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This paper presents a quantitative analysis of the Chinese wheat and rice industries. The specific purpose is to analyze government policies for wheat and rice, and their impacts on industry performance. Dynamic relationships among prices, quantities and total GNP are investigated with a vector autoregression using Chinese data. Government intervention in domestic commodity markets is quite common in China. The Chinese government is not only heavily involved in production, but also in marketing and distribution of most commodities, especially agricultural products. Production planning and collection rationing are used to reduce the need for food imports. Grain price policy is used as an economic tool to promote the government's objectives of maintaining price stability and containing inflation. Rice and wheat are an important constituent of Chinese food consumption, and these grains are also a big part of agricultural production. Sixty percent of the total agricultural output value is from grain production, and fifty-seven percent of total output of grain is from rice and wheat. The price is not a result of market equilibrium between supply and demand in China. Rather, the price is a measure of the government's distribution objectives among different sectors. It is known that China is different from market economies in its institutions. For example, most western countries have a market system, and prices are determined by the equilibrium of supply and demand. China is a socialist country and administers a planned economy. No free markets were allowed to exist before the economic reform of 1979. Thus, conventional supply and demand analysis cannot explain the price level since prices of commodities are not determined in a market. This paper consist of six sections. The next section discusses VAR models. The following section is an overview of Chinese grain policy. Section four reports on setting up the models. Results are presented in section five, and section six contains conclusions.


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