Rural consumption
China’s agricultural land reforms should contribute to rising rural incomes and higher levels of cosumption in the countryside. In an article published by the China Economic Review at the end of 2008 I take a look at rural consumption and the likely impact of the reforms:
700m peasants
On a Friday afternoon in late October, China’s first agricultural land rights exchange stands empty. Neither peasant farmers clamoring to sell nor developers eager to buy land crowd the stylish, modern lobby. The exchange, a market maker in the sale and leasing of agricultural land, has yet to see the benefits of the land reforms announced by Chinese government leaders in Beijing earlier in the month.
The Chengdu United Assets and Equity exchange is part of a science and technology development park on the edge of Chengdu, Sichuan province, itself built on former agricultural land. Soft-spoken Market development manager Hou Peng explains the absence of customers: “the land reform policies announced by the government have yet to be translated into law.”
China’s 700 million peasant farmers will have to wait a while longer for the property rights they need to sell, lease or mortgage their land. China’s economy will have to wait a while longer for the arrival of the rural consumer and the expansion in demand from the countryside that is expected to follow. And Hou Peng and the agricultural exchange will have to wait a while longer for business to pick up.
Life for China’s rural population is tough. According to 2004 calculations by World Bank economists Martin Ravallion and Shaohua Chen, China’s economic reforms have lifted 400 million rural residents from absolute poverty, but 114 million remain below the US$1/day standard.
For hundreds of millions more, the opportunities opened up by China’s 30 years of economic reform remain out of reach. Low levels of education, poor public services and inadequate infrastructure all contribute to lower life chances for those born into rural poverty.
An average annual disposable income of RMB4,140 (US$606) for China’s rural residents compares unfavorably to urban net income of RMB13,786 (US$2,019), and the gap is widening. Because of these low incomes, consumption is low and focused on everyday necessities. Total rural retail sales in 2007 were about RMB2 trillion (US$292), compared with urban total retail sales of RMB3 trillion (US$438), up 128.29% and 148.49% respectively since 2001. With some 57% of the population still livening in the countryside and 43% in the cities, the difference in per capita spending is even more striking.
The current Chinese leadership has made improving the standard of living, and raising the level of consumption, in the countryside a priority.
The RMB 4,000bn stimulus package announced by the government at the beginning of November confirmed spending on rural infrastructure, education, and medical services as priorities.
New spending will complement and reinforce existing policies. China has recognized the need for improved medical coverage in rural areas. Chris Spohr, social sector economist at the Asian Development Bank’s mission in China, notes that ‘the “rural co-operative medical scheme” began pilot testing in 2003 and is approaching nationwide coverage.’
Underpinning improved public services and social supports, the abolition of agricultural taxation, completed in 2005, contributed to raising farmers’ disposable incomes.
Improved access to health and education services should reduce the need for precautionary saving, and free up farmers’ incomes for spending on a wider range of products and services.
In a further attempt to boost consumption in the countryside, the government has launched a rural retail development market scheme. The scheme aims to reduce the costs to rural residents of lengthy trips to retailers, and bring some of the benefits available to urban consumers to villages and small towns.
Local and foreign retailers and manufacturers including Carrefour, Procter & Gamble, and meat product company Shuanghui are all involved.
But it is land reform that will do more than anything else to improve the quality of life and increase consumption in the Chinese countryside.
Li Guo, the World Bank’s expert on China’s land reform, notes “under the current land rights system, peasant farmers face risks that make it difficult for them to plan for the future on the farm or migrate to the city.”
Peasant farmers face difficulties in using their land as collateral for a mortgage to invest in technology to improve on farm productivity, and in the sale or lease of their land to raise money for a move to the city.
The result is millions of small farmers subsisting on meager incomes, and millions of rural urban migrants living an insecure life on the edges of China’s urban centers.
The impact of China’s land reform will be gradual. China’s peasant farmers are risk-averse. Their land is their best insurance policy and no one will sell without a great deal of thought. But the direction of the reforms will be toward bigger farms using more capital and less labor in the production process. That will mean higher incomes, and higher levels of consumption, in the countryside.
For Wu Xianhua, a farmer from a village near Wuhan in Hubei province, a higher income would translate into higher levels of consumption: ‘health insurance is the first thing we need, and a PC, air conditioning, and home improvements are someway down the list.’
At the World Bank, Li Guo confirms: “the first consumption priority for China’s rural population will remain health and education.” With elementary education free and basic medical expenses covered by cooperative schemes in many areas, extra resources will be focused on higher levels of education and increasing quality of medical coverage.
The second focus will be on purchases to improve agricultural productivity and shift the ratio of labor and capital in the production process. Small tractors, superior quality seeds, and soil testing will all be on peasant farmers’ shopping lists.
Finally, while some Shanghai and Beijing residents may be making calls on their iPhones as they watch their flat screen televisions, for the poor rural population, the first purchase of household electronics items may now be a real prospect.
There are also risks to reform. Wang Shaoping, a farmer from Donghai in Jiangsu province, the reforms bring the risk of creating unemployment amongst rural youth who set out for a better life in the city: “they are easily to be laid off, just like in the financial crisis which caused a lot of farmers return to their hometown.’
But with reform promising to drive higher incomes, and levels of consumption, for both those who remain on the farm and those who move to the city, the benefits appear to outweigh the costs.