When taking office last year, the Premier, Zhu Rongji, ranked reforming the country's grain management system as his highest priority. He quickly banned private grain trading and boosted the Government's procurement, storage and grain sales monopoly. Yet the losses keep mounting and it now looks like a major political setback for the embattled Mr Zhu. In a retreat from market-oriented policies, Mr Zhu announced more subsidies for buying up all surplus grain, a move intended to bolster reserves and stimulate consumer demand by lifting rural incomes. Yet in the past year these policies probably cost the Government an extra 200 billion yuan (HK$187.3 billion) and the grain distribution system is losing 15 billion yuan every month. This is on top of an existing mountain of debt run up by most grain bureaus. Some of the epic losses might be recovered when last autumn's grain harvest is sold but, for the moment, market prices are falling and the grain bureaus are continuing to lose money. Despite the floods, China has had large harvests, forcing the Government to pay out more at prices well above international levels. American corn is cheaper even after it has been shipped across the Pacific. But Mr Zhu cannot afford to seriously drop procurement prices or cut guarantees without damaging peasant 'enthusiasm' for growing grain. A drop in grain production would add to his existing political woes as this always looks bad in China. Further, undermining peasant earnings would also run counter to another key policy - to raise peasant incomes to boost demand for surplus industrial goods and ensure social stability. Premier Zhu can also be accused of having been ineffective in stopping private trading, cutting over-manning - a million jobs were to be slashed in the grain management system - and rooting out systematic corruption. The World Bank and the Asian Development Bank have also tried and failed to help improve the efficiency of the national storage and distribution system by handing out large loans. It now looks as if Mr Zhu is about to engage in a policy turn-around. He is proposing to allow large-scale commercial enterprises to buy grain from the farmers and may permit private mills and traders. Behind this also lies Premier Zhu's readiness to prepare China for entry into the World Trade Organisation and implement a bilateral agreement on agriculture which was reached in Washington in spring. This means abandoning the imperative of avoiding any dependence on imported grain, which conservative leaders feel would leave China vulnerable to a US grain embargo. Five years ago, Mr Zhu's predecessor, Li Peng, became so worried about the possibility China could not feed itself that he introduced policies which encouraged peasants to grow as much food as possible, irrespective of quality or cost to the state. The result was four years of record harvests. But economically, China would have been better off abandoning subsidies and, if need be, importing up to 10 per cent of its grain needs. A peculiarity of Chinese agriculture is its reliance on hybrid rice, a Maoist discovery made in the 1970s, which enables peasants to obtain high yields. Unfortunately, this hybrid rice tastes horrible and no one wants to eat it, not even the peasants. While hybrid corn can be fed to pigs, the hybrid rice is sold to the state and rots in storage. The peasants keep the better rice to eat at home and the surplus rice (as well as corn, cotton and wheat) is sold to the state at prices above those on world markets. No one in the cities wants to eat the rice either. People prefer fragrant imported rice. Its main function is thus to provide propaganda, in the form of statistics recording record harvests. Premier Zhu now wants to phase out the hybrid rice crop and abandon the Government's pledge to purchase all rice whatever the quality. Hybrid rice accounts for 45 million tonnes of China's annual 190 million-tonne grain crop. Roughly half the rice cultivated in China is hybrid. A new crop mixture is being pushed by Beijing, more in line with market demand and Mr Zhu said this could save 35 billion yuan next year. For the peasants, he is promising short-term pain, but long-term gain. In other words, peasants' incomes will have to fall next year although in the long term they will be better off if they can grow the food that people want. China is making a big push to try to introduce better seeds and to develop a type of high-yielding, high-quality hybrid rice. If it fails to do this, it will have to import new varieties that have been developed abroad and abandon the agricultural innovation of which it is most proud.