vegetables, dairy products and oilseeds.

China's ability to feed itself has been a matter of intense debate in recent years. Following China's substantial imports in 1995, Lester Brown in his book "Who will feed China?" predicted alarmingly high rate of growth in food imports of up to 200 million to 370 million tons by 2030 associated with higher rates of Chinese per capita consumption, with adverse effects on the low income food import-dependent countries, particularly in Africa (Lester Brown). Brown's predictions have been refuted by virtually every analyst of the global food situation (Alexandratos 1996 and 1997; Paarlberg 1997; Rozelle and Rosegrant 1997; Pinstrup-Andersen, Pandya-Lorch, and Rosegrant, 1997; World Bank 1997.) and the Government of China (Information Office of the State Council of the People's Republic of China 1996). However, the Brown projections did help focus the attention of the Government of China, the World Bank and others to more critically examine the food security prospects for China. Some analysts have forecasted that China will become a major food exporter (Chen and Buckwell 1991, Mei, 1995). A few others have predicted that China will become a major importer (Garnaut and Ma 1992, Carter and Funing 1991, Brown 1995). The World Bank has projected demand for food grains to rise to almost 697 million tons of trade grain, 608 million tons of milled grain equivalent including 206 million tons of feed grain in 2020. The World Bank argues that, provided China invests sufficiently in agriculture, it will be able to supply most of its domestic food needs with likely increases in food imports to the tune of between 30 million tons to 90 million tons by 2020.

Rozelle and Rosegrants' alternative simulations also suggest that only with extraordinary income growth, severe resource degradation and failure to investment in agriculture could China's net cereal imports increase by 85 million tons in 2020 leading to cereal price increases of 10 percent relative to the base scenario. However, they project increases in government investment of 5 percent annually could make China a net exporter of 31 million tons in 2020, causing prices to decline by 11 percent.

Expanded livestock production could also put pressure on cereal imports in their simulations causing world market prices to increase by 10 percent depending on the technologies China uses in livestock intensification. Furthermore without further investment in agriculture, China's meat imports are also estimated to increase to 24 million tons from the current low level of 0.4 million tons. However, with investments and associated improved efficiency in the used animal feed and technologies, net meat imports could be half (0.2 million tons) of those currently.

It is clear that the precise levels of Chinese food trade will depend on investments in agricultural research, fertilizer production and import policies, investment in irrigation and pricing and trade policies, but they are unlikely to contribute more than a marginal increment to global cereal trade.

China's agricultural land is exceptionally small relative to its population. Official sources list cultivated and sown areas to be 95 million and 145 million hectares, respectively. However, satellite imagery indicates that the true cultivated area is about 132 million hectares. The 40 percent additional cultivated area implies that fertilizer application rates and yields are 40 percent less than indicated in official statistics and offer considerable potential to increase yields with important implications for food security. Under this scenario, the wheat and corn yields are similar to those in other Asian countries and well below the yields in major developed countries. According to some estimates since 1988 capital construction has removed 190,000 hectares of land from cultivation annually. Other estimates show greater loss of land. This has been compensated by land reclamation of 245,000 hectares annually. However, the land lost in the Shandong and Southeastern coastal provinces is high quality land where multiple cropping is practiced compounding the loss. Reclaimed land tends to be of poorer quality. Besides, the cost of land reclamation has varied between $2,000 to $20,000 per hectare depending on the terrain.

Whereas China increased agricultural investments considerably in the 1960s and 70s, growth in investment has slowed in the 1980s and 90s. In the government's 9th plan strong emphasis has been placed on agriculture in general and grain production in particular. Agriculture still contains a large share of the population, is an important source of rooting out poverty and keeping urban food prices low, an essential ingredient of urban political stability. But there are two quite different routes China could take. One is to continue the current emphasis on increased grain production and self sufficiency through a policy of controlled grain and fertilizer markets and subsidies as China has pursued in the past. The other is to increase production of relatively high value and labor intensive crops such as fruits, vegetables, poultry, piggaries and marine products while relying on the international market for the supply of grains.

Although the government has freed many markets, it still controls food grain markets, holds one of the largest stocks of grain equivalent, estimated to be between 260 to 400 million tons, if stocks at the level of prefectures, counties, provinces and the national level are considered. This level of stocks allows it to maintain 95 percent self-sufficiency. National and provincial level stocks of 40 million and 90 million are considered necessary. They are acquired by purchasing three quarters of all marketed grain at well below market prices, a level considered to be important to maintain low urban prices for consumers. Government pays provinces through the budget and the banking system for maintaining stocks. Taken together these policies cost China Y 85 billion annually, more than 5 times the resources the government spends on anti-poverty programs. The expenditures constitute three percent income tax on every man, woman and child. As agricultural supplies have far exceeded population and income growth, consumer reliance on government distributed grain has been reduced to a minimum in the last several years. This suggests that the government could gradually liberalize the domestic grain market reducing for instance, government purchases from 75 percent to 25 percent of the marketed grain output by 2020, while also liberalizing international trade in grain, in much the same way that it has liberalized industrial production and trade both domestically and internationally.

Fertilizer consumption in China has quadrupled since 1978. But China still uses poor quality fertilizers and there is much scope for improving the efficiency of fertilizer applications. While the rates of fertilizer application are still lower than in Japan or Korea, the marginal return to fertilizer use has declined due to the imbalance in the use of fertilizers with far too much emphasis on nitrogenous fertilizers and far too little on potash. Control of the fertilizer imports and emphasis on domestic self-sufficiency may explain the imbalance in fertilizer use. Policy reforms in the fertilizer sector involve liberalized trade in fertilizers, particularly in the types of fertilizers in which China is not a producer, rationalization of the domestic fertilizer industry to increase efficiency in production, and a more balanced application of fertilizers.

Agricultural Research has done much to increase agricultural production. Whereas government expenditures on research increased considerably in the 1970s, research spending as a share of agricultural output has decreased steadily over the last fifteen years and currently stands at between 0.4 to 0.5 percent of agricultural GDP (excluding investments by provinces), while the pressure on the research system to earn resources by commercialization of research results has increased. As a share of agricultural production, China's central government investment levels are a quarter of those in industrial countries if only public sector research is considered and perhaps one-tenth of those if investments in public and private sector research are compared, and perhaps half of those in Brazil. Yet only a small share of the income earned from commercialization of research is allocated to research (Pray 1997). The research by Rozelle illustrates that the number of new rice cultivars developed, released and commercially used in the first half of the 1990s was similar to that of the first half of the 1980s, but 25 percent below the output in the second half of the 1980s (Rozelle, 1996). But it is important to note that yields continued to increase despite the reduction in new cultivar releases. There is insufficient evidence to conclude that research productivity and output is declining, but it does suggest that greater attention must be paid to this issue because it could reflect a weakening of the agricultural research system. But it could also signal the inadequacy of technology transfer (extension) as research staff state that only 30 percent of the technology developed is regularly applied in farmers' fields and the balance remain "on the shelf," although new variety adoption rates are about 80 percent. However, it could reflect high risk or financially unattractive technology (World Bank, 1997c). China will need to increase its research expenditures considerably if the challenge of increased food self reliance is to be realized.

A China-CGIAR meeting in November 1997 indicated that Chinese policymakers are aware of the importance of investment in agricultural research, and the need for stronger linkages between the Chinese and the international agricultural research system. Nevertheless, returns to research are long term and difficult to capture and there are many competing demands on public resources. An important stimulus to investment in agricultural research will be the government's continued recognition of the consequences of not investing, namely, far greater reliance on international grain markets at reasonable prices for a large country such as China.

Water is one of the biggest constraints to increasing agricultural production particularly given the uneven distribution of water between the north which is drought prone and the south which is under constant threat of flood. Irrigation systems are essential for multiple cropping but are badly in need of repairs and maintenance, and there is much wastage of water due to poor water pricing policies. Substantial increase in investments in water are needed to ensure flood control and improved water management, rehabilitation of dams and containment of dikes together with improved policies to conserve the use of water. Besides industrial uses of water and the depletion in the quality of water due to industrial pollution are some of the most important sources of constraints to water use in agriculture (see below the discussion on environment).

As China liberalizes grain trade leading to average projected grain imports of about 60 million tons, it would need to expand the grain handling capacity of its ports. Only three ports have the capacity to handle bulk grain and delays in offloading entail considerable costs. At today's prices off loading of grain would entail costs of $900 million requiring new deepwater births, high volume rail corridors and bulk loading and unloading facilities.

There are few quantitative estimates of projected environmental degradation associated with intensive agricultural production. Yet environmental cleanup will pose a competing challenge for investment in agriculture. Abundant use of coal to meet the burgeoning demands for energy and rapid growth of cities with associated growth of automobiles and municipal waste have been large sources of air pollution with levels being high in China even by the standards of developing countries. Mortality rates of chronic pulmonary disease, a leading cause of death in China is five times as high as in New York, not only leading to considerable loss of life, but high cost of hospitalization and lost work days estimated to be 7.4 million person years a year.

Acid rain and water use and pollution associated with industrialization and urbanization are other major sources of water constraint. Disposal of industrial waste and organic fertilizer runoffs has been the major source of water pollution. Yet the health impact has been generally contained due to the widespread availability of safe drinking water. Still, water pollution is increasing water shortages and increasing the cost of provision of drinking water by having to move to safer areas.

China's per capita energy demand and increased use of automobiles associated with urbanization will critically shape the environmental prospects in China. Reduction in environmental pollution will call for replacement of outdated and environmentally polluting technologies, increasing energy efficiency and emission standards to that of Europe and the U.S., and pricing polluting industrial inputs to reflect the cost of pollution cleanup. As administered prices give way to market prices, the government would need to consider imposing taxes on such items as coal, based on sulfur and ash content, investing in alternative technologies in public transport and domestic energy use such as the greater use of gas for cooking and planning and regulating industrial, public and household uses more effectively.

China's integration with the rest of the world has been remarkably swift, and its trade patterns have been highly diversified, a phenomenon facilitated by import of goods for further processing and the window of Hong Kong. Between 1978 and 1995 the value of exports and imports as a share of GDP tripled, with China becoming the second largest recipient of foreign direct investment after the U.S. Link between trade, FDI and China's high savings rates have been key to China's rapid economic growth. China now accounts for 40 percent of the FDI to developing countries and is the largest FDI recipient among developing countries. In 1995 the $38 billion inflows accounted for 13 percent of industrial output, 12 percent of tax revenues and 16 million jobs mostly to the coastal cities in manufacturing. China wants to shift the investments more to the interior and towards infrastructure projects. Foreign investors are increasingly involved in power generation, railways, ports and highways with local governments selling shares to foreign investors. Agro-industries will benefit from these investments in the interior.

Further reforms will have to entail reduction of import quotas, and tariff and non tariff barriers. China's accession to the World Trade Organization and the associated reduction in trade barriers will also benefit many of China's trading partners, particularly if it includes agricultural trade reforms.

As in other countries, trade reforms involve substantial adjustment costs including reduced protection of state enterprises, a more flexible labor market, less employment and income security leading to concerns about domestic sociopolitical stability. Liberalization of cereal and fertilizer imports also cause concern about access to world markets and likely increases in world prices and domestic food price instability due to China being a large importer. Yet the World Bank's analysis shows that the current administered government price and stocking policies may be more destabilizing to domestic supplies and prices than would be a liberal trade regime at home and abroad. Furthermore, China can enjoy substantial efficiency gains from playing up to its comparative advantage, in the case of agriculture, between the production of grain vs. high value crops, and benefit more from the import of technology from industrial countries. Virtually all the research and technology development is done in industrial countries and increasingly much of it, including in agriculture through research on genetically engineered products, is in the private sector. China can benefit from increased use of imported technologies which have tended to spread rapidly and there is growing interest in the major agricultural exporters to China and multinational corporations in the expanding Chinese market for seeds, fertilizers, cereals, edible oils and other products.

China's external debt position gives it the flexibility to liberalize agricultural policies incrementally in much the same way that it has managed reforms so far. By the end of 1996 China's external debt of $130 billion with debt to export ratio of 85 percent and the debt to GNP ratio of 20 percent was less than half the developing country average and among the lowest in the developing world. Yet in view of the recent developments in East Asia, China needs to show prudence in foreign borrowings, monitor its short and long term debt more effectively and develop a clear framework for external borrowing including developing selected performance guarantees for its foreign borrowers and integrate its domestic public finance needs with the strategy for external borrowing.

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