Until just a few years ago, the West generally saw China as an unstoppable economic juggernaut governed by able and committed leaders, well on its way to challenging the US on the global stage. Today, attention is more likely to centre on China’s intractable debt problem and the rise of autocracy and the surveillance state. Yet just as China was not as robust and reform-minded as it looked before 2015, China today is not as troubled, ossified or despotic as it now appears. Our 2018 paper, ‘The Second Great Transformation’, argued that concerns about China’s recent challenges need to be set against its reinvigorated economic reform agenda, which has continued to gather speed in impressive ways since 2013.1
Under President Xi Jinping, China is seeking to augment the quality of growth, not just its quantity. Whereas targeting GDP involves reaching a numerical target, the new policy focus requires attaining several diverse objectives, including reducing inequality, broadening growth from coastal areas and rebalancing away from investment towards consumption. Among other things, this means focusing on rural China, because these 560 million residents are the key to all four priorities: keeping growth strong, reducing inequality, stimulating non-coastal growth, and stimulating consumption-led growth.
As a result, the residents of rural China have become a key engine of China’s second great transformation – the term we have used to describe the revival of energetic economic and social policy reforms under the government of President Xi Jinping since his arrival in 2012. This has been especially true in Xi’s second term. “The rural revitalisation strategy” announced by Xi Jinping at the 19th National Party Congress in October 2017 is a core policy proposal. It is gaining ground in impressive ways.
The residents of rural China have become a key engine of China’s second great transformation
Despite these developments, the arguably backward-looking consensus among most market observers is that the future of China lies in its urban areas, and the relevance of the rural sector to China’s development trajectory is small and diminishing.
This could not be further from the truth.
For one thing, the sheer size of the rural economy means it matters greatly for China’s future. Even today, the rural sector accounts for 560 million people and around 350 million jobs, or 45% of employment throughout the economy.
Within the rural sector, agriculture proper remains significant. Since 1980, agriculture’s share of rural employment has fallen from more than 90% to less than 60%. But it still generates 215 million jobs.2 While urbanisation is expected to continue for the foreseeable future, current estimates suggest China's rural population will still number 420-450 million in 2035 – larger than the projected total population of any country in the world except India.
Such statistics throw into sharp relief the productivity challenge the government faces in agriculture. That more than a quarter of China’s workforce should generate less than 8% of GDP highlights farming’s inefficiency compared with that of the other parts of the economy. China cannot advance economically if it leaves half a billion people behind.
The rural sector accounts for 45% of employment but just 8% of GDP comes from agriculture
Moreover, managing rural development is key for China’s urban centres. While statistics clearly distinguish between rural and urban, in practice they are strongly linked. In China, industrialisation, urbanisation and even globalisation all have distinctive rural characteristics. For example, urbanisation has included the creation of towns and cities deliberated sited in the countryside. An important aspect of industrialisation has been the expansion of rural manufacturing. Meanwhile, many rural enterprises have been engaged in production for export markets overseas; and reforming the household registration system (hukou) will allow many more rural workers to permanently reside in urban areas. China’s policymakers know that it is therefore impossible to plan for the whole economy without planning for rural areas too.
Focusing on food security
For a security-minded regime like that of Xi Jinping, the core importance of rural areas revolves around food security. Sixty years ago the party proclaimed that “agriculture is the foundation of the economy”. Against the background of a catastrophic famine that took up to 45 million lives between 1959 and 1961, policy emphasis on farming to restore food supplies made obvious sense. Today, however, conditions are far removed from those of the early 1960s. The challenge then was to meet the basic subsistence needs of an impoverished nation. Now it is to fulfil the aspirations of an increasingly affluent population for a protein-based, toxin-free diet.
Aside from these practical concerns, there remains a strong ideological component to rural reform. Even today, the Maoist ethic of agriculture being foundational continues to influence Chinese leaders. The current five-year plan (2016-20) explicitly endorses agriculture’s fundamental economic and social role. Senior members of the Xi Jinping administration are too young to have strong memories of the events of the famine years. But history counts for a lot in China, and Xi and his colleagues cannot fail to be aware of the famous Chinese adage that captures one of the great lessons of China’s history: “Without the support of farmers, stability will be threatened; without grain, there will be chaos”.
When Chinese speak of ‘chaos’, they are articulating a notion which carries potentially apocalyptic overtones of social collapse, administrative disorder and political implosion. Chinese history has many historical precedents for peasant rebellions, which have sometimes been serious enough to have overthrown dynasties. This is important, not least because the roots of the Chinese Revolution lie in the countryside. The successful rise of the CPC came in large part from peasant support.
“Without the support of farmers, stability will be threatened; without grain, there will be chaos”
Peasant rebellions through the ages
Viewed from such perspectives, it’s ironic that, until quite recently, those living and working in the countryside – above all, farmers – were among the most marginalised groups in Chinese society. The rural surplus was consistently deployed to urban areas. Indeed, for most of the four decades since marketorientated reforms began in 1979, urban-rural income and consumption gaps have steadily widened, transforming China from one of the most equal to one of the most unequal countries in the world.
Rising discontent in the countryside
Since the 1990s, the limits of rural social tolerance have increasingly been tested. This has given rise to widespread expressions of discontent and frustration among poor farm workers and other deprived rural constituencies, whose personal difficulties have been reinforced by lack of access to adequate social security provision (pensions, health and elderly care, and education). Such resentment has sometimes spilled over into demonstrations, which occasionally have turned violent. The Chinese leadership is acutely aware of the political threat inherent in any form of protest. Anticipating such dangers, therefore, commands a high policy premium.
For all these reasons, it is no coincidence that Xi Jinping himself has embraced the notion of ‘rural revitalisation’ as one of the cornerstones of the development strategy designed to fulfil his ‘Chinese Dream’. As he clearly stated in his speech to the 19th Party Congress in October 2017:
Issues relating to agriculture, rural areas, and rural people are fundamental to China as they directly concern our country’s stability and our people’s wellbeing. Addressing these issues should have a central place on the work agenda of the Party, and we must prioritise the development of agriculture and rural areas. To build rural areas with thriving businesses, pleasant living environments, social etiquette and civility, effective governance, and prosperity, we need to put in place sound systems, mechanisms, and policies for promoting integrated urban-rural development, and speed up the modernisation of agriculture and rural areas”.3
Ultimately, the rural sector lies at the heart of Xi Jinping’s economic agenda. The government’s ability to fulfil major economic goals – those relating to employment, food security and rebalancing – depends critically on the success of its rural policies. So too does its ability to realise important social and other objectives, including poverty reduction, the creation of a more inclusive society, and environmental sustainability. Finally, an economically and socially revitalised countryside promises to deliver the political stability which China’s Party leaders see as the bedrock of their continuing rule.
Ultimately, the rural sector lies at the heart of Xi Jinping’s economic agenda
*Other contributing authors
Greg Kuhnert, Co-Head of 4Factor | Mark Evans, China Analyst | Mike Hugman, Portfolio Manager, Emerging Market Fixed Income