China’s commerce ministry has announced an investigation into sugar imports over the past five years, as the country prepares to unload excessive reserves built up when the government set minimum prices too high.

Developments in the Chinese sugar industry could set a precedent for the more strategically important grains markets, where China is struggling to reduce mammoth reserves accumulated over the past few years as the state bought at above-market prices.

Minimum prices set by China’s sugar-producing regions had inflated domestic prices and led to a strong flow of imports, as Chinese prices climbed above international levels. Last year, Yunnan, Guangdong and Hainan provinces eliminated the minimum price policy, causing sugar cane producers to plant less but leaving Chinese mills struggling with high costs of production.

The investigation into import practices comes as China prepares to sell off part of an estimated 7m tonnes of reserves, equivalent to about 40 per cent of annual sugar consumption. China could sell as much as 2m tonnes from reserves over the next year, its first such sale in four years, Bloomberg reported last week.

China’s minimum price policies for cotton, corn, rice, wheat and sugar were implemented several years ago in an attempt to maintain revenues for rural farmers and powerful state-owned co-operatives. But as prices diverged from market prices, they spawned widespread fraud in the reserves system.

They also attracted strong imports, some smuggled. The US Department of Agriculture estimates that between 1.5m and 2m tonnes of sugar were smuggled into China in 2015 alone.

The reserves policy has inflated apparent demand from China for a number of crops and spurred additional planting overseas, thus exacerbating the gap between Chinese and international prices.

The government has proceeded cautiously with its effort to unwind the problem by eliminating the minimum prices as state planners fear a crash in prices will cause a steep drop in domestic production, leaving China strategically vulnerable.

And an attempt to substitute minimum prices with direct subsidies to corn, wheat and rice farmers has proven tricky internationally. Last week, the Obama administration challenged China’s subsidies at the World Trade Organisation.



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