Cablegate: China's Rural Policies: Update On the State Of

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DE RUEHBJ #3857/01 2830002
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P 090002Z OCT 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 0353
INFO RUEHOO/CHINA POSTS COLLECTIVE
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UNCLAS SECTION 01 OF 04 BEIJING 003857

SENSITIVE
SIPDIS

Refs: A) Beijing 3788; B) Beijing 3598, Beijing 3519; C)
OSC/FBIS CPP2080915704018, OSC/FBIS CPF20081006554002;

E.O. 12958: N/A
TAGS: ECON EAGR PGOV SOCI CH
SUBJECT: CHINA'S RURAL POLICIES: UPDATE ON THE STATE OF
PLAY GOING INTO THE CPC THIRD PLENUM

1. (SBU) SUMMARY: The stated focus of the October 9-12
Third Plenum of the 17th Communist Party of China (CPC)
Central Committee is rural reform. Scholars continue to
debate China's current path of rural reform and doubts
remain about implementation and whether China's current
policy direction addresses fundamental problems in the
countryside. Concerns about broader economic issues may be
discussed internally at the Third Plenum, and except for
possible progress on land policy, the Plenum may serve
primarily to reinforce ongoing efforts to increase rural
incomes and address the urban-rural income gap. But rural
sector economic issues are nonetheless likely to be an
important factor weighing on policymakers' minds given
concerns about the implications of a slowing global and
domestic economy on rural stability. END SUMMARY.

2. (SBU) With the Third Plenum of the 17th CPC Central
Committee scheduled for October 9-12, the official Chinese
press has carried numerous articles and commentaries penned
by prominent scholars on various ongoing rural reform
efforts (Ref A), including new measures that may be
introduced and adopted at the Plenum. Rural policy experts
have also commented on ongoing rural policy debates in
recent meetings with Econoff. This cable provides
background on the rural economic policy issues that are
likely to part of any Plenum deliberations on rural issues
specifically, as well as any internal deliberations at the
Plenum on economic growth and financial stability (Ref A).
See Ref B for recent reporting on food security, which is
also expected to be on the Plenum agenda.

--------------------------------------------- ----------
The New Socialist Countryside: Progress Overshadowed by
Rising Inequality and Stability Concerns
--------------------------------------------- ----------

3. (SBU) For the past five years, rural issues have been
the focus of China's No. 1 central documents -- the name
given to the first document issued by the Central Committee
of the Communist Party and the State Council each year.
The New Socialist Countryside and related policies covered
by these documents emphasize promoting rural farmers'
interests and rural economic and agriculture development
through agriculture subsidies, tax cuts, cutting tuition
and school fees for rural residents, and improving the
rural social safety net (e.g., education, medical care,
pensions). These policies also include efforts to balance
and coordinate urban and rural development (including
through gradual rural-urban migration and reforms to the
hukou system) as well as commercializing agricultural
production and linking farmers to domestic markets.

4. (SBU) Chinese Academy of Social Sciences (CASS) scholars
told Econoff that recent surveys show broad satisfaction
among rural residents with agricultural subsidies and rural
healthcare policies. And on August 28 China's Minister of
Agriculture Sun Zhengcai claimed per capita income in rural
China rose 10.3 percent in the first half of 2008, the
largest six-month period increase in four years. Rural
residents' average net income for the six month period was
2,528 yuan (USD 370). This follows a 9.5 percent annual
increase in 2007, the largest since 1985.

5. (SBU) In the same report, however, Sun also reported
that the per capita income gap between rural and urban
residents expanded to 1:3.33 and the net income difference
reached 9,464 yuan (USD 1,382), the largest income gap
since 1978. Although the growing income gap was expected,
local observers and press commentary focused on the bad
news, and scholars repeatedly emphasize the need to address
the growing urban-rural gap in incomes and social services.
They also emphasize the threat to social stability that
would result from mishandling rural sector issues in
meetings with Econoff.

6. (SBU) The New Socialist Countryside policies have been
accompanied by large increases in fiscal expenditures. But
scholars such as Yang Tuan at CASS explain that funds do
not make it to the most marginal, needy rural areas. In
late July the Audit Bureau published the results of a
survey of 50 counties in 16 provinces highlighting
mismanagement and misallocation of Central Government
transfers to provinces for rural development. According to
the report 32 percent of funds allocated for projects

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required more than one year to be spent. A separate 2003
Audit Bureau survey of 50 counties found that 10 percent of
Central Government rural development funds were
misallocated. Contacts at the Asian Development Bank and
World Bank explain that the central government lacks the
basic technical tools (e.g., databases) as well as
institutional capacity, to track and monitor the use of
rural development funds. The Central Government's lack of
budget execution capacity often results in funds being used
for more immediate and easily executed expenditures such as
cadre salaries and infrastructure projects in provincial
capitals.

7. (SBU) Problems implementing rural development programs
and abuse by local officials are also being reported on by
the domestic press. Beijing's Xinjing Bao, the prominent
Party-run mass circulation daily, highlighted a case in
Henan Province last month in which inappropriate harvesting
fees were imposed on peasants in the middle of the corn
harvest season. After the case came to light in the press
the local village government returned the fees.

-------------------------------------------
Land and Property Rights: Gradual Progress?
-------------------------------------------

8. (SBU) Hong Kong and Chinese press (Ref C) reports on the
Third Plenum predict reforms aimed at clarifying and
strengthening peasants' land rights, but no one is
predicting privatization. According to press articles in
late September, a policy has been drafted for the Plenum
that will greatly reduce the ability of local governments
to obtain land from farmers for real estate and
infrastructure projects without fair compensation. The
story also notes that local governments will likely resist
these reforms because they rely heavily on the large
revenues they earn from developing real estate on land they
confiscated without paying appropriate compensation.

9. (SBU) Rather than advocating land privatization, press
commentary by prominent scholars (Ref A) focuses on
extending land use rights or making them permanent,
addressing problems with fair compensation for land
confiscated by local governments, clarifying farmers'
rights to transfer land use rights, creating a dispute
resolution mechanisms for land confiscation disputes, and
clarifying "public good" and the fair price landholders are
assessed in the eminent domain land confiscation process.
The proposals also aim to solidify land use rights in order
to make it easier to use these rights as an asset that can
be mortgaged or transferred or "circulated" (Ref C) in ways
that provide an income stream to the land use right holder.

10. (SBU) In meetings with Econoff, Xu Xiaoqing from the
State Council Development Research Center (DRC) commented
that since implementation of new legal protections
implemented in the last two years, outright land grabs by
local governments has decreased dramatically. Forty
million farmers have been compensated in some way for
having their land confiscated, according to Xu, although
the number of illegal land confiscation cases is much
higher since many go unreported and uncompensated.
Although the number of incidents may have decreased, Dang
Guoying from CASS and others emphasize that disputes over
land are the primary cause of rural instability and
therefore a key concern for the government.

--------------------------------------------- ---------
Specialized Rural Cooperatives: Not Everyone is on Board
--------------------------------------------- ---------

11. (SBU) Scholars point out that since decollectivization
and the start of market reforms peasants have lost the
support of strong rural institutions with the capacity to
protect their economic interests. To fill the void rural
specialized cooperatives are being promoted to help rural
farmers commercialize production and gain access to
technology and market information. Specialized
cooperatives are usually organized around a single
commodity and in most cases have an exclusive relationship
with a single "dragonhead" enterprise that links farmers to
the market. (Note: "Dragonhead enterprises"--longtou qiye-
-are relatively large-scale rural enterprises that can
integrate farmers into their supply chains and provide

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access to inputs and market information while also
providing a sales outlet. End Note.) The two entities
coordinate closely and may share managers. New laws
implemented in 2007 and 2008 are helping the development of
cooperatives by clarifying registration and internal
management procedures.

12. (SBU) Recent visits by President Hu Jintao to Henan and
Anhui as well as press commentaries (Ref C) highlight the
contributions of specialized rural cooperatives. But in a
recent meeting with Econoff, Henan Agricultural
University's Zhang Dongping highlighted the lack of
transparent and fair decision-making and the dominant role
of the dragonhead enterprises in the management of
cooperative affairs. Zhang also admitted that cooperatives
are not themselves a poverty alleviation tool for remote
rural communities without easy access to markets and a
local entrepreneur or dragonhead enterprise that can
provide the link to outside markets. An October 6 story in
the Xinjing Bao about the village Hu Jintao visited
September 30 mentions that villagers in a specialized
cooperative were disadvantaged by the pricing power of the
single dragonhead enterprise they sold to. The cooperative
subsequently broke ties to that company so it could sell
directly to multiple dragonhead enterprises. Xinjing Bao
also gave extensive coverage to a July incident in Yunnan
involving a dispute between local rubber farmers and
dragonhead enterprises over prices and contract obligations
to sell harvests exclusively to the enterprise. The clash
left two villagers dead.

13. (SBU) Although the specialized rural cooperative model
is the main policy focus, a number of scholars including
Renmin University's Wen Tiejun, China Agricultural
University's He Huili, and CASS's Yang Tuan argue that
comprehensive village cooperatives that include village
members involved in a range of economic activities serve
the farmers' interests better than specialized cooperatives.
According to Yang, specialized cooperatives only provide
cover for bellwether companies or rich individuals to get
ahead and only have the faade of a cooperative. They
prefer the participation of truly grassroots efforts with
varying degrees of government and/or outside (e.g.,
domestic and international NGO) support. Although these
ideas are not in the policy mainstream, these scholars are
involved in demonstration trials in various rural locales
and are active in Beijing policy debates.

--------------------------------------------- ----------
Rural Finance: Will Current Reforms Matter without Land
Privatization?
--------------------------------------------- ----------

14. (SBU) According to Xu Xiaoqing the land issue is key to
fixing rural finance. Although privatization of land is
not in the cards, some localitis in Anhui, Shandong, and
Zhejiang are allowig farmers to use certificates verifying
long-term rights to residential land (though not their
fields) as collateral, and forest land in som areas can
also be used as collateral for bank loans.

15. (U) The People's Bank of China's (PBOC) Rural Financial
Services Report released on September 19 did not include
groundbreaking recommendations on the use of land as
collateral, but did discuss measures to work around this
constraint such as expanding the ability of rural residents
to use contracts to deliver harvests to dragonhead
enterprises and other non-real assets as collateral for
loans. The report highlights efforts to improve credit
rating systems for individual borrowers and recommends
removing interest rate cap on loans to make lenders more
profitable and help increase incentives to increase rural
banking services. The report also notes commitments by the
Agricultural Bank of China as part of its restructuring
efforts to expand its rural banking services, which shrank
over recent years.

16. (SBU) Removing the interest rate cap would be an
important step. But many observers emphasize that without
significant progress on the land issue it will be difficult
to expand the availability of rural banking services to the
majority of rural residents. The PBOC's report focuses on
expanding financial services for dragonhead enterprises and
well-off agricultural entrepreneurs, and not poor peasant

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farmers. Scholars such as Wen Tiejun and He Huili argued
in recent meetings with Econoff that comprehensive village
cooperatives (not specialized cooperatives) are needed
because they can provide cooperative rural financial
services that are more appropriate for rural communities in
which land can not be used as collateral and information on
individual creditworthiness is lacking.

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Comment
-------

17. (SBU) Many of the policy alternatives to current rural
reforms cited by our contacts are inconsistent with the
broader goals of increasing efficiency and the role of the
market. Given the need to make rural banking financially
viable, for example, even the most successful rural finance
reforms may never reach the extreme rural poor. Government
and donor-supported micro-finance programs are probably
more viable than cooperative banks as a solution to the
lack of financial services available to the poorest rural
residents. Likewise, a return to more socialized rural
organizations due to concerns about income inequality,
the dominant role of dragonhead enterprises, and
mismanagement in rural specialized cooperatives would hurt
broader reform and economic growth efforts. Nevertheless,
the problems raised by our contacts reflect sources for
rural unrest and therefore need to be addressed in the name
of maintaining social stability.

PICCUTA

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