Freedom of the land

In essence, farmers are being encouraged to either transfer their land-use rights to agricultural corporations or to use their plots as collateral for loans. In practice, millions of farmers already engage in such transfers, especially those working in the cities, but these informal transactions usually involve other small farmers, not business organisations.

A hint that something was in the air was signalled by Hu Jintao's visit in September 2008 to the historically significant village of Xiaogang. After Mao's disastrous policy of collectivisation and the introduction of the communes during the Great Leap Forward of 1958-60, the villagers of Xiaogang saw their once productive rice fields slowly degenerate into a dry, barren wasteland leaving them poverty stricken and dependent upon government subsidies for survival. In 1978, they took a stand deciding that communal land would be divided up between the villagers. Within a year productivity increased. By 1980, similar schemes, openly endorsed by Deng Xiaoping, were put in place by neighbouring village communes.

Deng subsequently introduced the Household Responsibility System which assigned land to individual families to use as they saw fit. Rural incomes increased dramatically, even as the average urban incomes stagnated, but a combination of inefficient agricultural practices and accelerating growth in the urban real estate market combined to increase the wealth divide as the city dwellers became increasingly affluent.

In October 2008, the Central Committee of the Communist Party of China adopted the Decision on Several Major Issues Concerning the Promotion of Rural Reform and Development (中共中央关于推进农村改革发展若干重大问题的决定). These reforms, in conjunction with the Property Rights Law adopted in 2007, the Methods for Punishing Violations of Regulations on Land Management and the allocation of US$82.2 billion to agricultural development earlier in 2008, are being heralded as Hu Jintao's assumption of Deng's mantle as champion of the rural poor in the 30th year of China's economic reforms. Hu has been long perceived in rural communities as being a metropolitan leader who is more concerned with urban development than with the plight of farmers. No Chinese leader can hope to feel secure in power while ignoring the plight of China's huge rural population.

Consoling country-dwellers

There are about 800 million farmers in China, and over 700 million live in the countryside. In 2007, the average income of a city-dweller was almost three times that of rural workers – in the region of US$600 a year. This is the largest gap yet recorded and a dangerous disparity for Hu Jintao's government which is built on the theme of creating a “harmonious society”.

Adding to this discontent among farmers is the widespread practice by which local officials – usually at the village level – requisition land for sale to manufacturers or property developers. Farmers allege that the process is rife with corruption, with local officials profiting from these development projects and farmers not given adequate compensation. In effect, local officials have become landlords treating collectively-owned land as their own.

The new policy requires that any transfer of rights in land must be entered into voluntarily and that adequate payment should be made. Nonetheless, although the policy document is silent on the point, it is likely that village committees will retain the final say-so over land deals, which is a worrying prospect for farmers.

The party communiqué states the government is looking to achieve a doubling of the per capita disposable income of rural residents to more than US$1200 by 2020. The Xinhua news agency has reported that the government intends to establish a modern rural financial system to extend more credit and investment into the countryside and has ordered banking regulators to establish 40 more rural banking institutions by the end of 2008.

It is widely anticipated, however, that many rural residents will use the equity in their leases to move to the cities. This will help mitigate the injustices within rural communities, add fresh impetus to the economic growth of China's urban centres and unleash entrepreneurial resources which would otherwise remain in the countryside. It should also help ease threats to national stability caused by unemployed city workers returning to their farms.

Opposite effect

In preparation for this anticipated migration, many large cities, most recently Shanghai, have introduced measures by which the country's 100 million migrant workers are now entitled to enjoy the same rights of official residency as locally-registered inhabitants (including social welfare benefits and subsidised education). In itself, this move is very attractive for rural migrants who have often been viewed with hostility and suspicion by urban dwellers and systematically ignored by the local government social welfare provision.

Nonetheless, the country faces the daunting problem of feeding 22% of the world's population on 7% of the world's agricultural land. It is facing a sharp conflict between land supply and demand. In 2007, the amount of available of arable land shrank to just above the amount deemed necessary to feed the population.

Agriculture is the leading occupation in China, although cultivation is limited to only about 15% of the land surface. The existing agricultural system of small scale, subsistence farming has hindered productivity and scale efficiency. In advanced agricultural markets such as the US, Canada and Australia, mechanised farming has traditionally established high yields using small workforces. And here lies a major cause for concern.

There is anxiety both within the government and elsewhere is that the new policy will lead to a rapid increase in landlessness and a dramatic widening of the gap between rich and poor. Instead of gaining from the ability to trade their land-use rights, farmers may have to give up their plots to large-scale agricultural enterprises because of the decay in publicly funded healthcare and education in rural areas. They will then find themselves obliged to move to the urban centres, bringing their discontent with them.

China's cities have so far avoided the sprawling slums found in many developing countries. One reason for this is that smallholdings have provided a safety net for migrant workers if they are without work in the cities. Mindful of the swelling urban population and the vulnerability of migrant workers, urban businesses may attempt to drive down labour costs, a move which would be met with stern resistance from the rural poor.

Boost to spending and investment

Nonetheless, at a time when the economy is slowing, the new policy offers a spur to consumer spending as new money either settles in rural communities or flows to the cities. Not only domestic but also foreign-invested banks are poised to make the most of the huge business potential in China's rural areas. Regulations issued by the China Banking Regulatory Commission in October 2007 (Opinion on Accelerating the Innovation of Rural Financial Products and Mode of Services) lifted restrictions on overseas financial institutions establishing branch offices in rural areas and will allow them to take up the slack created by the weak presence and inadequate service offered by local financial institutions.

Similar positives are in place for the agro-sector which is set to see increasing demand for sophisticated agricultural technologies and services: providers of irrigation and crop management technologies, agro-chemicals and agricultural plant are all set to enter a boom period. Du Hui of the agro-business division of chemicals manufacturer Dow is optimistic about the future in the agro-business sector. “Foreign companies are developing new strategies in China and speeding up agro-chemical production,” he observes, going on to say that new environmental protection policies and enhanced regulatory requirements are raising the bar for companies in the sector.

“A few big local and foreign companies will come to dominate the market,” he says.

Professionals in the construction sector are advised to proceed with caution. Measures adopted in December 2007 increased five-fold the tax on the use of arable land for non-farming purposes, removed the tax breaks previously available to foreign invested companies and increased the tax on farmland use by up to 75% in special economic zones where arable land is scarce. The new policy urges local government to adhere to “the most stringent farmland protection system”, and with satellite monitoring of land use in progress, there will be close scrutiny of the legality of new builds particularly in sensitive special economic zones.