CHINA'S SECOND-STAGE AGRICULTURAL REFORMS: THE PROBLEMS OF SUCCESS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00794R000100590001-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 22, 2016
• Document Release Date: July 25, 2011
• Sequence Number: 1
• Publication Date: January 1, 1986
• Content Type: REPORT

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Directorate of
Intelligence 25X1
China's Second-Stage
Agricultural Reforms:
The Problems of Success
An Intelligence Assessment
EA 86-10003
January 1986
Copy
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 Directorate of Confidential
Intelligence
China's Second-Stage
Agricultural Reforms:
The Problems of Success
Office of East Asian Analysis. Comments and queries
are welcome and may be directed to the Chief
China Division, OEA
This paper was prepared by
Confidential
EA 86-10003
January 1986
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China's Second-Stage
Agricultural Reforms:
The Problems of Success
Key Judgments In January 1985, China launched its second-stage agricultural reforms to
/~t/ormation available cope with problems created by the reforms initiated in 1978. Six consecu-
as oJ'23 December 1985 five years of bumper harvests:
was used in this report.
? Placed a drain on the state budget because of grain and cotton price
subsidies.
? Taxed an already inadequate state transportation system.
? Left large quantities of unwanted low-quality goods stockpiled in the
countryside.
The second-stage reforms attempted to remedy these problems by moving
toward an even more market-oriented agricultural economy. Peasants now
sign contracts with the state to sell grain, cotton, and oilseeds at negotiated
prices. Noncontract production of these commodities is sold on the open
market with the government guaranteeing a price. Fruit, vegetables, and
meat are no longer purchased by the state, and price is determined solely
by the market. Rural industry is being promoted to absorb some of the ex-
cess labor created by increasingly efficient agricultural production and to
ease transportation problems.
We believe Beijing judges these policies in their first year to have been gen-
erally successful. On the plus side, the second-stage reforms have succeed-
ed in:
? Reducing the drain on the state budget.
? Moving excess labor into industry.
? Continuing to increase the gross value of agricultural output.
? Increasing peasant incomes and the rural standard of living.
The second-stage reforms have not worked entirely as Beijing expected,
however. Peasants were quick to plant more profitable crops, such as
oilseeds and vegetables, and grain production fell as a result. The inflation
that followed the deregulation of food prices was more serious than
Chinese officials anticipated. State vegetable and meat markets are having
difficulty competing with the free markets. Beijing is finding it harder than
expected to enforce agricultural guidelines on a peasantry increasingly
comfortable in a more market-oriented environment.
Rural finance was a particularly volatile issue in the early months of the
new reforms. Efforts to control loans for rural industry led to a credit
crunch in April that left many state enterprises short of operating capital.
This situation seems to have eased.
iii Confidential
EA 86-10003
January 1986
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The successes and problems have left both policymakers and local officials
struggling to adapt to the state's new role in agriculture. Advocates of
reform realize that success depends on decentralization of authority, but
they are concerned about the negative side effects and are feeling the
criticism of conservative critics. In his speech to the party conference in
September, Politburo member Chen Yun charged that the reforms under-
cut the party's authority in the countryside and were threatening grain
production.
Low-level officials, in particular, have been adversely affected by the
second-stage reforms. Their prestige has been reduced along with their
power. As a result, many have held back on implementing the program or
seized on the numerous opportunities it provides to line their pockets.
In the coming year, we expect Beijing to fine-tune current policy rather
than undertake any initiatives. We believe Chinese agriculture will grow by
6 percent this year and that per capita consumption of rural residents will
increase by 4 or 5 percent. Key problems must be addressed, however, if
the success of recent years is to continue:
? A policy must be developed that ensures increasing grain production
without discouraging other agricultural production.
? Food-price inflation must be controlled without increasing state food
subsidies.
? The conservative opposition to reform must remain contained.
? Beijing must bring low-level officials into line.
We expect an increase in grain output in 1986 as Beijing uses various
incentives to rekindle peasant interest in grain production. Also, Beijing's
fine-tuning will probably stabilize the rural economy somewhat and may
help mollify party conservatives who have criticized reform.
The success of China's agricultural reforms makes it less likely that China
will be a market for US agricultural products. China will be looking to the
United States for agricultural technology, but we do not expect China to
make any major purchases of US agricultural commodities any time soon.
Indeed, as agricultural reform continues, China may even compete with the
United States in some markets, as it did last year in corn.
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The Need for More Agricultural Reform
Changing Rural Production
The State's Changing Role in Agriculture
Implications for the United States g
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China's Second-Stage
Agricultural Reforms:
The Problems of Success
The Need for More Agricultural Reform
For the past few years, China's leaders have been
using agriculture as a testing ground for a series of
pragmatic economic policies that are transforming the
entire economy. The main thrust of this program-
the peasant responsibility system-was to make peas-
ants more responsible for their own production (see
inset). In 1985, Beijing introduced the "second-stage
agricultural reform," touting it as a preordained step
in its expansion plans for the rural sector. We believe,
however, that China was forced to take action sooner
than expected because of the overwhelming success of
earlier reforms (see figure 1).
Six consecutive years of bumper harvests and an
unprecedented overabundance of farm goods present-
ed policymakers with a new set of problems to discuss
at the Third Plenum in October 1984. One of the most
serious problems, from the viewpoint of the Chinese
leadership, was the drain the burgeoning agricultural
sector was placing on the state budget. According to a
Chinese press report, in 1984 state expenditures grew
by nearly 11 percent, largely because of increased
grain and cotton price subsidies. State procurement
policies had also failed to adequately reward product
quality, so peasants produced low-value crops that
required a minimum of investment. The problem was
compounded when consumers, with their increasing
disposable income, quickly purchased the limited sup-
plies of high-quality goods, while the stockpiles of less
palatable goods became ever larger. Also, the state-
controlled transportation system lacked the capacity
to move surpluses to areas where they could be better
utilized.
The second stage of reforms, presented in Central
Document No. 1 of 1985, was an attempt to solve the
farm economy's marketing and budget problems by
abolishing the state monopoly purchase of agricultur-
al commodities. Beijing's planners envisioned inte-
grating peasant initiative, a streamlined bureaucracy,
and a modified agricultural control structure to create
The peasant responsibility system, which increased
peasant incentive by linking income to decisionmak-
ing responsibility and production, became official in
December 1978 during the party's Third Plenary
session of the 11th Central Committee. Reformers
recognized that the communal work structure failed
to reward diligent labor because peasant income was
not directly linked to output and peasants had little
say in collective decisions. The jact that food produc-
tion was barely keeping pace with population in-
creases was a probable factor in the decision to
implement more pragmatic policies. Also, production
costs had risen, and, in the absence o.1"price increases,
farm incomes had stagnated. These new policies
brought several important changes to the Chinese
countryside:
? Communes were dismantled. Individuals and fam-
ilies were allowed to rent farmland and to make
their own production decisions.
? Farmland was rented for 1 S-year periods, encour-
aging peasants to invest in the land.
? Procurement prices were adjusted upward, so farm-
ers had more incentive to increase production.
Such incentives brought an increase in willingness
among peasants to invest their time and resources in
agricultural production and were largely responsible
for the SO percent increase in rural production be-
tween 1978 and 1984.
a "commodity" agricultural economy with large ele-
ments of free market circulation. The reforms have
several important elements:
? Peasants sign contracts to sell part of their grain,
cotton, and oilseed harvests to state commercial
departments at negotiated prices.
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Figure 1
China: Gross Value of Agricultural
Output, 1970-84
In various press reports last spring, leaders expressed
their belief that prices would go up and then slide
back to near their original levels as supplies increased
to match demand. In actuality, dramatic inflation
occurred after price decontrol, and, although prices
appear to be falling some, they are still above their
original levels. However, the current higher prices
better reflect an equilibrium between the prices con-
sumers are willing to pay and the prices at which
peasants can profitably produce farm goods.
increases
in consumer prices occurred throughout the country.
By early May 1985, within a few weeks of price
~ decontrol, a local press account indicated that average
? Noncontract grain, cotton, and oilseed production
are sold on the open market. The government will
now purchase these products only if the market
price falls below the procurement price.
? The state will no longer purchase nonstaple products
such as vegetables, fruit, and meat. Supply and
demand forces will set the prices for these
commodities.
? Rural industrial development is now promoted. Ru-
ral businesses are to absorb surplus labor being
forced out of the increasingly efficient agricultural
sector.
The Impact of Reform on the Market and Prices
In our judgment, the abolition of state-set prices and
monopoly purchases of meat, fruit, and vegetables has
caused larger price increases than Beijing expected.
Beijing food prices had increased by 30 percent. In
the following months, the prices of some local favor-
ites, such as lean pork, beef, and some varieties of
fish, had doubled or tripled. In Shanghai, Guangzhou,
and other major cities, press reports indicate the story
of increasing food prices has been the same (see inset).
Local and provincial governments have been using
various methods to fight food price inflation and to
compete with free market vendors. State-controlled
food markets have been directed to sell merchandise
at below-market prices. After trying to hold the line
on prices, however, the state trading system in some
areas raised prices because middlemen were buying
the grain from state stores and reselling it at higher
prices on the open market. State vegetable and meat
markets are also having difficulty competing with free
market vendors, who offer higher quality produce.
Some government stores have responded by distribut-
ing lower quality goods to match their lower price
structure. Local cadre are reassigning some market
workers to other responsibilities to try to cut their
excessive overhead costs. A recent press report from
Guangdong states that over 400 state markets have
been shut down this year because of free market
competition.
Attempts by local and provincial governments to use
subsidies to soften the effect of rapid price rises seem
to be creating as many problems as they solve. US
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Food-Price In/lation
in Two Chinese Cities
In Beijing, meat has increased 30 percent. Vegetable
prices soared as well and are not expected to settle at
reasonable levels for some time. When price controls
on meat and vegetables were first lifted, the retail
price index rose by 9.3 percent, which is an all-time
high.
- UPI quoting Peking Review
12 December 1985
Prices of agricultural and sideline produce have gone
up to varying degrees, officials of the city vegetable
company said. Compared with last year, the price of
pork rose 72.13 percent, and vegetables as a whole
went up 46.4 percent.
- Xinhua
16 August ]985
increases by subsidizing incomes are in fact exacer-
bating inflation, putting new pressures on an already
strained budget, and endangering the economic and
political viability of the reforms.
Changing Rural Production
Although China's peasants reacted hesitantly to the
initial reform policies, we believe they quickly grasped
the implications of the new reforms and the opportu-
nities available to them, and are using the new
reforms to their best individual economic advantage.
One of the most significant changes has been a shift
away from traditional grain production to cash and
industrial crops.
Although Beijing planned for some movement out of
grain production with the implementation of the
second-stage reform, party leaders at all levels have
recently expressed concern about the "malaise in
peasant attitudes" toward grain production. In Au-
gust, the Chinese press reported that farmers would
harvest 3.3 million fewer hectares of grain in 1985-a
reduction of 3 percent-as croplands are used to
produce more profitable crops (see figure 2). Antici-
pating lower profit margins for grain, peasants are
using lower levels of production inputs such as fertiliz-
er and labor. In addition, press reports indicate that,
as profit margins fall and workers leave agricultural
Embassy and Chinese press reports note rising discon-
tent over inflation and unequal distribution of subsi-
dies in many major cities.' As local governments move
to relieve food-cost burdens on workers in one sector
of the urban economy, other workers and students
have complained that the subsidies are discriminatory
and have demanded equal treatment. In many areas,
a pattern is developing where prices are allowed to
rise, a subsidy or wage increase is granted, and then
prices rise again. Some urban residents have indicated
they would prefer not receiving any more subsidies to
avoid what they perceive to be an inflationary spiral.
We believe that attempts to counterbalance price
' Inflation was a major complaint of students who demonstrated in
Beijing and other Chinese cities during September and October
1985. "Urban peasant" protests in Tianjin and Yunnan were
blamed on popular displeasure over the unfair distribution of food
production, it is becoming unprofitable to produce on
marginal land, and these areas are occasionally being
allowed to lie fallow. As a result, we expect 1985
grain output will be 7 to 8 percent below 1984 levels
(final figures are usually released in March).
Moreover, with the new grain procurement system,
peasants apparently feel less obligated to follow state
guidelines on grain production. Early last year, the
Chinese press reported that some peasants delayed
signing grain contracts in the hope that prices would
rise. An Embassy report stated that in Hunan peas-
ants are hesitant to fulfill state contracts because of
low procurement prices, preferring instead to sell their
grain on the open market or to feed it to livestock.
Unfulfilled contracts could create a poor legal prece-
dent for future state-peasant relations and could mean
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Figure 2
China: Grain Production,
197(1-KS
that in some areas the state will have trouble fulfilling
its procurement quotas. As of 1 December, for exam-
ple, state grain purchasers in Henan Province had
procured only 28.4 percent of their contracted grain.
In recent press reports from Hebei and Sichuan, the
provincial governments, concerned with the peasants'
lack of enthusiasm for grain production, announced
plans to raise the procurement prices or to reinstitute
grain production quotas this year.
Party conservatives, who generally oppose Deng's
pragmatic reforms, have recently used the press to
pinpoint declining state control in grain production as
a threat to central planning. The strongest attack
came at the Party Delegates Conference in Septem-
ber, where Politburo member Chen Yun used statis-
tics on falling grain figures to attack the rapid pace of
Grain output wr!! decline an estimated 7 percent
in 1985 after six consecutive years of record
economic reform and the current lack of state control.
Chen's clear implication is that even the past success-
es in grain production may be jeopardized if reform is
too rapid, or if central planning is abolished in favor
of market regulation.
The production levels of nongrain crops, on the other
hand, are continuing to increase as producers adjust
their production according to changing market sig-
nals. China expects 1985 oilseed output to be up by
more than 30 percent. Cotton producers have side-
stepped state quotas and overplanted their cotton
acreage in expectation that the state would continue
to purchase all of their production. Higher meat and
produce prices have brought about a rapid improve-
ment in the quantity and quality of these products
available on the market. According to USDA reports,
red meat production increased by 16 percent in the
first six months of 1985 over the same period in 1984
and milk output by 33 percent. Poultry and egg
production have each increased by over 40 percent.
Fish production and other specialized agricultural
industries are also increasing in size and number.
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A more efficient and profit-conscious agricultural
economy is pushing surplus labor out of farm produc-
tion and into other types of work. By mid-1985,
according to Chinese press reports, government-
sponsored programs to develop rural industries had
led 60 million peasants to leave farming to engage in
businesses such as restaurants, service shops, repair
businesses, and transport firms. Recent US Embassy
reporting indicates that the rate of growth of rural
industry during 1985 will be higher than in previous
years. The Chinese press reported that the number of
restaurants in China's rural areas has increased by
more than 13 times in the last seven years. The fastest
growth, however, has been in the private transport
sector. According to Xinhua, the number of private
transport businesses increased by more than 40 per-
cent in the first six months of 1985, accounting for 40
percent of the total goods transported in China on a
ton-per-kilometer basis.
China's planners may be somewhat disappointed by
the move to light industrial production and service
industries. In various official speeches and press re-
leases, national leaders expressed their belief that
peasants leaving farming would initially focus on food
processing, a shift that could have bolstered China's
agricultural exports. High commodity prices, poor
transportation, and inadequate technology and capi-
tal, however, apparently made most types of food
manufacturing unprofitable. Prepared fruit drinks
and beer for domestic consumption were exceptions,
as both experienced phenomenal growth in 1985.
Rural Credit Problems
The shift to rural industries made rural finance a
volatile issue in the early months of the new reforms.'
A US Embassy report noted how the National Rural
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Figure 3
China: Deposits and Loans of Rural
Credit Cooperative, 1981-85
~~ First-quarter figure.
~' Secund-quarter figure.
Work Conference in December 1984 reaffirmed Bei-
jing's full support for the development of rural indus-
tries by offering preferential loans for rural enter-
prises and income tax exemptions for newly
established entrepreneurs. Spurred by the new poli-
cies, local bank loans to rural enterprises during the
first quarter of 1985 rose more than three times over
the corresponding period in 1984 (see figure 3).~
Alarmed by the "irrational" credit explosion, the
State Council tightened bank credit in April for all
rural enterprises. According to a US Embassy report,
the People's Bank policy initially damaged rural
entrepreneurs, who had to cut back expansion plans
and in some cases return borrowed money so banks
could meet annual loan targets. The shock was short
lived, however, as local officials and businessmen
turned to popular credit-local stock issues and other
types of borrowing-to finance rural businesses. This
has allowed for a continuing boom in the development
of rural industries, evinced by the fact that, in the first
six months of 1985, Chinese rural industrial output
was up 50 percent over last year.
Ironically, perhaps, the credit squeeze was felt most
by the public sector. Summer grain procurement was
affected in some areas during June and July-the
peak summer grain harvest months-when local offi-
cials in several grain-producing provinces were caught
with inadequate funds to fulfill purchase agreements
with grain producers. Some localities had to give the
peasants temporarily uncashable checks. In all report-
ed cases, however, local officials were eventually able
to gather sufficient funds from various local sources to
handle summer crop procurement.
The State's Changing Role in Agriculture
One of the most serious setbacks of the new policy's
implementation has involved local cadre and their
difficulties in adjusting to the new reforms, particu-
larly the reduction and decentralization of national-
level involvement in agriculture. Responsibility for
procurement, marketing, banking, and other econom-
ic decisions is being placed more squarely on the
shoulders of local government personnel.
In many ways, however, the reforms conflict with
cadre interests. Before reform, the surest route to
success in China, economic or otherwise, was through
membership in the party. Even lower level cadre were
treated with respect by the Chinese populace. But the
reforms, with their emphasis on individual responsibil-
ity and economic gain, are making the "10,000-yuan
households" the new rural heroes. Local press reports
suggest that cadre and peasants alike are wondering
what the proper role of officials is in rural develop-
ment. Imprecise guidance from Beijing has contribut-
ed to the problem.
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that most rural cadre are promulgating the new
policies,) (raises questions
about how responsibly the reforms are being imple-
mented. Circulars issued by national leaders to
"clarify" policies can be seen as implicit admissions
that not all rural cadre agree with the new policies.
Some rural officials have openly refused to carry out
the reforms, and others, while espousing the new
system, have not altered their agricultural programs.
Worse yet, some officials have drawn up reform
programs that directly violate the policies established
in Central Document No. 1. The Chinese press has
noted that in these areas the peasants humorously
refer to these unsanctioned policy changes as Central
Document No. 2. Other rural cadre are too enthusias-
tic about reform, allowing peasants to go their own
way-even turning a blind eye to economic crimes. In
a few cases, state authorities have been attacked in
the press because of their complicity in illegal opera-
tions. Beijing recently announced that it will carry out
a rural rectification campaign to provide local-level
cadre with more detailed information on the reforms
and how they are to be implemented.
The greatest number of peasant complaints deal with
overtaxation and other abuses of power by rural
officials. Since July, a national and local media
campaign to "reduce the burden" on peasants has
disclosed some of the problems. According to the
national press, some local cadre are pushing their own
expansion programs, and recently the number of
theaters, gymnasiums, roads, buildings, and other
public works projects has skyrocketed. To finance
these projects, local cadre have illegally docked funds
from procurement checks, increased taxes and tolls,
and solicited contributions from peasants. Press re-
ports state that some corrupt cadre have also used
public funds to pad their bank accounts or to build
themselves new homes. Other local leaders, resentful
of those who make money from private activities, set
up bureaucratic roadblocks to business entry or tax
away the profits of successful businessmen. According
to China News Service, in one county of Guangdong
Province a peasant has to pay 29 different fees to 11
departments to own a tractor. These fees can add as
much as 750 yuan to the cost of owning a tractor, the
equivalent of one-third its purchase price.
The Keys to Continued Success 25X1
The party guidelines for the Seventh Five-Year Plan 25X1
for National Economic and Social Development 25X1
(1986-90), adopted at the party conference on 23
September 1985, established several goals for Chinese
agriculture during the next five years. National plan-
ners estimate that agriculture will grow by 6 percent
annually, and the output of all sectors of the rural
economy, including grain production, will increase
during the planned period. The per capita consump-
tion levels of rural residents are expected to grow
annually by 4 or 5 percent, and more consumer goods
and better housing will be provided to ensure a higher
standard of living. Resource conservation and product
quality in the production of economic goods are being
emphasized.
We do not believe this plan will lead to any major
changes in Chinese agricultural policies in the coming
year, but we anticipate that Beijing will make policy
adjustments to fine-tune the present program. Policy-
makers will try to slow rural industrial growth by
controlling official and popular forms of rural credit.
Concerned with the decline in 1985 grain yields, they
will also raise grain procurement prices, subsidize
peasants for agricultural inputs, or perhaps reinstate
quotas for some types of grain to encourage produc-
tion.
Even if these adjustments are successful, key agricul-
tural problems must be addressed if reform is to
prosper:
? A program must be developed that ensures stable
and increasing grain output while encouraging other
agricultural production.
? Local cadre need to control effectively the growing
rural private sector.
? Food-price inflation must be checked without bur-
dening the state bud et with increased food subsi-
dies.
Over the short term, we believe Beijing will be able to
satisfy its demands for economic control and still offer
the incentives peasants need to attain a 6-percent rate
of annual growth in agricultural output. After a
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substantial decline in grain output last year, we expect
higher grain prices and state directives to stimulate an
increase in grain production in 1986. Overall, Bei-
jing's economic fine-tuning will probably bring a
greater degree of stability to China's countryside and
may help mollify party conservatives who have high-
lighted falling grain production and the uncontrolled
growth of rural industries in their criticism of reform.
In this regard, the success of the rural program is
important for the reformers' larger agenda. Expansion
of urban reforms, including price and wage reform, is
set for this year. Growth of the urban economy
depends in part on continued growth of the rural
sector. Perhaps more important, however, the contin-
ued success of the agricultural program provides the
reform coalition with one of the strongest arguments
with which to refute their more conservative col-
leagues. The reformers must retain the initiative on
this issue if they are to contain the opposition and win
the time to work through the problems.
Implications for the United States
The agricultural reform program will probably lead to
Figure 4
China: Farm Trade, 1978-84
I
0 1978 80 82 84~
increased Chinese agricultural exports, possibly in-
~~ USDA estimate.
creasing Chinese competition with US products in
some markets. National and provincial agricultural
leaders are pushing the export of Chinese agricultural
goods, and sales of Chinese corn, soybeans, cotton, ~,8~3 ,.~
and other agricultural commodities have increased as
a result (see figure 4). Moreover, until it expands its
livestock industry, Beijing will try to export its surplus countries for breeding stock, hybrid seeds, and other
of coarse grain. Finally, we look for the Chinese, agricultural technology, but, unless the weather
already exporters of fresh and processed fruit and brings an unexpected crop failure, we do not expect
vegetables, to broaden their international markets for China to make any major purchases of US agricultur-
these products. al commodities any time soon.
The drop in Chinese agricultural imports will contin-
ue this year even though a weather-induced decline in
Chinese soybean production will require the purchase
of a few shipments of soybeans from other countries,
most likely including the United States. Although it is
possible China will need US coarse grains to fully
develop its livestock industry, we think the Chinese in
the near term will try to keep livestock herds within
the bounds of domestic feed production. China will be
looking to the United States and other Western
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