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China's tea industry in transition.

Like the rest of the economy, which has been transformed at great speed from a sluggish command-style system to one where market forces and international competition play an increasingly greater role in its operation, the Chinese tea industry has experienced great changes over the past decade.

Ten years ago, the tea industry was subject to a variety of price and production controls by the ministries and departments which were responsible for its operation. That the administrative management of the industry was not totally ineffective can be seen by the enormous advances made since the early 1970's in the expansion of area, and increases in national output, and export volumes.

However, by the mid 1980's the Chinese authorities decreed that productivity increases in land and labor were no longer possible under the old collective system, and that personal incentives were necessary to take the agricultural sector out of the rut into which it had appeared to fall. The fact that the problems of the sector as a whole were not necessarily experienced by the tea industry was either not appreciated or overlooked.

Since 1978, the production and marketing systems of the tea industry have been overhauled, the role of the state greatly reduced particularly in the purchase and sales of tea, and tea farmers left more to their own devices in contriving strategies to grow and market the crop.

This is not to say the Chinese government has withdrawn completely from the industry. In terms of the provision of production inputs, the supply of funds to purchase and sell the crop, management of processing factories, and the purchase and sale of exports, the authorities, whether at the national, provincial, or lower levels in the administrative hierarchy, still play a powerful and sometimes crucial role in the operation of the tea industry.

In fact, government intervention in the tea industry rates high by the current standards of an increasingly deregulated Chinese economy. Because of the importance of hard currency earnings to the internationalization of the Chinese economy, volume targets and mandatory procurements of tea - a major cash crop export - remain under the overall direction of the central government in Beijing and its provincial subordinates.

With the relaxation of export controls from January 1, 1993, tea remains one of the commodities which still requires a government export license, and it is listed as one of 16 key export commodities coming under unified national control.

The production, processing, and marketing of compressed tea for China's border minority nationalities (see Tea & Coffee Trade Journal, April 1990, pg. 50 and Ortober 1990, pg. 26) remains under strong government control because of the importance of tea to the diet of minority nationalities and the political necessity of maintaining peace on the sensitive border regions of the country.

However, the bulk of tea produced in China, green or scented tea which is consumed mainly on the home market is now grown, processed, and marketed largely free from administrative interference.

Recent trends

After a quarter of a century of uninterrupted growth in production from 1963 to 1988, national output fell by 2% in 1989. Since then, output has hovered around 540 million tons on a basically unchallenged total tea area of around 1.1 million ha (mature tea fields totalled 850,000 ha in 1992). Total yields have also remained constant at around 540 kg/ha, while yields on plucked gardens have reached 660 kg/ha.

In 1990, export volumes also fell. By 1992, exports had picked up somewhat to 190,000 tons. In 1988 (some sources claim it was not until 1991) the Chinese government abolished blatant subsidies on exports of many commodities. For tea, particularly black tea, which for many years had been heavily subsidized through an artificially low exchange rate and other means, the effect was dramatic.

Chinese export corporations could no longer afford to dump inferior quality subsidized black tea on world markets without paying a heavy price. However, this move had its bright side for the industry. The tea varieties in which China has traditionally excelled and gained high returns, that is green and specialized teas, were now able to assert their natural advantage over black.

The switch away from black tea in domestic production and exports has been immediate. Since 1990, the output of black tea in China has dropped by over 30%, while the production of green tea has increased by 15%. Increases have also been recorded by Oolong, up by 18% over the years 1990 to 1992.

Since a high point of 100,000 tons in 1988, the export of black tea had fallen precipitately to 65,000 tons by 1991. The export of green tea had grown by a similar percentage to the fall in black tea.

The procurement and sale of tea, for both the domestic and export markets, which had formerly been monopolized by state commercial interests, has now been thrown open to a wide range of government institutions, collective organizations, and individuals. Thus, the percentage of tea marketed by the state is on a long-term, probably irreversible, slide.

From a high point of 90% of total tea output in the 1970's, procurements by Supply and Marketing Co-operatives, an arm of the Ministry of Commerce, had fallen to 55% of production in 1992. The percentage of total social procurements (that is tea which is marketed and not consumed by tea farmers) purchased by the same organization had declined from 98% as late as 1979 to 60% in 1992.

In the retail sector, the decline of the state has been even more dramatic. From a position of virtual total monopoly in 1978, the state only sold about half of the tea retailed in China in 1992. Clearly, the withdrawal of the government from the market has had a major impact on the industry, the consequences of which have yet to be fully observed or measured.

In 1992, a wholesale tea market was opened in the south-eastern port city of Fuzhou, home to one of the largest Jasmine tea factories in the country. Two hundred operators from state, collective, and private enterprises, as well as individual merchants, gather to trade the commodity.

One of the most common complaints from Chinese experts over the past decade of economic reform has been the reference to the fall in the quality of tea. There is no sign of an improvement on this front. Investigations in 1992 revealed that only 50% of tea sold on the domestic market was up to standard, with a 40% rate for border tea. It is claimed that the quality of export teas is now below that of the 1960's.

The future

In recent years a number of organizations within and outside China have made optimistic medium-term projections for China's tea production and exports. In 1988, the State Council and in 1989 the influential Economic Daily were suggesting highly speculative output figures of 900,000 and one million tons, respectively, by the turn of the century. A 1991 analysis of the global tea scenario extrapolated past trends to predict that Chinese output would reach 1.4 million tons and exports 564,000 tons by 2001.

Projections for tea in the Chinese government's 8th five-year plan are still ambitious, calling for 650, 400, and 250,000 tons of output, domestic use, and exports, respectively, by 1995. However, according to a leading Chinese academic in the field, the output target has recently been revised downward to 615,000 tons, with 220,000 tons set aside for export. The same source estimates output to be 700,000 tons and exports 250,000 tons by the end of the 9th five-year plan period in the year 2000.

The ability of the government to meet export targets depends heavily on future trends in domestic consumption. Domestic consumption of tea in China grew at an average of over 9.5% per year for the period 1965-88. Over the 10 years 1978-88, it grew at an annual rate of about 11%.

The above figures imply that the growth in consumption will slow down to less than 3% per year. This, in turn, suggests that the income elasticity of demand will drop well below 1 (a figure more than sustained over the 10 years to 1988). This is unlikely given the continued rapid increases in incomes in China, and the fact that per capita domestic consumption lags well behind the levels of other major producing countries and other communities in the Chinese diaspora.

In 1990, per capital tea consumption in China was 0.37 kg. It is predicted that this figure will rise to 0.5 kg by the end of the century. The proportion of exports to domestic consumption has reversed from a ratio of 100:20 in 1949 to 100:210 in 1991, and the potential for further growth in the domestic market is enormous.

In China, tea is still a luxury product, both in terms of the size of the income elasticity of demand and in the sense that it is priced beyond the reach of the average citizen, particularly Han Chinese peasants in nonproducing areas. But rising incomes and price competition on the deregulated market may rapidly bring about a change in this situation.

The likely continued increase in domestic demand and the static nature of tea yields suggest that the tea industry in China is facing a major crisis. It is highly unlikely that the growth in supplies will be able to cater for future trends in domestic consumption and export ambitions.

In relation to yields, the "cause" of past output increases, that is the enormous expansion in area during the years of the Cultural Revolution (1968-76), has completed its impact. To return to a period of rapid or even steady output growth in tea output will require a qualitative improvement in farm management practices, substantial re-organization of the bureaucratic structure whereby three major ministries (agriculture, commerce, and foreign trade) are currently responsible for running the industry, as well as more extensive price reform for all sectors of the industry.

The persistent problem of processing capacity far exceeding the production of raw leaf will continue to destabilize the output of different tea varieties and their prices. In 1984, it was estimated that six refineries would be sufficient to meet output demand in Huangshan City in Anhui province. In 1991, there were 230 small-scale township and village tea enterprises alone in the locality.

The tea variety of real interest to the international tea trade is Black tea, which currently makes up less than half of China's tea exports and less than 20% of national output. The potential always exists for switching manufacturing between Green and Black tea from a given output of green leaf and, given the volatihty of the market and the different price and procurement regimes for different tea varieties, such changes have been frequently observed over the past decade in China.

Some of China's major tea producing provinces have made such switches in the recent past but, as the process of reform deepens and the exercise of market forces plays an even more important role in the allocation of resources, it is highly likely that the natural superiority which the Chinese possess in the production and manufacturing of Green and other specialized teas will spur on the further development of these varieties at the expense of Black tea. Recent figures have revealed such a trend.

Given the rapid expansion of other Chinese exports, it is highly possible that the government will allow, or will not be in position to prevent, a structural transformation in the mainland tea industry similar to that experienced by the tea industry in Taiwan during the 1980's: that is, a phasing out of exports and a rapid rise in domestic consumption. If this occurs, the expectation widely held at the beginning of the 1980's that China would pose a major threat to the world's black tea market and prices will not be fulfilled.

Thus, over the medium and long term, it is most likely that the domestic market will retain an ever increasing proportion of China's output, and that the export industry will lose its present importance as an earner of foreign currency. Like the industries of Japan, Taiwan, and India before it, China's tea industry will one day finally return home to serve its long neglected and suffering domestic customers.

China's capacity to increase tea yields, raise output, and catch up with the rest of the world should not be underestimated. However, patterns of change in the Chinese countryside, whereby farming is increasingly viewed as a low-profit occupation subject to the arbitrary rules and onerous taxes and charges imposed by local officials, as well as lacking the appeal of the myriad of nonfarming alternatives, will place further pressure on the production side of the industry.

The increased cost of inputs, particularly land and labor, makes mechanized pluking more attractive and economies of scale more likely. For example, in 1991 two-thirds of the tea fields on the Hangzhou Tea Experimental Farm were mechanically plucked (see Tea & Coffee Trade Journal, February 1990, pg 32).

Increased costs could also lead to a shift in tea-growing districts away from the prosperous, rapidly industrializing eastern provinces and further into the more undeveloped Chinese hinterland. Large-scale farms, managed by the state or groups of individuals, will replace the present small plots run by peasant households.

And foreign investment from Japan and Taiwan, which both have expertise in the production and processing of Green tea, may play a major role in the modernization in this, one of the most venerable of all Chinese industries.
COPYRIGHT 1993 Lockwood Trade Journal Co., Inc.
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:state role diminishes
Author:Forster, Keith
Publication:Tea & Coffee Trade Journal
Date:Jun 1, 1993
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