By Wan Zhe Source: Global Times Published: 2017-1-5
Starting this year, the State monopoly in China`s salt industry will be officially dismantled with the removal of administrative price controls, allowing wholesale and retail salt prices to be determined by operating costs and market supply and demand and encouraging cross-region sales, even though the government will still issue licenses for salt producers.
The salt industry`s State monopoly has had issues in poor profitability and oversupply. These can largely be attributed to the State`s control over distribution, an old system that cannot guarantee a win-win situation for the salt market, the industry or salt producers, which hinders the true allocation of resources and the goal of matching supply with demand.
China`s decades-long reforms across industries have only left a small number of controversial industries untouched, such as salt, oil and telecom. To a large extent, putting an end to the State salt monopoly signifies the start of a new round of institutional reforms and can offer some insight for the future of those remaining sectors.
Inspiring as the market-based move sounds, it will be necessary to enhance regulatory measures for complicated market behaviors and remain rational in the anticipation of salt price movements.
First, opening up the salt sector to private players will require strengthened regulatory efforts from the government bodies. China`s salt regulatory authority has the power to issue licenses, exercise law enforcement and supervise licensed salt producers, most of which are State-owned enterprises (SOEs).
After adopting a market-oriented approach and removing the State monopoly, private capital will enter an industry that is not competitive, and will try to maximize profits through steps such as salt producing, packaging, transport and distribution and pricing. A more vigorous industry landscape is anticipated, but it is crucial that strengthened regulatory policies be in place to scrutinize food safety and fraudulent behaviors.
Second, some people have projected that salt prices are likely to fall. Compared with the previous model in which salt miners were only allowed to sell to State-owned distribution enterprises that pocketed a majority portion of profits through a chain of intermediation, China`s salt producers can now sell directly to the market. But, opening markets doesn`t necessarily lead to price falls.
People tend to believe that a market-based system will lead to a decline in prices, whereas a monopoly indicates high prices. In China`s case, the salt industry was part of an administrative monopoly, and its problems mainly resided in low efficiency and personnel redundancy among SOEs and high institutional costs. Under such circumstances, the high costs were not transferred to consumers, as certain State monopolistic sectors have recorded losses, but have relied on fiscal subsidies.
On the other hand, with market-based operations, salt prices will largely be determined by market supply and demand. Compared with the previous method of setting a price range and achieving an equilibrium by controlling both ends of supply and demand, now equilibrium will be reached via market forces, in which the price of equilibrium is unknown. After all, the ultimate goal for market players is to expand business to where one or two firms possess monopolistic resources and can set their own prices. In that sense, privatizing the salt sector will not ensure a price decline, and possibly reduced production and distribution costs are not exactly relevant to the consumer base.
In this respect, salt prices are likely to move both ways. Considering the expenditure of salt among households is negligible, consumers will not be greatly affected by salt price movements, but are expected to have access to a larger variety of products.
While the government has made a big move in reforming the salt industry, there are concerns that it will be difficult for new market players to enter into the industry, given that most salt producers in China are State owned and that there are bureaucratic hurdles to overcome. In fact, these concerns aren`t necessary. Looking back at China`s reform and development footsteps, almost every industry has followed a similar path of opening-up, shifting from State-owned to mixed ownership that includes private and collective capital.
It will only be a matter of time before private enterprises gain strength and market presence, because as long as the sector proves to be profitable and encourages competition, private players will gather talent and enter the industry. Besides, the rule of the survival of the fittest will filter out incapable companies from the old system, SOEs included, and leave room for further market competition.
It is clear that the government is determined in reducing certain administrative and regulative powers from the SOEs, fostering development of the private sector and facilitating competition. So long as the government policies don`t seek a backward path, which they won`t, those concerns are unnecessary.
The author is a visiting fellow of Chongyang Institute for Financial Studies, Renmin University of China.