Pass the salt

Is China preparing to dismantle its oldest monopoly?

A labourer works at a salt production factory in Nangqian county

Salt of the earth: a low-tech approach to production persists in Qinghai

“The state should not be competing with the people for profit.” So argued an official in 81BC as Confucian scholars tried in vain to dismantle the government’s salt monopoly.

They had been recalled to the Imperial court after the death of Emperor Wu, who first instituted state control over salt in 119BC. Under pressure from merchants, Wu’s regent initiated a debate on the subject. But the salt revenues were deemed too important to abandon.

A Song Dynasty guide described salt many centuries later as one of the “seven necessities of life,” alongside firewood, rice, oil, soy sauce, vinegar and tea. By the time of Kublai Khan, salt taxes accounted for up to 80% of government revenues. And when the explorer Marco Polo visited China during the Mongol emperor’s reign, he noted that salt was being boiled and set into moulds as a form of payment.

“These rascals have none of the great Khan’s paper money, but use salt instead,” Polo reported.

Today, more than 2,000 years after Emperor Wu first hit on the idea of monopolising salt profits, the commodity is still the sole preserve of a government-owned entity: the China National Salt Industry Corporation (China Salt). China Salt is responsible for every aspect of edible salt production and is controlled by Sasac, the entity that manages more than 100 of the country’s largest SOEs.

But critics are getting more vocal in their condemnation of its monopoly. Salt, they say, is no longer the strategic commodity it once was. It also generates little tax revenue – about 0.04% of the total fiscal take according to an article published recently on NetEase.

So why has it not been opened up to more competition?

In 2010, there were hints that reform was imminent when the media reported that 100 private sector salt manufacturers would be allowed into the market. But the move never happened. China Salt put up a fight, arguing that it needed three more years to prepare for change.

These blocking tactics still seemed to be working in February 2013, when Alibaba’s shopping platform Taobao was told to remove rival edible salt listings from its site. The online giant was told it was breaking rules forbidding salt sales.

But in late April, reform seemed to be back on the cards again when China’s top economic planning body, the NDRC, announced that it was revoking administrative rules governing China Salt’s exclusive rights to produce and sell salt.

This had an immediate impact on the share price of industrial and chemical salt manufacturer Yunnan Salt, which traded up to its daily limit on the Shenzhen Stock Exchange the following day. The day after that, the Global Times reported that the new ruling would make little difference initially as the government had delegated production-licencing rights to provincial level authorities under China Salt.

The flurry of reports has refocused attention on China Salt’s revenues nevertheless and the impact that its monopoly has on retail prices.

According to China Business News, producers sell table salt to China Salt at Rmb500 ($80.25) per tonne. It is then resold by China Salt’s provincial bureaus to wholesalers at more than Rmb2,000 per tonne. As a result, Chinese consumers are forced to pay roughly double their US counterparts for an equivalent-sized bag.

Historically, this mark up has translated into big profits. According to NetEase, China Salt made profits of Rmb13 billion in 2011.

Its monopoly covers all aspects of the production and distribution chain. Producers have no decision-making powers over how much salt to manufacture because China Salt determines production and pricing levels based on demand estimates from provincial and city level governments. The group then distributes the salt via provincial bureaus.

However, local media reports that China Salt has been losing money in recent years despite revenues increasing by Rmb979 million year-on-year to Rmb20.4 billion as of September 2013.

Over the same time period it reported an increase in net losses from Rmb151 million to Rmb428 million.

One retired China Salt official told CBN that the company “should be profitable, but it also now invests in other areas such as chemical salts where it’s a novice so the investment inevitably goes wrong.”

Its realisation that the government was likely to open up the market to more competition was one of the triggers behind China Salt’s decision to enter the downstream salt business. Domestic media reckons the company wanted to widen its business scope as a selling point for a future stock market flotation.

But CBN suggests that China Salt has plunged into deficit because it does not know how to operate a competitive business and the downstream sector is plagued by overcapacity.

NetEase laments that China Salt’s main business is plagued with problems too and that the industry as a whole is beset by rudimentary business practices and inefficient resource allocation.

End users have tried to get around China Salt’s monopoly by buying salt on the black market but face fines and jail sentences if they are caught. Worst affected are small food producers who need edible salt to make their products. Many have turned to industrial salt, which is open to competition and fetches about Rmb500 per tonne. The main difference between edible and industrial salt lies in the fineness of the grain.

Another gripe from food manufacturers is that the government’s salt is damaging the country’s health because of the mandatory addition of iodine.

This policy was instituted in 1994 as a means to combat goitres, a condition which enlarges the thyroid.

Yet the media reports that iodised salt can be unhealthy, with Oriental Outlook citing a number of surveys suggesting that excessive iodised salt consumption has led to an increase in thyroid cancer. It highlights the case of a man called Li Liguang who was told by a doctor to find non-iodised salt for a family member suffering from hyperthyroidism. But it was impossible. After hunting every supermarket and shop in his home town in Shaanxi province, he came back with nothing.

NetEase says that the Chinese consume between 200mg and 500mg of iodine per day via salt. The upper end of the range is more than double the maximum limit recommended by the World Health Organisation.

In spite of the health risks of its salt seasoning, the removal of China Salt’s monopoly is not universally popular. Some fear that private sector competition could lead to the kind of shortcuts that have tarnished other elements of the food chain (milk being a prime example, see WiC6).

Others argue that it is down to the government to put more effective monitoring in place.

Sun Jin, a professor of competition laws at Wuhan University told China News Service that the salt monopoly was created around the idea of food safety and strategic reserves, but that in practice the policy has been “misapplied”.

Should the government crack the monopoly open, it would give consumers more chance to purchase iodine-free supplies.

Capacity increases might even turn the country into a net exporter as well. Despite being the world’s top producer – 73 million tonnes were made in 2012 – China still has to import the mineral. It accounts for about a third of global salt demand, equating to about 100 million tonnes a year.

Keeping track: the Beijing Youth Daily reported that China now plans to scrap its state monopoly on the sale of salt, marking the end of a system with nearly 2,700 years of history (see WiC236). The move is intended to bolster competition. For years, the country’s economic planners have tried to eliminate the monopoly, but faced opposition from the China National Salt Industry Corporation, the state-owned company that controls salt distribution, and from consumers concerned about prices and food safety. Under the monopoly, the price consumers paid was three to four times higher than the price China Salt paid to authorised producers. (Nov 28, 2014)

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