Another new deal

On a Friday afternoon in late October, China’s first agricultural land-rights exchange stands empty. Neither peasant farmers clamoring to sell land nor developers eager to buy it crowd the stylish, modern lobby. The Chengdu United Assets and Equity Exchange in Sichuan province, is a market maker in the sale and leasing of agricultural land – but it has yet to see the benefits of the land reforms announced by Chinese government leaders in Beijing earlier in the month.

The soft-spoken market development manager, Hou Peng, explains the absence of customers: "The land-reform policies announced by the government have yet to be translated into law." 

China’s 700 million farmers will have to wait a while longer for the property rights they need to sell, lease or mortgage their land. Consequently, China’s economy must wait for the birth of the countryside consumer and the expansion in rural demand that is expected to follow.

The hard life

Life is tough for China’s rural population. According to 2004 calculations by World Bank economists Martin Ravallion and Shaohua Chen, reforms have lifted 400 million rural residents from absolute poverty, but 114 million remain below the US$1 per day standard.

For hundreds of millions more, the opportunities opened up by China’s 30 years of economic reform remain out of reach. Low levels of education, poor public services and inadequate infrastructure all contribute to lower life chances for those born into rural poverty. Precautionary saving is high while consumption is low and focused on everyday necessities.

China’s leaders have made improving the standard of living and raising the level of consumption, in the countryside a priority. About one-third of the US$586 billion stimulus package announced in early November will go toward rural development, with infrastructure, education, and medical services as priorities.

New spending will complement and reinforce existing policies. China has recognized the need for improved medical coverage in rural areas, for example. "The ‘rural cooperative medical scheme’ began pilot testing in 2003 and is approaching nationwide coverage," noted Chris Spohr, a social sector economist with the Asian Development Bank in China.

Rural consumption may also receive a boost through the rural retail development market scheme. The scheme aims to reduce the costs of lengthy trips to retailers and bring some of the benefits available to urban consumers to villages and small towns. Local and foreign retailers and manufacturers, including Carrefour and Procter & Gamble, are involved.

But it is land reform that will do more than anything else to improve the quality of life and increase consumption in the Chinese countryside.

"Under the current land-rights system, peasant farmers face risks that make it difficult to plan for the future on the farm or migrate to the city," said Li Guo, the World Bank’s expert on China’s land reform.

Specifically, farmers face difficulties in using their land as collateral for loans to invest in technology that can increase productivity. It is also hard to sell or lease land to raise money for a move to the city. The result is millions of small farmers subsisting on meager incomes, and millions of rural urban migrants living an insecure life on the edges of urban centers.

Slow progress

The impact of land reform will be gradual. China’s peasant farmers are risk-averse: Their land is their best insurance policy and no one will sell without a great deal of thought. But the direction of the reforms will be toward bigger farms using more capital and less labor in the production process. That will mean higher incomes and higher levels of consumption.

"Health insurance is the first thing we need," said Wu Xianhua, a farmer from a village near Wuhan, Hubei province. "A PC, air conditioning and home improvements are some way down the list."

With elementary education free and basic medical expenses covered by cooperative schemes in many areas, extra resources can be focused on higher levels of education and increasing quality of medical coverage, the World Bank’s Li said.

After health and education come purchases to improve agricultural productivity and shift the ratio of labor and capital in the production process. Small tractors, superior-quality seeds and soil testing will all be on peasant farmers’ shopping lists.

Once these necessities have been covered, the first purchase of household electronics items may then become a real prospect for rural families. No one is running to the shops, though. Wang Shaoping, a farmer from Donghai in Jiangsu province, notes that the reforms risk creating unemployment among rural youth who set out for a better life in the city.

"They are easily laid off, just like in the financial crisis that caused many farmers to return to their hometowns," Wang said.

But with reform promising to drive higher incomes and levels of consumption higher, for both those who remain on the farm and those who move to the city, the benefits appear to outweigh the costs.