On Ming Tang Shan, a steep snow-covered mountain with terraced fields in Anhui province sits Henghe village, a place known for its vegetables, tea and traditional Chinese medicine ingredients. It is remote enough that there are periods in the winter when people cannot get in or out of the village due to blocked roads.
It is also home to the consumers that Beijing says will help to drive domestic spending in China’s economy.
Under a new government program intended to help stimulate consumption, rural dwellers qualify for 13% subsidies on purchases of home appliances such as television sets and personal computers. They must pay the full price up front and then can apply at their local township office for the subsidy afterward.
But it’s a program that the villagers of Henghe will not be taking advantage of.
"Even with this 13% subsidy, we still need money to buy [the items]," said a farmer surnamed Ling, who met with CHINA ECONOMIC REVIEW in his home. "We already have some home appliances like a TV, so we don’t need a new one."
Not far enough
Observers say the program is a good idea, but that it fails to address the fundamental problem behind rural consumption: Farmers don’t have enough money.
"I think it will help rural consumption because it will reduce the purchasing price," said Li Ping, a staff lawyer at the Rural Development Institute (RDI), a global non-governmental organization that helps rural residents obtain legal rights to land. "However, I think the more important issue is for farmers to have money in the first place before they can buy anything, even at a reduced price."
Rural inhabitants make up more than 50% of China’s total population, but their level of consumption is very low. In 2007, rural per capita consumption came to just US$471, less than a third of the urban rate. In Anhui, consumption is even lower, coming in at US$402 per head in 2007.
This disparity is largely attributed to two factors: the rural-urban wealth gap (rural incomes rose 10.9% between 1990 and 2006 compared with 13.7% in urban areas, according to Celent, a financial strategy consultancy) and high savings rates among rural people who live above a subsistence level. The latter is blamed on the absence of social security and pension coverage, which spurs people to set aside more money for medical emergencies and potential loss of income.
This low base of spending means that even if Beijing is able to trigger a sharp increase in consumption, it’s unlikely to make a significant impact on the economy. The bottom line is farmers must still pay for 87% of the subsidized product from their own pockets.
This problem is compounded by the fact that up to 60% of an average rural household’s income comes from non-agricultural sources – principally family members who have moved to coastal provinces and found jobs in manufacturing or construction. With these jobs now in short supply, there is less money in the kitty and more mouths to feed as unemployed migrant workers return home, and those that might have sought factory jobs choose not to leave the village.
"Because of the financial crisis, our situation is a bit worse than last year," said Ling.
In Henghe village, there are approximately 2,000 farmers with about 96.67 hectares of farmland between them. The government gives the families subsidies for seeds and crops, but these are not enough for many families to support themselves. In the past, about 500 people "went outside" every year to look for work. They headed for Quanzhou in Fujian and Wenzhou in Zhejiang, where people from their village have relationships with factory management. This year, only 200 people left the village to search for a job. The rest will stay home to work the land.
Rural retail agenda
Excess labor on the farm doesn’t translate into more productive farming, though, and the Ministry of Commerce is trying to redress this balance by creating non-agricultural jobs in rural communities. It plans to open 150,000 shops in rural areas with the long-term goal of boosting consumption among the rural population by providing better access to consumer goods while creating jobs. The ministry estimates the program could create 775,000 jobs nationally by 2010.
The program has its skeptics. Andrzej Kwieci?ski, a senior analyst within the Trade and Agricultural Directorate of the Organization for Economic Cooperation and Development (OECD), notes that a government-directed – rather than a market-directed – program may create stores where there is insufficient demand. Meanwhile, Li of the RDI stresses that, the program still fails to address the issue of how farmers can make money.
Beijing tried to address the problem further at last month’s annual session of the National People’s Congress. Officials said an additional US$17.7 billion would be used to boost farm yields and rural incomes. Li is doubtful that this will have a long-term effect. He is adamant that the solution is to give farmers the security of land tenure.
"Once the farmers have tenure security they can make investments," he said. "To improve agricultural conditions, they must make long-term investments such as terracing and leveling their land, and doing some kind of land diversification."
Farmers are unwilling to spend the money at present due to the enduring specter of land seizures. Should a local government decide that a farm must make way for a factory, the farmer has no recourse, while any compensation package may be lower than the land’s actual value.
Ironically, the cornerstone of Beijing’s efforts to stimulate the economy – the US$586 billion stimulus package announced in November – might do as much to erode farmers’ faith in land security as it does encourage them to consume. A large portion of the package will go toward infrastructure projects, many of them intended to provide better links between urban and rural China. It is feared that this will trigger a new spate of land seizures as local governments make space for the new projects.
Available space is limited: Beijing has mandated that the country have 120 million hectares of farmland by 2020, only slightly less than the present level of 121.73 million hectares. Li is concerned that local governments might take advantage of the approximately 12.3 million hectares of rural residential land that is allocated for farmers’ housing.
"This residential land is already categorized as construction land, not farmland," he said. "So why don’t they use this land to satisfy their development needs?"
Time to cash in?
Land reform proposals have been trumpeted before. In October 2008, Beijing announced that farmers would be able to lease, sub-contract and swap their land-use rights, thereby giving them stronger security of tenure as well as options similar to urban land-use rights holders. The policy is also considered by many observers to be the first step on a long road toward land privatization.
Under the proposal, for which a pilot project has been set up in Chengdu, farmers could – in theory – cash-in on the value of their land and use it as collateral for loans. It also codifies the informal but longstanding practice of farmers renting out their land while they go to find work in the cities.
"The subtle differentiation goes a long way, when I as a farmer can be assured … nobody can just come and expropriate that property and take it away," said Subinay Nandy, country director for the United Nation Development Program’s (UNDP) China operations.
If land is privatized, farmers will feel they have a greater ownership over it, which in turn may deliver higher incomes and increased consumption, said Scott Rozelle, the Helen F. Farnsworth Senior Fellow in international relations at Stanford University. The idea is that a more fluid and secure transfer system may facilitate land consolidation. Bigger plots mean increased mechanization and larger crop yields, thereby boosting incomes.
According to the World Bank’s 2008 Quarterly Update report, Beijing has also made moves to register and certify farmers’ land, another step in securing land tenure. The effect of both measures would be to limit the scope of eminent domain that can be used by local governments to acquire farmers’ land. The government would also replace farmers’ 30-year leases with open-ended ones.
Flaws in the plan
There are problems with these reforms, however. First of all, the same local governments responsible for administering Beijing’s land-use policies rely on land sales for up to two-thirds of their revenue. There is currently no revenue replacement to encourage local officials to turn away from lucrative land grabbing.
Li Guo, a land reform expert at the World Bank, advocates the introduction of a market value-based annual property tax, which would make up for some of the lost income while leaving farmers with tenure security. There is no sign of it yet.
There is also the global economic crisis, which is slowing the rural development process. The proposed land tenure reforms that emerged in October 2008 have since been pushed down the list of priorities by concerns about the export sector – a case of the right policy at the wrong time.
"Twenty-five million farmers get laid off. What do they do? They go back to the farm. What happens if they had already sold their land?" said Rozelle.
Rozelle believes Beijing will not push for greater land reform until the economy is in a position to support a migration of farmers to the cities. At the same time, since many government officials fear the policy will spiral out of control with millions of jobless migrants overwhelming the cities, Rozelle cautions that the economic crisis may be used as an excuse to freeze the process indefinitely.
However, the experiences of other countries that have gone through land privatization – Vietnam is the stand-out Southeast Asian example – suggest that farmers are not inclined to sell up and move to the cities at the drop of a hat.
"The farmers would move very slowly on it. [This land] is a huge valuable asset. People are going to take it as an insurance policy, so they probably won’t cash it out," Rozelle said.
The villagers of Henghe are of a similar mind. A farmer named Wang, who spoke with CHINA ECONOMIC REVIEW at Ling’s home, said he and others would rather stay and work close to home rather than try their luck in the cities. The possibility of making more money is not worth the difficult living conditions that come with it, Wang explained.
The farmers think they could improve their incomes if they could sell Henghe’s tea and vegetable crops outside the local area, but no one is interested in developing a local processing industry or helping market products further afield. The largest and most successful farm collectives in China have generally emerged thanks to local government money and coordination. The Henghe village government has given the farmers some assistance with getting the crops out of the village, but villagers said they lack effective marketing strategies to let buyers know about the benefits of their crops.
The corporate model
When efforts are properly coordinated, it is sometimes done in conjunction with industrialized agriculture companies. These firms are still a relatively new phenomenon in China and they occupy a small fraction of the market. Two of the largest and best known are Chaoda Modern Agriculture and China Green Holdings, both of which are Hong Kong-listed. The companies rent land directly from farmers or local governments and then employ the farmers to work en masse on consolidated plots.
Chaoda has 34 production bases and nearly 33,000 hectares across China devoted to growing crops including tea and organic fruits and vegetables. Wholesale distribution accounts for nearly two-thirds of the company’s revenues, while the rest comprises a combination of exports and institutional clients such as hotels and supermarket chains. Fruit and vegetable player China Green is smaller, with just over 5,200 hectares to its name, but exports accounted for nearly half of total sales last year.
The business model is based largely on market intelligence – Chaoda and China Green are closer to the customers making them well-placed to gauge demand and decide what crops to grow and when to grow them. This prevents individual farmers from all growing one crop and causing the local market to collapse.
But farming on a larger scale brings countless other benefits.
"They procure seed and fertilizer centrally, and can ensure the quality of those things," said David Peerless, head of research at Evolution Securities China. "They can improve yields and productivity. They build greenhouses and open up additional land for cultivation by building roads and improving accessibility."
A China Green spokesman noted that the company is in a position to make investments in value-added infrastructure because it holds long-term land leases and has ample cash reserves. This is a luxury not afforded to most independent farmers, who have no choice but to pursue short-term, less cost-effective strategies.
"These investments require a large initial capital investment and, generally speaking, farmers don’t have these kinds of resources," the spokesman said. "Moreover, individual farmers on average own only small units of farmland. They may not be able to justify making such a large investment in their land."
The likes of Chaoda and China Green can also ensure product quality by monitoring the entire production process, even working with clients to select seeds and decide where and when they will go into the ground. The level of control is far removed from the fragmented supply and distribution chains that have long been typical of the industry.
"As food safety regulations are strengthened, it will become increasingly important for food to be tracked from land to end-user and therefore difficult for the traditional wholesalers to export," Peerless added.
For those who meet the relevant requirements, there is an opportunity to sell at a premium into overseas markets. Consistency is also rewarded. Lucrative supply contracts go to companies that have nationwide coverage and – because they are able to work around seasonal restrictions – can provide certain products throughout the year.
The same consistency is there in pricing. Peerless notes that Chaoda and China Green’s selling prices have been remarkably stable over the last few years, even during the first half of 2008 when food prices in general were rocketing. He puts this down to the cost savings that come from purchasing farming materials and equipment centrally. The companies can maintain big gross margins without taking advantage of higher selling prices.
The farmers themselves, meanwhile, stand to gain more from these arrangements than just money. In addition to leasing land, Asian Bamboo, a bamboo distributor and processor that works with farmers in Fujian, has invested in local logistics networks and set up agriculture education programs.
"We take quite a scientific approach. We have a huge research center in Fuzhou with Fuzhou Agricultural University and we are educating [the farmers] on bamboo," said Peter Sjovall, CFO of Asian Bamboo.
An industrialized agriculture company and the perks that come with it is something the farmers in Henghe village would appreciate having in their area – and they would even be willing to give up some of their farmland for it.
"We need agricultural product processing factories," said Ling. "If anyone can establish a factory here, with the capacity for about 500 people, that would be great – the surplus labor problem would be solved."