The grain market was a typical example of a situation in which the government was confronted with major problems whether it allowed the irrational price structure to persist or carried out price reform. State commercial agencies paid farmers a higher price for grain than the state received from the urban residents to whom they sold it. In 1985 state commercial agencies paid farmers an average price of -Y416.4 per ton of grain and then sold it in the cities at an average price of -Y383.3 a ton, for a loss of -Y33.1 per ton. Ninety million tons were sold under this arrangement, causing the government to lose nearly -Y3 billion. If the state reduced the procurement price, farmers would reduce their grain production. Because grain was the staple Chinese diet, this result was unacceptable. If the state increased the urban retail price to equal the procurement price, the cost of the main food item for Chinese families would rise 9 percent, generating enormous resentment. But even this alternative would probably not entirely resolve the problem, as the average free-market price of grain---Y510.5 a ton in 1987--indicated that its true value was well above the state procurement price.

There was no clear solution to the price policy dilemma. The approach of the government was to encourage the growth of nonplanned economic activity and thereby expand the proportion of prices determined by market forces. These market prices could then serve as a guide for more accurate pricing of planned items. It was likely that the Chinese economy would continue to operate with a dual price system for some years to come.

Data as of July 1987