By Paul O`Brien for China Brain
Understanding how China regulates its food supply chain is greatly facilitated by dividing it into two broad categories. The first is regulation of all farming orientated activities (crop cultivation, animal husbandry and fishing) and the regulation of all associated farming inputs/outputs officially termed edible agricultural products as regulated by “The Law of the People’s Republic of China on Quality and Safety of Agricultural Products” which fall under the remit of China’s Ministry for Agriculture (MoA).
The second broad designation includes all other food trade and production activities which are regulated under China’s keystone food safety legislation The Food Safety Law (2015) and falls primarily under the regulatory remit of the China Food and Drug Administration (CFDA) at a domestic level with the help of China's customs authority the AQSIQ . (* It is also noteworthy that all subsequent trading of edible agricultural products is regulated by the CFDA).
With this important designation in place it is necessary to mention that the content of this article will be restricted to dealing with legislation and regulation of food trade and non-farming related production activities and will primarily reference China’s Food Safety Law (promulgated October 1st 2015) and all supporting regulations, administrative measures, provisions and guidance documents already promulgated in support of China’s overarching food safety law.
China has a two tier food supply chain and this is reflected in its new food legislation, its regulatory system and its associated economic development plans. China’s food safety targets are now firmly focused on its middle and upper classes (about 300m people) and for this reasons the content of this article will also be limited in scope to the regulation of this food supply.
In China there is an extensive network of farmers that fall somewhere in the middle of a spectrum between subsistence and small scale industrial farmers. They operate throughout the country, utilizing self-owned logistics and selling small volumes of seasonally available produce through completely unregulated channels. These farmers are a standalone supply chain, encompassing all supply chain elements. They embody the concept of a self-contained farm-to-fork supply chain and due to the ephemeral nature of their business activities are almost impossible to effectively regulate. They do however represent a significant but ultimately unquantifiable contribution to China's complete food supply chain.
In addition there is an equally unquantifiable influx of foodstuffs imported through unregulated channels and then sold through social (weibo) and mobile media (wechat).
Defining the Context: A Brief look at China’s Food Regulation over the last Decade
It would be remiss not to include a brief chronology of the recent legislative and regulatory changes that have occurred over the last several years to a decade culminating in the recent promulgation of China’s new Food Safety Law on October 1st 2015. I cannot also fail to mention the specter of food scandal which continues to plague China’s food supply chain and is inextricably linked with the development of China’s food safety legislation. Indeed for well more than a decade the development and implementation of the Chinese government’s food safety policies have been reactionary in nature and largely in response to scandals. A significant number of China’s most important legislative and regulatory changes have been kneejerk reactions in response to the illegal activities of food criminals and attempts to fill the gaps in supervision and enforcement capacity highlighted by these scandals. In contrast recent food industry policies have been developed with careful foresight and are indicative of the shift in China's economic development plans.
A Chronology and Overview of Major Food Safety Scandals Precipitating Regulatory Changes (2004-2013)
2004: Fuyang Fake Infant Formula Scandal Precipitates promulgation of 2 hugely significant pieces of food legislation namely
- GB 7718 – 2004 “General Rules for Labeling of Prepackaged Foods”
- GB 13432-2004 “General Rules for Labeling of Foods for Special Dietary Purposes” (Infant formula falls under this category
2004-2007: Sudan Red Scandal and Nestle Excessive Iodine Scandal
The Fuyang Milk Powder Incident was followed over the course of the next several years by a succession of scandals most notably the “Sudan Red G” scandal of 2005 and a scandal involving excessive iodine in Nestle produced milk powders .
2008-2009: Melamine Milk Powder Scandal
At the time the melamine scandal first broke China’s overarching food legislation was the “Food Sanitary Law”. As early as 2007, in the wake of recent scandals, there were rumblings of government’s plans to consolidate all of China’s disparate food legislative documents, administrative measures, standards and guidance documents into a single umbrella legislative document that would function as China’s food safety law. It however wasn’t until the melamine scandal of 2008 was uncovered that a concerted government effort involving multiple ministries was finally undertaken, culminating in the promulgation of China’s first food safety law in 2009.
2009 -2013: Shineway Clenbuterol Adulterated Pork and Taiwan Beverage Plasticizer Scandal
- These two incidents prompted the promulgated of GB 7718-2011 “General Rules for the Labeling of Prepackaged Foods in China.”
From Reactionary Legislation to Strategic Economically Orientated Food Safety Legislation. (2013-Present)
- Up until March 2013 China’s food industry was regulated and administrated by numerous ministries each responsible for different elements of China’s food supply chain. Regulation of domestically circulated foods at this time was divided between the State Food and Drug Administration (SFDA), in addition to the Ministry of Health (now disbanded), the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and the State Administration for Industry and Commerce (SAIC).
- In March 2013 the government elevated the then SFDA to ministerial level status, renaming it the China Food and Drug Administration (CFDA) in addition to consolidating the regulatory responsibility previously designated to the aforementioned ministries under the sole regulatory remit of the CFDA. This became China’s first centralized regulatory authority tasked with ensuring food safety, production standards and the integrity of China’s food industry.
- CFDA: Regulates China’s Domestic Food Supply China
- AQSIQ: Customs Bureau Responsible for Inspecting and Testing the compliance and safety of goods at ports
- CNCA: Work in conjunction with AQSIQ and CFDA to conduct onsite inspection of international manufactures exporting to China to ensure compliance with Chinese national standards
- NHFPC: Work in collaboration with CFDA to help develop national food safety standards
Recent Developments in China’s Food Industry
As we can see China's food industry has undergone a period of a rapid transformation in the last several years. Picking a single milestone as a reference point is a difficult task but looking back to March 2013, which saw the elevation of the SFDA to the ministerial level institution we know as today's CFDA, is probably a good line in the sand to help focus further analysis. Looking at the events that have transpired after this key marker helps us place the concerted regulatory efforts of China's primary food regulatory institutions namely the CFDA, AQSIQ, NHFPC in the context of China's broader economic goals and understand the rationale behind many of China's recent legislative and regulatory efforts. Our second marker is the Oct 1st promulgation of China's new food safety law and the heavy emphasis placed on regulating imported foods.
The Bigger Picture: Finding a Balance between Trade Stimulus and Food Safety
A key goal as expounded in the sessions of China's National's People’s Congress is to continue to shift China in the direction of a more consumption based economy, deregulate key industries and to allow market forces to have a stronger influence on government policy. The government has earmarked China's food industry (in particular food importation) as a key battleground to achieve these goals as evidenced in recent data (AQSIQ 2014) indicating 17.6% annual growth in the imported food sector (roughly 3 times domestic average).
3 Birds with One Stone - Food Safety, Market Forces and Increased Importation
- The imported food supply chain with its clearly defined entry points is inherently more regulatable than China's domestic supply chain, meaning food safety can be more easily guaranteed. Combined with massive domestic demand for safe foods and the overall plans to allow market forces to dictate policy and to promote consumerism in its middle and upper classes China's recent food industry reforms and the contents of China's new food safety law begin to make sense.
- Unfortunately China faces a bit of a catch 22....deregulation in any key sector of the economy poses significant dangers. If China reduces regulatory compliance requirements for imports it invites disaster in the form of food safety scandals. On the other hand if it over-regulates importation of food it runs the risk of suffocating international investment, fueling importation through grey and black market channels and hamstringing its economic development plans.
On a Knife Edge.....
Treading this precarious line between over-regulation at the expense of international investment and deregulation at the expense of food safety the majority of China's policies reflect an effort to find the stable middle ground. China is shifting its emphasis from supervision and inspection at ports which is already stretching the supervisory capacities of AQSIQ towards source control and post market inspection by CFDA with plans to phase-in onsite manufacturer inspection in country of origin using CNCA (similar to meat, dairy, aquatic products, birds nest), to all food commodities, more requirements for documentation and recording of foreign manufacturer credentials and incrementally stringent inspection and testing of food imports for traders with a history of compliance issues at port. China plans to stimulate importation by reducing customs tariffs and reducing customs clearance administrative red tape which will bring about a more affordable, streamlined administrative process complete with user friendly IT-based recordkeeping for foreign enterprise exporting to China.
Haitao: The Leak Channel
China's best laid economic plans and attempts to control food trade balance through technical barriers to trade must cater to the massive demand for imported foods from Chinese consumers which due to the litany of food safety scandals is increasing every year. Import and sale of foods through unregulated channels known as "Haitao" is an extremely destabilizing force for China's economy and in recent years, developments in China's food industry particularly the development of crossborder ecommerce and associated food regulatory reforms have attempted to address this, echoed by Premier Li Keqiang's recent calls to give Chinese consumers greater access to foreign consumer goods.
Some Key Points about China’s Food Industry and Markets
- an unmatched consumer base composed of a burgeoning middle class with serious discretionary spending power
- continued upward mobility of lower classes (more consumers)
- safe food sells - traceability and authentication of foods
- dissatisfaction and mistrust of domestically produced foods
- changes in family planning policy and an upcoming baby boom
- an equally important senescent demographic with an interest in anti-aging products, functional foods
- a deep cultural appreciation for the multifactorial nature of disease and the role nutrition plays in prophylaxis.
- despite this fact there are paradoxically low rates of breast feeding among Chinese mothers
- government calls for increased access to foreign consumer goods
- a switch from premarket inspection to postmarket supervision
- deregulation of specific importation and trade channels e.g CBEC
- an upcoming baby boom (change in 1 child policy)
Coupling of Food Safety Legislation and Economic Goals
Under China's new food safety law the government has clearly legislated with an emphasis on food importation and will also push accountability for any food safety issues to the food industry ensuring individual enterprises bear full responsibility for food safety issues. In line with this it has legislated for source control via CNCA audit of international manufacturers exporting to china, risk based supervision, credit/blacklisting, a self-regulating industry and shifting from premarket to postmarket supervision.
The Chinese government's food industry development strategy is perfectly encapsulated by developments in its infant formula and dairy industry over the last several years. The coupling of legislation and development of technical barriers to trade have been carefully designed to shape markets and harness consumer demand for imported goods as a force for domestic economic growth. (I'll revisit later)
Major food safety issues will mean manufacturers lose the right to export to China by being struck off the AQSIQ/CNCA accreditation list. For smaller issues during standard testing at port, any safety and compliance issues uncovered by the AQSIQ will cause manufacturers to accumulate penalties and be subject to incrementally stringent compliance requirements based on their track record. CFDA will then be tasked with conducting monthly random sampling campaigns to mop up the unlikely problems that escaped the first 2 steps.
China’s Infant Formula Sector as the Model for Future Growth
In the next decade China will have the safest infant formula available anywhere. That will be just 10 short years after China's melamine scandal. The progress made in China's infant formula industry has been realized not by any massive improvement in domestic conditions, manufacturing standards, animal husbandry or pasture management but in savvy foreign trade policies and technical barriers to trade in the form of incrementally stringent regulations. Developments in China's infant formula sector encapsulate the key regulatory, economic, trade and business strategies adopted by China's government to improve food safety. It is the model which China's government will continue to use to rapidly improve the safety of foods circulating in its markets. When the Chinese government talk about focusing on imports, allowing Chinese consumers access to foreign products and letting market forces dictate changes in food safety the following is a broad overview of the strategy they follow.
- Regulatory Selective Pressures at a Domestic Level
China implemented successively stringent regulatory requirements for domestic producers forcing closure and/or mergers of China's lowest technical capacity manufacturers and survival and consolidation of supply into the hands of China's fittest domestic manufacturers. In a few years the number of manufacturers went from several hundred to just 128.
- Merger and Acquisition
The world’s largest international dairy manufacturers have engaged in multibillion dollar deals with China's largest infant formula manufacturers. International infant formula manufacturers get access to the world’s largest consumer base and a head start on competition through foreknowledge of pending regulations and changes to market access requirements. The Chinese manufacturers get access to raw materials from high value regions seen as the safest in the eyes of Chinese consumers ...Ireland, New Zealand, Holland, France, Germany, the experience of the world’s largest dairy companies and a share in the spoils of international companies’ profits.
- Technical Barriers to Trade: Funnel and Control Supply
Once the first two strategies are in place controlling supply is particularly important. China first required CNCA onsite inspection of all infant formula manufacturers. Recent notices to WTO and draft regulations released here in China show how China will limit manufacturers to just 3 product lines and require registration of all infant formulas. With the first 3 steps complete the boundaries between what is considered a purely Chinese enterprise and a international enterprise are becoming increasingly blurred. All players exporting to the Chinese market now have mutually vested interests with the Chinese manufacturers and their partner enterprises here in China.
- Fitting the Economic Paradigm: Made for China
The food industry is an important sector of China's economy and particularly important from a cultural perspective. A consumption based economy requires consumer products that are in demand. From a food industry perspective this essentially equates to sourcing of imported packaged goods and the ingredients which are used in these products. The government has earmarked specific high risk high demand sectors for implementation of its food safety improvement strategy starting with infant formula and other "special foods", meats and aquatic products. Chinese national standards also increasingly require dedicated labeling and formulation strategies which forgo use of simple over labels on existing products produced in other markets.
Current Regulation of Food Safety in Mainland China
To further aid understanding of China food legislation and regulation it is necessary to further subdivide China’s food supply Chain into another 2 key categories specifically
- Entry of imported food as controlled and regulated by the AQSIQ
- Regulation of domestic circulation, production and trade as regulated by the CFDA.
- In addition a significant number of Chinese national food standards are developed by the NHFPC (National Health and Family Planning Clinic)
New Food Safety Law
Beginning in earnest at the start of 2015 Chinese food safety policymakers have been working flat out to build a solid foundation for practical implementation of China's food safety law on October 1st 2015 which will serve as the framework for development of China's food safety infrastructure over the next several years. China is heavily reliant on imported foods and this is reflected in the strong emphasis placed on regulating imports, particularly what China classifies as special foods and foods for special dietary purposes i.e. health foods, nutrient supplements, infant formula .