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Fred Gale: China farm plan missing key ingredient

Delegates fill the Great Hall of the People at the opening session of the National People's Congress in Beijing on March 5. (Photo by Akira Kodaka)

China's new five-year plan calls for a complete overhaul of the countryside. If successful, the traditional patchwork of small plots, laborers in straw hats and water buffalo will be replaced by verdant fields stretching into the distance, dotted with tractors and lined with high-tech irrigation pipes.

     The big question is who will make the investments to transform a landscape that nobody really owns.

     Officials hope to lure massive amounts of investment to the hinterland while maintaining the idiosyncratic collective ownership system that was cobbled together over the last four decades. While they are developing adventurous workarounds to accomplish this, Chinese leaders' devotion to collective ownership is likely to end up undermining the transformation.

     Their critical innovation is a separation of rights to use land from rights of ownership. Rural land will still be "owned" collectively by village member families, but rights to use land will be packaged and leased out in commercially viable parcels for cultivation by a new class of "professional farmers." Rural officials are experimenting with arrangements that consolidate and securitize village land, distributing shares to village families who then receive annual dividends derived from rent and profits. In some instances, villagers can work as hired hands on the new farms, earning wages as well.

     Investment is a weak link in the plan. It's no accident that the massive investment in fixed assets that accounted for nearly half of China's gross domestic product at its peak mostly bypassed the countryside. During 2015, investment in agriculture accounted for less than 3% of China's fixed asset investment and also less than a third of the sector's share of GDP.

     No one has firm ownership rights of agricultural land, so there is little impetus to invest for the long term. Bankers won't lend to farms since farmers have few assets to use as security for loans. Moreover, commodity prices are falling and costs are rising. A number of village banks went bust last year when managers invested deposits in urban real estate projects that failed instead of making loans to local farmers.

Insecure assets

The villagers who nominally own the land have little interest in investing in it. Rural households mainly invest in their houses, an asset that is much more secure than plots of cropland. Their spending on building and refurbishing houses is nearly four times their investment in agriculture. Moreover, housing investment by rural people has grown nearly four-fold over the past decade while their agricultural investment has been mostly stagnant.

     Land that no one owns is often neglected. Soil has been stripped of organic matter and eroded at an alarming rate. A fifth of China's farmland is seriously contaminated with pollutants. Reservoirs and irrigation canals have crumbled. Significant amounts of investment are needed just to restore lost productivity due to neglect.

     The government is working hard to promote rural investment. The new five-year plan calls for loan guarantees, arm-twisting companies and banks to invest in farming, experiments with rural savings and loan banks and spending billions on irrigation networks and upgrades of low-yielding fields. Officials want to earmark farm subsidy payments for soil fertility improvements and on-farm grain storage bins. Restrictions on farmland use are being loosened to allow farmers to build grain drying facilities and sheds where they can park their tractors.

     The sticky fingers of rural officials may make a new countryside much more expensive than China's leaders thought. The torrent of cash headed to the countryside may present a potential bonanza for corrupt officials. Despite a three-year anti-corruption campaign, a representative at this month's National People's Congress session raised concerns about widespread corruption. Misbehavior by grassroots officials has included the skimming of funds sent down by the central government and the creation of fake farmers to pad subsidy payments.

     Like many city people, Chinese officials seem to take for granted the massive investments made by farmers in developed countries.

     By the time China's leaders are forced to privatize farmland, villagers will have already been removed from farmsteads that have been turned over to "professional farmers" and will not be in much position to benefit from ownership reform.

Fred Gale is senior China economist for the U.S. Department of Agriculture's Economic Research Service. The views expressed here are the author's and do not represent those of the USDA.

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