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The next half billion: China’s rural residents

What does the future of China’s rural economy look like and why does it matter?

The fast view

By* Philip Saunders - Co-Head of Multi-Asset Growth,
Sahil Mahtani - Multi-Asset Strategist,
Professor Robert Ash - SOAS, China Institute, University of London

China’s vast rural economy is the next growth opportunity

Investors are well aware of the urbanisation story in China. Yet it is rural China, with its over half a billion residents, that is now becoming the key engine of China’s next great transformation. To take just one example: the scale of rural e-commerce has expanded substantially in recent years and is now growing at twice the national rate. For Alibaba, rural e-commerce sales are growing more quickly than sales for urban areas.1 Disposable income growth in rural China is now running at nearly 11 per cent against 7 per cent in urban areas.2

As we detail in this serialised paper, which is based on a joint collaboration between Investec Investment Institute and SOAS' Robert Ash, who has spent his entire career thinking about rural China, this is not just a story of organic catch-up growth but of strong policy momentum. Under President Xi Jinping, China is seeking to augment its quality of growth, not just its quantity. This means moving away from GDP growth targets towards achieving several diverse objectives, including broadening growth from coastal areas, reducing inequality, and rebalancing away from investment towards consumption. None of this can be achieved without developing rural China. The 'rural revitalisation' strategy announced by President Xi Jinping at the 19th National Party Congress in October 2017 is the main instrument of reform.

For investors, this is an opportunity to get involved in the take-off of Chinese consumption growth. Rural incomes will continue to benefit from institutional reform, sustained agricultural productivity improvements, university enrolment, nutritional improvements, and rural tourism. Ultimately, however, the development of rural China is a story of integrating an economy on a vast scale. In the 20th century, the United States became a major continental trading power and the economic motor of the world, benefiting investors who rode that wave. In the 21st century, we believe investors should be laser-focused on the same transformation in China.

China’s rural economy: understudied and underestimated

Yet over the last two years, rural China has quietly become central to President Xi Jinping’s reform plans, as he believes the Communist Party of China's (CPC) ability to fulfil its major economic goals all critically depend on turbocharging the rural economy.

Economic goals:

Stimulate consumption

Reduce inequality

Environmental sustainability

Higher employment

Social stability

For this reason, an ambitious ‘rural revitalisation’ agenda has been at the top of the government’s policymaking since the 19th National Congress of the CPC in October 2017.

Infographic: Rural economy set for turbocharge

Rural China today

40% (560 million people)
of population
45% of national employment
3,202 Taobao villages
8% of GDP from agriculture
urban/rural income gap $6,939 in PPP* terms in 2018

Source: Beijing Statistical Yearbook 2018 (Zhongguo Tongji Nianjian or TJNJ), National Bureau of Statistics of China (NBS).
*Purchasing power parity

A new policy framework

China has set out a clear timetable for rural reforms based on a new policy framework with the ultimate goal to create a rural sector exemplified by "strong agriculture, a beautiful countryside and well-off farmers".

The new framework has three pillars.

Boosting rural income growth

  • On rural incomes, the first challenge is addressing poverty among large numbers of farmers
  • The second is to close the gap that exists between urban and rural residents’ living standards.

Improving food security

For a security-minded regime like China under Xi Jinping, food security is essential. There are three challenges:

  1. Eliminating undernourishment
  2. Providing enough food to meet the demand for a more nutritious, protein-rich and toxin-free diet
  3. Achieving self-reliance in food security needs.

Achieving environmental sustainability

  • On sustainability, the focus is on addressing farmland loss, soil pollution, water shortages and water pollution
  • Detailed policy prescriptions have been issued to address these challenges.

The ideology of rural reform

Aside from these practical concerns, there remains a strong ideological component to rural reform. Even today, the Maoist slogan, “agriculture is the foundation of the national economy”, continues to resonate with 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 still counts for a lot in China. President 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.”

Viewed from such perspectives, there is an irony in the fact that until quite recently, those living and working in the countryside were among the most marginalised groups in Chinese society. The rural surplus was consistently deployed to urban areas. For most of the four decades since market-orientated 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.

Discontent in the villages

Since the 1990s the limits of rural social tolerance have been increasingly 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, occasionally 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.

As Xi Jinping himself put it in his speech to the 19th CPC National 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.”
The Chinese leadership is acutely aware of the political threat inherent in any form of protest

Meritocracy in government

Aiding China in pursuing its rural reforms is its unique system of meritocracy in government. Rural progress is now a yardstick for promoting officials. This is important because of China’s model of political meritocracy, or what some have called its 'promotion tournament model'. It is a key platform for how China has been able to achieve such impressive levels of growth since the Deng years.

An early form of civil service examinations began in 165 BC in the Han dynasty, and was abolished only in 1905 at the end of the Qing dynasty. Exams were restarted after the end of the Cultural Revolution in 1978 and have become the main way of entering government since the 1990s. Today, China has gone a substantial way to revive its long tradition of examinations, evaluations and apprenticeships.

The system is not perfect – as everyone knows there remains a sizeable role for corruption and patronage. However, at its best, meritocracy is the system of government China strives for and often achieves. When China’s political system prioritises a policy outcome, its realisation can happen relatively quickly because there is less need for ‘on the job’ training given the extensive preparation of officials.

Today the challenge for China's administration is to move away from a focus purely on growth metrics as a means of bureaucratic advancement. Under Xi, the priority is increasingly on the quality of growth, which benefits a complex area of policymaking, like rural development.

Under President Xi, the priority is increasingly on the quality of growth

E-commerce: a new growth driver

E-commerce has become a prime engine of rural revitalisation. Explosive growth numbers already bear this out. In the four years to 2018, online retail sales in rural China increased by a compounded annual growth rate of 66%, compared to 34% nationally. As a proportion of total e-commerce sales, online gross merchandise value (GMV) for rural areas accounted for 20% of total online retail sales in 2017, up from just 6% in 2014. Meanwhile, the percentage of rural internet users that engaged in online shopping has tripled to half since 2008.3

In the fourth quarter of 2018, the growth rate of rural digital spending on Alibaba’s e-commerce platforms reached 24%, or 4.5% higher than that in first-tier cities.4 Recently, Alibaba has said that it is looking to make its rural strategy one of its three core strategic development plans over the next two decades, after global and cloud.5 has pointed out that in some rural provinces, the percentage of orders from smartphones is more than 90%.

E-commerce is not just about e-commerce. It boosts consumer spending power, narrows the income gap between urban and periphery, and augments productivity growth. In other words, it is vitally aligned with the government’s rural revitalisation effort.

E-commerce is vitally aligned with the government's rural revitalisation effort

Urbanisation with rural characteristics

This flies in the face of the backward-looking consensus that China’s future lies in its urban areas. If nothing else, such a view neglects the indelible link between China’s cities and villages. As we detail in this paper, which is based on a joint collaboration between Investec Investment Institute and SOAS' Robert Ash, who has spent his entire career thinking about rural China, in China urbanisation, industrialisation and even globalisation all have distinctive rural characteristics. For instance, urbanisation has included the creation of towns and cities deliberately 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 reform of China's hukou family registration system will allow many more rural workers to permanently reside in urban areas. It is therefore impossible to plan for the whole economy without planning for rural areas too.

Urbanisation has included the creation of towns and cities deliberately sited in the countryside

There is, moreover, the rural economy’s sheer size and impact on productivity. It accounts for 40% of China’s population and 45% of China’s employment. 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. 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. Reform is essential. It is impossible for China to modernise if it leaves half a billion people behind.

The rural future: three scenarios

Taking all of this together, we lay out three scenarios for the prospects for income growth in rural areas, each depending on Chinese reform momentum.

In the best-case scenario, rural incomes will benefit from institutional reform, sustained agricultural productivity improvements, high school and university enrolment, nutritional improvements and the growing use of e-commerce, and rural tourism. This will reduce the urban-rural income divide. In the worst-case scenario, these reforms will happen slowly, if at all, and the income gap between China’s rural and urban areas will continue to grow.

Figure 1: Rural-urban income gap

Figure 1: Rural-urban income gap

Source: National Bureau of Statistics, Investec Asset Management.
*($USD purchasing power parity)
**Absolute urban-rural disposable income gap


Final thoughts

Successful rural revitalisation impacts all the big questions in Chinese equity and fixed income. For equities, it implies a longer runway of growth for companies linked to the Chinese consumer, faster consumption growth, and, of course, a tailwind behind companies attuned to the needs of rural consumers. In fixed income, broadly it would mean a lower rate of inflation and a stronger currency that flows from a higher sustainable rate of Chinese economic growth and higher productivity growth.

In the past the way to convert the impressive Chinese macro story into returns has been to focus not on Chinese assets but those of suppliers to China—such as resource companies, resource-producing economies or exporters of capital and consumer goods. The creation of a vast, consumption-led domestic Chinese economy means the opportunity for domestic assets is where the opportunity lies this time. To judge by current Chinese equity valuations, that change is not yet reflected in prices.


*Other contributing authors
Greg Kuhnert, Co-Head of 4Factor | Mark Evans, China Analyst | Mike Hugman, Portfolio Manager, Emerging Market Fixed Income

1 See case study for more detail. Specifically communication with Elinor Leung, Head of Telecom and Internet Research at CLSA.
2 Source: Don't forget the countryside, Professor Robert Ash, SOAS, June 2019.
This is not a buy, sell or hold recommendation for any particular security.
3 and
Online retail sales in China in 2018.
4 “China’s rural areas surpass cities in growth of digital consumption,” Xinhua, China Daily, 30 January 2019.
5 Soo, Z., “Alibaba invests 4.5 billion yuan in online services firm to boost rural strategy in China,” South China Morning Post, 19 April 2018.

Important information
This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein.
All rights reserved. Issued by Investec Asset Management, October 2019.

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