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China’s agricultural reform grows bolder

The past 40 years of development and reform have profoundly changed China’s agricultural and rural areas. Annual growth of real agricultural GDP averaged 4.5 per cent during this time. China, with nearly 20 per cent of the world’s population but only 5 per cent of its freshwater and 8 per cent of its arable land, met 95 per cent of its own food demand in 2015.

Farmers transplant rice seedlings with a rice transplanter at a paddy field in Hengyang, Hunan province, China, 20 April 2018 (Photo: Reuters/Stringer).

Since the 1970s, agriculture in China has diversified dramatically. The farm economy is now highly commercialised and tens of millions of farms produce high-value commodities. Where off-farm employment was once rare, a majority of rural household income is now earned off-farm. Growth in agriculture and rising off-farm employment has dramatically reduced rural poverty. The number of people in rural China in extreme poverty fell from 250 million in 1978 to less than 15 million in 2007. Today, the goal of China’s government is to eliminate rural poverty by 2020.

This growth has occurred due to the combination of institutional reforms (the movement from collective farming to the ‘household responsibility system’), technological change (predominantly through sustained investment into the public sector’s R&D system), market reform (which took China from a planned economy to one characterised by efficient and relatively free-from-distortion markets) and agricultural investment (mainly in areas of water control, roads and communications). Of course, as China’s overall economy and society have changed, the agricultural sector has begun to face a new set of challenges

Food production has risen at the expense of the environment: research shows groundwater in northern China is being withdrawn and the water table is falling. Soil degradation is being observed in many regions and excessive use of chemicals has caused serious pollution. This has created tremendous challenges to achieving sustainable rural development.

Rising wages have increased the cost of food production and lowered China’s agricultural competitiveness in global markets, while concerns about national food security are high. Despite steady growth in rural incomes, the rural–urban income gap remains large.

In response to rising concerns about farm incomes and food security, China has taken several major policy measures since 2004. The initial set of policies included the abolition of taxes and fees and the introduction of direct subsidy programs, the first of which were the direct grain subsidy, quality seed subsidy and machinery subsidy. After domestic prices of chemical fertilisers and other agricultural inputs rose in 2006, China’s policymakers expanded the direct subsidy program to include an aggregate input subsidy.

At their peak in 2012, the four major subsidies reached 164 billion RMB (US$26 billion). Additional farm subsidies included those introduced for agricultural insurance, credit, land consolidation, and soil conservation and improvement. But despite this enormous investment, the subsidy program has only had a moderate impact on farmers’ incomes.

Beyond the use of subsidies, China’s agricultural officials have also used price supports. The most important policy measure was the minimum procurement price initiative, which was launched for rice in 2004 and for wheat in 2006. There was also the temporary storage program aimed at raising market prices, which was initiated for maize, soybean and rapeseed in 2008, cotton in 2011 and sugarcane in 2012.

While these price interventions did increase farmer incomes, they also generated a large price gap between China’s domestic market and international commodity markets. For example, by 2015 the wholesale price of maize was 40 per cent higher than the imported price. It reached 50 per cent in early 2016.

Given the clearly unsustainable nature of the market intervention, several new policies have been implemented and the subsidy targets were changed. Officials gradually began to shift part of the budget from subsidising contractors to supporting more productivity-enhancing investments, such as land consolidation. In 2016, China merged all subsidies on grain, seed and aggregate inputs into a single general income support program.

China also started to reduce the intensity of market interventions and phase out most price distorting policies. In 2013, the government lowered the minimum agricultural procurement price before completely phasing out procurement programs for rapeseed, sugarcane and soybean. Procurement for maize (which had been the most distorting) was abolished in 2016. The target price policy is currently only being implemented for cotton in Xinjiang. While rice and wheat are still subject to the minimum price procurement program, procurement prices and grain levels have been reduced since 2015. China, it seems, is returning to a more pro-market agricultural policy.

Recognising the resource constraints in its farming economy and the challenge of meeting a strict set of sustainable development goals, the Chinese government has made a strong commitment to agricultural investment. Since the mid-2000s, the Ministry of Agriculture has overseen significant public investment in land, water and technology. In 2011, China committed to investing about US$630 billion in water conservation during the period 2012–20. Priority is also being given to raising the land productivity and creating a system that protects and enhances its quality.

China’s agriculture sector has recorded remarkable achievements in the past four decades. But significant challenges remain. In 2017, China initiated a national strategy on rural revitalisation. It provides an even clearer pathway to agricultural transformation and aims to establish an institutional framework to oversee the revitalisation of the rural sector by 2020. It commits China to fully modernising agriculture and the rural economy by 2050. It also calls for higher-quality growth and stresses the importance of environmentally sustainable development.

Only time will tell if this strategy will succeed. But if it does, it will be in no small part because of the innovative and bold reforms of the last 40 years.


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