The concept stocks of supply and marketing cooperatives (SMCs) have been rather popular in China’s capital market recently, and there are widespread talks about the SMCs system will be recruiting civil servants. It has been widely rumored that there will be a “reboot” of the co-ops, allegedly 50,000 SMCs in rural China have been launched where the future purchase and sale of the country’s domestic agricultural products will be completed by them. As the present time is a special period on the eve of the central rural work conference, the issue of SMCs has aroused heated discussions within the country.
In the early days of the founding of the People's Republic of China, the SMCs were the core operators of agricultural products, materials, and rural daily necessities in the country, being the epitome of the era of planned economy. Back in those days, they were the main channel for material supply in small and medium-sized cities, especially in rural areas, even the only channel in some places. When the era of commodity shortage was over and the marketing channels became unblocked, the monopolistic position of SMCs in rural areas and small towns finally came to an end.
This does not spell the end of the SMCs in the Chinese economy. In fact, the All-China Federation of Supply and Marketing Cooperatives has always existed, and the system continues to operate, though it has shrunk compared to the past. In 2018, the total sales in the whole system were RMB 5.9 trillion, with profits of RMB 46.8 billion yuan, and total assets being RMB 1.6 trillion. Agricultural materials, agricultural products, consumer goods, and renewable resources constitute the main source of income for the co-ops, with profit accounting for 15.7%, 28.7%, 17.4%, and 3.3%, respectively. At present, SMCs still have a considerable size in the grass-roots circulation system. As of the end of 2020, there were 6,697 chain distribution enterprises nationally, 10,802 distribution centers, and 832,000 chain and distribution outlets in the system.
All these while the Chinese authorities have paid attention to the SMCs, with the No. 1 Central Document (herein “Document”) in the past two years clearly pointing out its important position. The Document in 2021 proposes to deepen the comprehensive reform of SMCs and carry out pilot projects for an integrated system of production, supply and marketing, and credit. It also mentions the improvement of the platform for serving farmers' production and livelihood. On June 23, 2021, the SMCs, the Central Agricultural Office, the People's Bank of China, and the China Banking and Insurance Regulatory Commission jointly issued guidance and proposed that by the end of June 2023, the integrated system be initially established to promote rural revitalization and agricultural modernization. Meanwhile, the Document in 2022 mentions the improvement of the county-level circulation service network and the building of the collection and distribution centers.
The operating scope of these SMCs has also extended from rural agriculture to logistics, from the chemical industry to real estate, and even to e-commerce, finance, automobile, oil, and other sectors. In the capital market, there are also related concept stock companies. In rural areas, which are the main bases of the SMCs, the system has fully involved in rural revitalization from the perspectives of agricultural materials, land, finance, and marketing. For instance, some years ago Shandong Province launched a pilot SMCs reform which combined with the land transfer. Through such a program, the grass-roots SMCs have been transformed from simple purchases and sales to farmland management. Guangxi and other regions have also sought to jointly promote rural revitalization through the SMCs + Finance model by taking shares in financial institutions.
However, the SMCs have been marred with negative images in recent years, with news of corruption associated with them. According to statistics, in the five years from 2016 to 2020 alone, more than 40 officials of the national SMCs system were sacked, at least 5 provincial-level leaders of it were under investigation, and the main leaders in more than 10 prefecture-level cities were also sacked. There were also corruption cases being reported in some regions as well.
Corruption and inefficiency are related to institutional flaws in the system itself. For example, the assets of the SMCs system have always been collectively owned rather than state-owned. In some places, the local State-owned Assets Supervision and Administration Commission (SASAC) has no statutory responsibilities for fund supervision. Superior supervision lacks focus, and effective supervision cannot be carried out. Furthermore, some internal management systems of certain of these co-ops are not standardized, making the supervisory and balancing mechanism unable to play its role.
Another institutional defect of the SMCs is that they fall within the government system. The head SMCs office is a ministerial-level unit, the provincial-level SMCs belonged to the department-level units, and county-level cooperatives are section-level units. The directors are not elected by the members but appointed by the corresponding department. After entering the threshold of the market economy, this organizational structure will not be able to possess competitiveness.
Multiple factors have caused the SMCs to be in the awkward situation that while not being government departments, they undertake some administrative functions entrusted by the government and are directly engaged in market economic activities. They are not only a cooperative economic organization of farmers but also involved in the management of civil servants. Although they belonged to a collective ownership system, and they organize their own income, they are also being supported by the state. This unique system and multiple identities have brought regulatory problems to the SMCs system and caused some cadres and staff to involve in corruption.
Chinese society shows great concern about the re-emergence of SMCs, chiefly because there is the fear that this spells the resurgence of the planned economy. If the planned economic systems continue to appear in the Chinese market, while the market-oriented channels and mechanisms continue to shrink simultaneously, then the reasons behind this phenomenon will indeed be a cause of worry. Some news even claimed that the SMCs will promote the construction of a unified national market as soon as possible in the future. Making a connection between the SMCs system to the unified large market is rather lethal in the Chinese market, as it could cause some market participants and foreign investors to be anxious.
Researchers at ANBOUND believe that the “comeback” of China’s SMCs and the disputes they have caused should be divided into two parts. The cooperative system is a product of the planned economy era and it had played a role in history. After the country’s reform and opening up, this planning system was disintegrated, and most of the problems were solved by the market mechanism. However, for rural areas with great regional differences in China, the rural supply and marketing system remains incomplete. This, to some extent, is also a public welfare matter. While the market-oriented reform has improved efficiency, there are still certain issues with it. In addition, China's neglect of rural development in the process of industrialization and urbanization has also exacerbated the problems faced by the rural market. These problems are the defects that need to be tackled.
To solve these issues, is it necessary to rebuild the SMCs system? If so, to what extent should it be rebuilt? These are questions to be considered. If, as some people worry, the restoration of the planned economy is to be promoted by rebuilding the SMCs, which would negate the effectiveness of the market economy, this is surely something to be aware of. China is currently facing an extremely complex external and internal environment, where globalization has been severely impacted and geopolitics now dominates the world instead. Should it continue to tread on the path of reform and opening up? There seem to be more uncertainties than in the past. In the 20th National Congress held not long ago, the spokesperson repeatedly emphasized that China will adhere to reform and opening up and will not close the door. This appears to be a move to dispel such concerns.
Final analysis conclusion:
There have been concerns in China about the “reboot” of supply and marketing cooperatives. Such concerns are not about the SMCs’ efficiency as a material circulation channel per se but more about whether the planned economic system will return with it.
