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Part 2:
Rural Revitalisation under Xi Jinping

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

In Part 2 of our deep dive into China’s rural economy, we address ‘Rural Revitalisation under Xi Jinpin’.

Key points

  • Ambitious ‘rural revitalisation’ has been at the top of the Chinese government’s agenda since the 19th CPC National Congress in October 2017 and has been reaffirmed several times since.
  • The new policy framework has three priorities, rural incomes, food security and sustainability:
    • Rural incomes: The first challenge is to address poverty among large numbers of farmers, and the second is to close the gap that exists between urban and rural residents’ living standards.
    • Food security: There are three challenges: eliminating undernourishment, providing enough food to meet the demand for a more nutritious, protein-rich and toxin-free diet, while achieving self-reliance in food security needs.
    • Sustainability: The challenge is to address farmland loss, soil pollution, water shortages, and water pollution.

Rural revitalisation tops agenda

Ambitious ‘rural revitalisation’ has been at the top of the Chinese government’s agenda since the 19th CPC National Congress in October 2017, which inaugurated Xi Jinping’s second term. The rural strategy was described only briefly in Xi's speech, but he placed it third of six priorities in his discussion on economic reform entitled “New Vision of Development and Developing a Modernized Economy” during the 19th Congress. Many of these priorities began as early as the 2000s, but Xi Jinping’s address formed a comprehensive restatement and augmentation of these various initiatives.1 Since then, the idea of ‘rural revitalisation’ has made numerous appearances in Chinese policymaking.

Rural revitalisation makes it into the top three of President Xi's economic priorities

For the last 16 years the first major policy document of any kind to appear each year has been the so-called “Number One Central Document,” issued jointly by the Central Committee of the CPC and the State Council. By tradition, this always focuses on rural and agricultural issues. It provides an overarching program of policy goals and priorities for the coming year. In February 2018, several months after the 19th Party Congress and the so-called economic work conference, the Number One Central Document laid out the “National Strategic Plan for Rural Vitalisation from 2018-2022”. This set out a clear timetable for rural reforms.

Number One Central Document - timetable for rural reforms

2020 Institutional & policy management framework in place

2021 Significant initial progress towards rural reform

2035 'Basic' modernisation of rural economy complete

2050 Strong agricultural sector, halt desert encroachment, prosperous farmers


Making farming attractive

“Rich peasants” is a recurring phrase, as the 2018 document attempts to construct a policy framework to “make farming an attractive job”. This is notable because in the Mao era, reference to "rich peasants" carried negative connotations. Rich peasants were seen during the 1949-1952 Land Reform as agents of capitalism in the countryside because of their frequent use of hired labour.

The plan expects that by 2020 an institutional and policy management framework will be in place to oversee future rural development, with significant initial progress already made towards rural reforms. All this will be done by the centenary of the Party in 2021. Meanwhile, by 2035 ‘basic’ modernisation of agriculture and the rural economy will be complete.

The ultimate goal, to be achieved by 2050, is to create a rural sector exemplified by “strong agriculture, a beautiful countryside and well-off farmers”. This would be in time for the centenary of the People’s Republic in 2049. These adjectives are well chosen, highlighting the core thrust of the new strategy: to eliminate rural poverty, raise rural incomes and significantly narrow the social and economic divide between cities and countryside. An ancillary, but no less important, goal of rural revitalisation is that both agriculture and the rural economy as a whole should attain a trajectory of sustainable and ‘green’ development. All this was reinforced by the most recent Number One Central Document, released on 19 February 2019.

The plan expects that by 2020 an institutional and policy management framework will be in place to oversee future rural development

Accountability at local level

The policy standout from the 2018 document was the ‘front-line commander’ system. As one policy analyst elaborated, “county-level party and state cadres are to be empowered to become the vanguard of rural revitalisation …The message from the Party centre is this: rejuvenating the countryside is now your metric to promotion, let the rural tournament system begin”.2

This dovetails with what Han Jun, the director of the Office of the Central Rural Work Leading Group and one of China’s top rural policymakers, has said, namely that local and provincial officials will be held accountable for realising the strategy. He added. “Implementing the revitalisation strategy will be an important yardstick to promote relevant officials”.11 In other words, solving rural reform is now increasingly one major way to advance in China’s political meritocracy.

What does ‘rural revitalisation’ mean in practice? Since the early 2000s the targets of rural policy have been captured in a Chinese formulation, often translated as the “three rural issues” (sannong wenti 三农问题). The three issues in question are those of:

Three rural issues

Implicit in the sannong mantra is acknowledging the need for a comprehensive policy package that can address the accumulated economic, social and environmental challenges facing China’s rural sector. As Han Changfu, the current Minister of Agriculture and Rural Affairs, put it:

“By resolving the ‘three rural issues’ ... we will ensure that the hundreds of millions of rural residents can share the benefits of modernisation so that the China Dream becomes everyone’s dream”.

Following the sannong formulation, rural revitalisation has broadly three priorities:

Farmers
Boost rural income

Agriculture
Improve food security

Villages
Achieve environmental sustainability

Boosting rural income

On farmer incomes, there are two problems to be solved: The first is persistent poverty among large numbers of farmers and others living in the countryside. The second is the wide gap between urban and rural incomes and living standards.

Although extreme poverty is concentrated in China’s western regions, a recent report in Hong Kong’s South China Morning Post4 vividly demonstrates that destitution can be a reality in rural settings much closer to affluent coastal provinces. It describes a village in Hebei Province, just three hours drive from Beijing, as “one of the poorest places in the country”, offering few employment opportunities beyond subsistence farming on land too barren to plant any crop except corn. One resident of the village said that, “I don’t think I will be free from poverty before I die”. Another, whose family makes do on 2,000 yuan a year (US$1.5 per day), confesses to having debts of 50,000 yuan as a result of having paid his son’s university tuition fees.

The legacy of such extreme poverty has left the son deeply disenchanted: “Life is so hard. I have learned not to compare anything with the others [fellow students]. I have stopped asking myself why I was born into such a family when I see my classmates getting new computers, changing their phones or just buying new shoes.”

Stories like these highlight the rationale and significance of Xi Jinping’s determination to eliminate abject poverty, as defined by China’s official poverty criterion (2,300 yuan per person per year, or just under US$1 a day).

Poverty at this level is almost exclusively a rural phenomenon in China and the government is putting its policy muscle where its policy ambition is. The number of people in the rural sector living below the 2,300-yuan poverty line fell from 166 million to 30.5 million between 2010 and 2017. Preliminary figures suggest that the corresponding number was 16.6 million in 2018.5 A report released by the OECD from July 2017 shows that the share of China’s rural population living below the poverty line fell from 30% in 2005 to 5.7% in 2015.6

The momentum of progress of recent years suggests that Xi’s achieving his goal of eliminating abject poverty from the countryside by the end of 2020 is likely, if not certain..

President Xi is likely to achieve his goal of eliminating abject rural poverty by the end of 2020

Improving food security

Food security comprises three challenges:

Eliminate undernourishment
Eliminating the undernourishment that still affects well over 123 million people living in poverty.

Meet demand for more nutritious food
Providing enough food supplies to meet the demand for a more nutritious, protein-rich and toxin-free diet as affluence increases.

Achieve self-reliance
Achieving self-reliance in food security.

 

Eliminate undernourishment

The first concern is still very real. Even today, China has not wholly eliminated hunger. Data published by the UN Food and Agriculture Organisation (FAO) reveals that in 2016-2018 undernourishment affected 122.4 million people in China7, representing 15% of the world’s undernourished and a figure exceeded only by India. Almost all of these are farmers, mostly living in impoverished central and western regions. Nevertheless, China’s record in reducing both the level and the incidence of undernourishment has been impressive. Ahead of time, China fulfilled the UN Millennium Development Goal target of halving the proportion of its population suffering from hunger between 1990 and 2015.

China’s record in reducing both the level and the incidence of undernourishment has been impressive

Improve food safety

On the second challenge of improving food safety, in 2011 a senior Chinese economist, Li Jingmou, encapsulated the history of China’s food security since 1949 in nine simple Chinese characters. The first phase, essentially referring to the Mao Era, was characterised by there “not being enough to eat” (bu gou chi, 不够吃). This was followed, Li argued, by a period (the 1980s and 1990s) in which their calorific needs having been met, consumers became concerned that their food “wasn’t good to eat” (bu hao chi, 不好吃). However, since 2000 – the third phase – a new preoccupation has emerged in the form of widespread fears by consumers that they “dare not eat” (bu gan chi, 不敢吃) the food that is available. In short, as affluence has grown, consumers’ concerns are increasingly shifting towards the quality and safety of the food they – and especially their children – eat. As a result, guaranteeing food safety has become a core focus of government food security policies.

The most serious threats to health derive from illegal practices such as food adulteration, use of toxic food additives, production of fake foods (e.g., milk powder from starch), excessive use of agricultural chemicals and soil pollution. The most infamous food safety incident involved the production by a Chinese company (Sanlu Group) of milk and infant formula adulterated with melamine – a toxic chemical compound added to milk to falsify its protein content. In 2008, more than 50,000 babies were hospitalised after being fed contaminated milk powder, six of whom subsequently died.

Following the melamine milk scandal, the government enacted new legislation designed to tighten regulatory control over food safety standards. A new Food Safety Law, enacted in 2009, failed to stem food safety violations, and in 2015 it was replaced by revised legislation. The 2015 Law establishes much more stringent food safety norms and imposes harsher penalties – imprisonment, fines, demotion and dismissal – on offenders and negligent supervisory officials.

A further issue has been the absence of clear lines of responsibility in dealing with food safety problems. Until the China Food and Drug Administration (CFDA) was established in 2013, several different agencies had overlapping responsibilities for regulating the food supply chain.

Moreover, the government is pushing consolidation among food manufacturers in order to boost food safety. Grain cultivation, livestock husbandry, aquatic production and horticulture are still dominated by small-scale production units, often operating on a household basis. The high degree of fragmentation that characterises the food supply chain makes it difficult to monitor and enforce quality standards. Although significant progress is being made towards creating larger farms, property rights reform and more comprehensive vertical integration of meat, vegetable, and dairy supply chains would help the government achieve tighter regulatory control.

Government is pushing consolidation among food manufacturers in order to boost food safety

Achieve self-reliance

On the third, China’s approach to food security is not just economic. It is also shaped by foreign policy considerations. Chinese foreign policy analysts have long believed that dependence on imported food risks increasing China’s vulnerability to foreign suppliers, especially the USA, which they point out has used food export controls to bring political pressure to bear on India and the former Soviet Union in the past. As Xi Jinping himself has put it, “we must … always have control over our own food supply”.

For many years, one of Beijing’s strategic goals was to secure 95% self-sufficiency in grain. In terms of cereals (rice, wheat, and corn), this target has been comfortably fulfilled. Between 1992 and 2016 gross imports expressed as a share of domestic output averaged a mere 1.9%. In only one year (2015) did they exceed 5%.8 But the picture is different if soya – a ‘grain’ in Chinese usage – is included. Until 2002 the 95% self-sufficiency goal was maintained, but since then such has been the explosive growth of soya imports that combined imports of cereals and soya have come to constitute around one-fifth of domestic production. The culprit is not direct consumption of grain, but its indirect uses, mainly feeding the animals to support the meat and dairy sectors.

In recent years, Beijing has retreated from – though not abandoned – its previous preoccupation with self-reliance in meeting its food needs. To meet the basic dietary needs of China’s impoverished and under-nourished farmers, rice and wheat self-sufficiency for direct human consumption remains a core policy goal. As a Ministry of Agriculture spokesman put it in 2014, “we must fill our rice bowls with Chinese rice.”

But a policy announced in 2014 has allowed greater flexibility in handling grain imports, especially for livestock and poultry feed, implying that self-sufficiency is taking a backseat to the first two challenges of food safety and undernourishment.

Figure 1: Net imports of soya beans, 1980-2017

Figure 1: Net imports of soya beans, 1980-2017

Sources: MoA, Zhongguo nongye fazhan baogao (China Agricultural Development Report), 2000 (Beijing: China Agricultural Publishing House; 2000); Zhongguo liangshi fazhan baogao, 2011 and 2017; Zhongguo liangshi shichang fazhan baogao, 2018.

Achieving environmental sustainability

China has faced environmental problems throughout its history. However, since 1978 the scale of its environmental challenge has reached unprecedented proportions. Resource pressures and environmental pollution already impose a huge social and economic cost, which may exact a political cost. This is why Beijing has, since 2004, placed so much emphasis on shifting China towards a new path of sustainable development. Judging from Xi Jinping’s speech at the 19th National Party Congress in October 2017, the coming years will see increasing attention devoted to finding a solution to China’s environmental crisis. As Xi himself put it as long ago as 2005, “Green mountains and clear water are like mountains of gold and silver”

Urban air pollution is the environmental problem that has attracted most media attention. The rural sector has four different challenges: farmland loss, soil pollution, water shortages and water pollution.

Farmland loss

Beijing has long sought to minimise arable land losses to help maintain China’s food security. But economic development and infrastructural construction have encroached seriously on arable land. Meanwhile, environmental degradation has affected the quality of arable land, especially through desertification and soil pollution. According to the Ministry of Natural Resources, between 1996 and 2005 alone 8 million hectares of arable land was ‘lost’. This equates to 6.2% of China’s 1996 total arable area, or more than twice Belgium’s total surface area. In response to desertification, the government has launched a “Green Great Wall of China”, a massive tree-planting initiative designed to halt desert encroachment by 2050.

Soil pollution

Soil pollution and contamination from domestic sewage, industrial effluents, farm chemicals and other toxic waste are other serious problems. The results of an official survey conducted during 2007-13 were so shocking that its detailed findings were declared a state secret. At a general level, it revealed that one-fifth of China’s arable land was polluted by chemicals that include lead, arsenic, zinc and cadmium. Some 70% of soil samples showed “light” pollution, and 7% were rated as “heavily polluted”, with pollution levels more than five times higher than the recommended national norm. Chinese sources suggest that millions of hectares of land may have to be removed from cultivation to combat the public health threat. In response, the government has enacted a new “Soil Pollution Prevention and Control Law”, effective as of 1 January 2019, to improve monitoring of and compliance with pollution control measures.

Water shortages

Lack of water is another huge challenge facing the rural sector. Agriculture remains by far the largest user of water, accounting for more than 60% of total use. China seeks to feed 20% of the world’s population with only 7% of global water supplies. Overall, China’s water productivity, measured in terms of GDP generated per m3 of water used is still around one-third of that of the global average and less than one-quarter of that of high-income countries. The Chinese government’s policy response to water shortages has been to implement a gigantic engineering project designed to transfer water from surplus regions of the south to northern regions where water shortages are most severe. In addition, it has boosted spending on water conservancy and pursued water price reforms in order to minimise wastage and encourage more efficient use, especially among farmers. However, raising prices for farmers poses a dilemma: agriculture is the least well remunerated sector of the economy. Thus, increased production costs resulting from higher water charges are likely to erode farm incomes.

China seeks to feed 20% of the world’s population with only 7% of global water supplies

Water pollution

Finally, China’s rural sector faces severe problems of water pollution, especially from human waste, industrial effluents and agricultural chemicals. Each year billions of tons of sewage and waste water are discharged into lakes and river systems.

A particular problem in the countryside is the lack of access to centralised sources of drinking water. Only 65% of Chinese villages have a centralised water supply. It is estimated that around half of all rural households still rely on groundwater for drinking, especially in poorer communities of western, central and north-eastern China. Efforts to combat water pollution are being pursued within the framework of important legislative initiatives, including an ‘Action Plan for Water Pollution Prevention and Control’ (2014) and a revised ‘Water Pollution Prevention and Control Law’, which took effect on 1 January 2018. Central to both are economic, legal and other control mechanisms, designed to improve water quality and safety by reducing the pollutant discharges of industry and farmers. Reports suggest that access to cleaner and safer water supplies has improved for the great majority of rural residents in recent years.

More than 90% of rural residents now enjoy secure access to improved sources of drinking water

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


1 “China’s ‘Rural Revitalization’ Set for 2018,” Dim Sums: Bringing Clarity to a Murky Chinese Economy, December 27 2017. http://dimsums.blogspot.com/2017/12/chinas-rural-revitalization-set-for-2018.html
2Kenderdine, T., “China’s rural revitalisation strategy underwhelms: Can the country reinvent the countryside?” Asia & The Pacific Policy Society Policy Forum, February 8 2018. https://www.policyforum.net/chinas-rural-revitalisation-strategy-underwhelms/
3 Patton, D., “China seeks to rejuvenate countryside with 2018 rural policy,” Reuters, February 5 2018. https://www.reuters.com/article/uk-china-policy-agriculture/china-seeks-to-rejuvenate-countryside-with-2018-ruralpolicy-idUKKBN1FP0NO
4 Zhuang, P., “Meet the Chinese villagers who fear they can never escape the poverty trap,” South China Morning Post, March 9 2019. https://www.scmp.com/news/china/society/article/2189274/meet-chinese-villagers-who-fear-they-can-never-escape-poverty
5 TJNJ and NBS, January 2019.
6 “China,” OECD Economic Surveys, OECD, March 2017. https://www.oecd.org/eco/surveys/china-2017-OECD-economic-survey-overview.pdf
7 http://www.fao.org/faostat/en/#country/351
8 TJNJ, 2018

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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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