Rural reform

Improving policy and strengthening financial support to rural areas

The Opinion emphasises that as a general rule, greater national investment will be made to the countryside and for agricultural development. The priority of financial expenditure will be given to the agricultural and rural development, and the main concern of budgeted fixed asset investment will be directed to agricultural infrastructure and rural livelihood projects. The priority for revenues from land assignment will be provided to agricultural land development and rural infrastructure construction. Meanwhile, the quality and level of rural financial services will be improved. More credit funds shall be targeted to 'agriculture, countryside and farmers'. The tax preferences for agriculture-related loans, recipient-specific subsidies, increment incentives and other policies will be put into practice and improved. Agricultural banks, rural credit cooperatives, postal savings banks and other banking financial institutions will grant more lines of credit for agricultural purposes. The Opinion stresses that within three years, all remote villages and towns will be provided with basic financial services.

More resources directed to rural areas

In terms of empowering and benefitting farmers, the Opinion highlights that social resources will be vigorously directed to the agriculture and the countryside. All social forces shall be encouraged to establish 'pair assistance' relationships with rural areas and to participate in the development of rural industry and infrastructure construction. The central government has pledged to channel more subsidies to agricultural-related projects in order to increase the output of grain, potato, highland barley and peanuts, as well as the purchase of agricultural machinery. More policies will be provided for purchasing and stockpiling major agricultural products, including corn, soybean and oilseeds to stabilise the prices of major farming commodities.

Furthermore, the central government plans to provide more favourable policies to encourage various social forces to support rural areas. Enterprises donating through non-government organisations for rural welfare projects or local governments at or above the county level donating through setting up a special rural public welfare foundation would enjoy tax breaks, with no more than 12% of their annual profits being deducted before the calculation of enterprises income tax. More urban teachers, doctors, and cultural and scientific research institutions are encouraged to offer their services in the countryside. Rewards to these volunteers include providing spiritual and material incentives, position and technical title promotions, free training for specific recipients and other necessary measures.

How the reform began

After the establishment of the PRC in 1949, the central government's strategy for the development of the socialist economy was to give priority to the expansion of industry instead of agriculture. Thus, the countryside and farmers contributed and relented to industrialisation and urbanisation in the thirty years between 1949 and 1979. The rural economy was regarded only as a source of capital accumulation for industrialisation and urbanisation, and the rural economy itself was essentially concentrated on grain production¹.

Since the start of the economic reform in 1979, rural areas have undergone tremendous changes. A greater portion of farmers have been released from grain production and channeled into other economic activities. Three major structural changes can be identified: First, there was a crop adjustment from mainly grain crops to commercial crops. Farmers were given the right to choose, so that instead of harvesting only rice or wheat, they were allowed to grow vegetables, fruit plants, oil-producing plants, sesame, peanut, jute, sugarcane, or tobacco among others in order to increase their income. Second, farms went from pure crops production to agro-forestry development with an increased effort toward afforestation. Third, there was an agro-industrial adjustment with the emergence and vigorous development of rural industry².

Due to these structural changes, farmers' incomes had also substantially increased. Between 1978 and 1984, as a result of the introduction of the rural household responsibility system (HRS) in the countryside, rural incomes increased at an exceptionally high rate of 14.2% per year, before slowing down to 1.9% during the second half of the 1980s³.Rural income growth accelerated again to 7.9% between 1992 and 1996 but dropped to 4.1% for the period of 1997-2001⁴.

Problems in rural areas

The frequent fluctuations in farmers' incomes revealed certain serious problems in the countryside. First, the HRS had undeniable side effects. Although the HRS provided farmers with great incentives to increase the output of grain and other commercial crops, the division of land into micro-plots made economies of scale difficult to realise, and vulnerable to natural disasters and market changes. Additionally, local cadres in many villages carried out periodic 'readjustments' on the allocation of land under which farmers could lose their right to work on the original plot which they had been working on for years and be transferred to a new plot. Quite often, the conditions of these new plots were worse. Farmers who were close to the cadres could obtain healthier plots during these readjustments, while farmers who failed to please the cadres could be transferred to work on inferior ones. These readjustments encouraged corruption. Farmers became concerned only in their short-term interests and refrained from making long-term investment plans to improve the quality of their plots and diversify their production.

Second, due to the rapid economic development in coastal cities, millions of farmers in remote rural areas were abandoning their farming for work and more pay in factories and service industries in cities. This resulted in a flow of human resources, capital and technique to the cities, leaving rural areas lagging far behind. Now, villages suffer from poor leadership and a lack of skills in the rural workforce. For example, children in certain countryside areas are forced to suspend their studies due to a dearth of qualified teachers.

Third, the collective economy was deteriorating and public welfare facilities were missing. As a growing number of young farmers left their villages to find jobs in cities, only old men and women remained to work on family-assigned plots. Production brigades that farmers were once able to depend on in case of a natural disaster now no longer exist. Farmers can no longer expect a production brigade to send young men to save their houses, crops and farmlands. All they can do is to wait for the government's financial support.

Fourth, due to the implementation of the HRS, farmers were required to work only on plots allocated to them according to family size. This arrangement resulted in farmers becoming self-interested, only sweeping the snow from their own doorstep and ignoring the frost on their neighbours' roof. These family-centered production units have features of low production efficiency and high production costs, making them vulnerable to natural disasters. In China, agricultural production is still subject to climatic hazards. Natural disasters like floods and droughts are a major cause of sharp reductions in agricultural production.

Local governments' response to the Opinion

Since the central government pledges to allocate more resources to the countryside, local governments, have responded to the Opinion by planning to carry out three strategies. First, it will adjust the structure of local agricultural products. For example, if a county is known for producing a particular fruit due to unique climate conditions, the local government will take advantage of the financial support provided by the central government to concentrate its manpower and technology on the development of its most well-known products so as to increase farmers' income and their competitive capability in the marketplace.

Second, considering farmers' vulnerability to natural disasters and market competition, local governments will encourage and provide necessary support to companies that are capable of organising farmers to produce high quality economic crops by equipping them with necessary technology and providing updated market information. Additionally, the companies should also be responsible for the purchase, process and sale of agricultural products. From the farmers' perspective, with contracts signed with the companies in hand, all they need to do is to concentrate on supplying their quality products without worrying about market changes and natural disasters.

Third, the Chinese government plans to accelerate the process of urbanisation. As many as 60% of the 150 million migrant workers in China were born in the 1980s or 1990s. This new generation of migrant worker is unfamiliar with farming and constantly striving to be part of city life⁵. Local governments therefore plan to ease the restrictions over permanent residence permits in county seats and townships so that more rural residents can move in and enjoy the same rights and public services as original urban residents. In addition, local governments are prepared to allow migrant workers who have stable jobs and live in the cities for a certain period of time to join in the urban housing program. An extra benefit of urbanisation is the efficient utilisation of land resources in rural areas. Experienced farmers will be able to cultivate and concentrate the land masses as many peasants give up their farmland to pursue a migrant worker lifestyle in the city. It will be easier for farmers with large pieces of land to upgrade technology and improve productivity.

Foreign investor opportunities

Benefits to foreign investors include income tax exemptions based on specific industry investments. According to the Catalogue for the Guidance of Foreign Investment Industries(Amended in 2007) ( 外商投资产业指导目录（2007年修订）)⁶, foreign investors are entitled to income tax exemptions and deductions if they invest in the farming, forestry, animal husbandry or fishery industries. These industries are considered encouraged investment projects. Also, in accordance with article 27 of the PRC Enterprise Income Tax Law, (amended in 2007) (中华人民共和国企业所得税法)⁷ enterprises can enjoy income tax exemptions or reductions from income derived from agriculture, forestry, husbandry or fishery projects.

Possible stumbling blocks

After the publication of the Opinion and full financial support being offered from both the central and local governments, foreign investors may find profitable investment opportunities in China's rural areas. However, it is also possible for problems to arise. For example, local governments may promise potential foreign investors many things to attract investment. But when it comes time to realise the promises they have made, the local governments may not be so active. The incentive for certain local government officials to actively attract foreign investment projects is the lure of upward mobility. By showing their superiors they are capable of bringing in foreign investors and have improved the local economy as a result, they are deserving of a promotion. The concept of rule of law has not yet been deeply rooted in people's minds. In China, when two parties are trying to resolve a dispute, it is not unheard of they would avoid proper resolution channels like court or an arbitration tribunal to avoid the lengthy decision process. They would prefer to solve their issues through the cultural norm, using the guanxi network or applying the 'unspoken rules'. The lesson to be learned is that when a foreign investor decides to invest in China's rural area, it is advisable for him or her to seek the counsel of local lawyers and to sign the proper contracts with the local government.

Despite the aforementioned cautions, chances and risks do coexist in rural China. Do not be discouraged. China has made significant improvements to its investment environment and under the guidance of the Opinion, alongside the Chinese government's full financial support and improvements in infrastructure, transportation, and communication in rural areas, foreign investors may find valuable investment opportunities here.

Dr. Weiqi Cheng, City University of Hong Kong

Endnotes

1 Ash, R (2006) Squeezing the peasants: Grain extraction, food consumption and rural living standards in Mao's China, China Quarterly, 188, 959-998
2 Weiyong, Y (2009) Economic structural changes and rural income: Evidence from Chinese provinces during the reform period, China Economic Review 20(2009) 742-753.
3 Yao, S (2000) Economic development and poverty reduction in China over 20 years of reforms, Economic Development and Cultural Change, 48(3), 447-474.
4 State Statistics Bureau of China China Statistics yearbook Beijing: China State Statistics Press (1990-2002)
5 http://www.gov.cn/english/2010-02/01/content_1524621.htm
6 http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=87372
7 http://www.fdi.gov.cn/pub/FDI_EN/Laws/GeneralLawsandRegulations/BasicLaws/P020070327495400001563.pdf