The nature of distortions to agricultural incentives in China and implications of WTO accession

China's domestic rice policy has moved toward liberalization over the last 20 years. Setbacks, however, have periodically occurred along the way because of conflicting policy goals. On the one hand, leaders recognize the importance of more efficient market mechanisms. Market outcomes, however, which often go against other important political goals such as holding ample rice reserved, low rice prices (in the 1980s), and higher farm income (in the 1990s), have induced policymakers to intervene in the markets from time to time. Thus, China's economic development has led to market liberalization, but this process is sometimes interrupted by retrenchment policies as a response to grain price fluctuations and other undesirable outcomes. The cyclical nature of grain liberalization has led to debate among scholars over whether China's rice markets are actually liberalizing or not. Some scholars argue that China's markets are not integrated, and rice markets are included among these. Others argue that China's rice markets are becoming remarkably integrated and that policy interventions are increasingly less effective. This paper examines the performance of China's rice markets with attention paid to the period 1995-2000. This period is of particular interest since policy clearly moved to disrupt the independent rice market growth during this time. Using a new set of disaggregated market prices, we analyze market integration using cointegration tests for rice and compare them with those for maize and soybean. In our paper, we find that, despite the periodic interventions into rice markets over this period, market integration remained robust and even increased over this period. In addition, a clear pattern of market activity has emerged for the different regions. Rice markets in North China appear to be more integrated, but that may be because different regions have preferences for certain kinds of local varieties. We also show that, even in poor rice-growing areas, village markets are tied to regional markets.