How Will 1.2trillion Yuan Reach China’s Farms?

By Christine Boyle 4 May, 2010

Agri-water expert, Boyle navigates the latest 2010 Agricultural Policy Directive.

Ed’s note: Agriculture accounts for the lion’s share of China’s water use at 63% and according to a recent Government pollution survey is responsible for a doubling of China’s Chemical Oxygen Demand (COD) discharge in 2007 from 13.8 million metric tonnes to 30.3 million metric tonnes. A McKinsey report identifies irrigation technologies as a key solution to bridge China’s predicted water demand-supply gap by 2030.

Recent news indicates that Chinese banks are ramping up lending to the nation’s agricultural sector (China Daily) in the order of a 1.2 trillion Yuan for 2010 alone, a 34.6% increase from the previous year.  But what does this renewed focus on lending and financial support for China’s agricultural sector mean for on-the-ground agricultural development?  And how does the lending and finance environment interact with other aspects of agricultural development such as research and development, institutional reform, and capacity building?  Long the neglected stepsister of China’s economic development efforts, recent heightened attention on food and water security, regional disparities, and social stability have renewed interest in modernizing the nation’s agricultural sector.  But challenges to the sector are large: China’s agricultural sector remains primarily a small-plot, household-based farming system characterized by individual operation of farm land, with low output values, and traditional farming techniques.

On December 31 2009, the Central Committee of the Communist Party released a wide-reaching 2010 Agricultural Policy Directive outlining the key strategies by which the government aims to support a range of rural issues known as the “san nong wenti ,” or three rural issues of agriculture, farmers, and rural areas.  The policy directive outlines provisions and updated policy measures around agricultural subsidies, rural financial services, and land administration, alongside a host of other trade and development issues.  This policy document provides a useful tool through which we can look deeply at the processes through which loans and subsidies reach (and target) rural areas.

Innovative financial tools

First, what are the main financial tools by which banks are dispersing the 1.2 trillion Yuan?  The government has set up a number of lending incentive programmes: 1) tax preferences for agriculture-related loans; 2) direct subsidies to banks and rural co-ops; 3) awards for loan issuance; and 4) bad-debt write off guarantees.  By injecting funds into the rural economy via these tools, the government intends to reach the traditionally under-served areas currently lacking access to credit.  But how to ensure that the funds reach communities in need, and not only communities within the purview of powerful local entities?

Investment Scale

This segues into the second important aspect of the recent prioritization of loans for rural areas, that is, how to make loans at the requisite scale in order to best achieve policy goals of food security, raising rural incomes, and maintaining social stability?  The complex bureaucracy through which projects and funds are dispensed often creates a mis-match between targeted funds and areas of need.  For example, funds targeted for irrigation and drainage projects in Hebei may provide funds to villages where 80% of land lays fallow and residents migrate to cities for work.  Alternatively, remote villages may be in desperate need for irrigation upgrades, soil management training, but will be looked over for more high-productivity locations.  Further development of local rural credit options in the form of rural co-ops and micro-credit agencies can help fill a void in the credit access distribution and allows funds to reach marginalized communities, especially where loans are coupled with technical advisory services.

Increasing credit access to rural areas

In fact, increasing credit access to hardship communities is a weakness of the present rural financial system.  There are three main facets impeding the effective utilization of funds at the local level. First, lack of bank oversight reform and consumer protection measures to provide transparency and accountability in loan services and operations at all levels of the financial system.  Second, the lack of crop insurance options available to farmers to offset production risks related to water shortages, weather, insects, crop diseases, and other unforeseen events.  Lacking insurance against unforeseen crop loss creates high variability in farmers’ incomes, and induces farmers to offset uncertainty by diversifying their income portfolios.  While this may aid in the government’s push toward urbanization and participation in the wage-labor economy, it leaves land fallow and ultimately can drive farmers off their land after a devastating season.

Land policy reform leading to increased industrial farming

Lastly, the issue of land tenure insecurity, at both the village and farm level, makes village leaders and farmers uncertain of the duration of their land use rights, and thus leaves people unwilling to invest into higher-cost fixed assets such as irrigation canals, plows, tractonage projects, and other long-term land improvements.  Land tenure reforms have changed and evolved since introduction of the household responsibility system in the late 1970s, but to this day, farmers tilling small plots of land remain committed to investing labor and small-scale inputs (seeds, fertilizer, pesticide), but not to making capital improvements.

Although the influx of funds in the order of 1 trillion Yuan in 2010 alone signals an impressive commitment to developing China’s countryside, without deeper fiscal and land policy reforms, the impact of the funds is constrained by structural deficiencies that keep funds from reaching the most under-served people and communities, and help modernize farming practices.