(Bloomberg Businessweek) -- Six years ago, Sun Zeshun was toiling on his farm in China’s coastal province of Jiangsu growing rice and wheat, earning about 19,800 yuan ($3,000) in a good year. He seemed doomed to a life of grinding poverty.
Then in 2012, Sihong, a county of about 1 million people, launched a pilot project to test a new land reform policy. For the first time in the more than 60 years the Communist Party had ruled China, farmers were permitted to rent out their land, as long as it continued to be used for agriculture. Sun leased his to a commercial operation called Jiangsu Meiyang Ecological Farming & Forestry Co. and got a job as a roofing contractor. His income almost doubled, to about 37,000 yuan a year, including the 7,000 yuan he earned in rent. Two years ago he bought a new house and a 110,000-yuan Changan-brand SUV. “Life is much better than before,” says Sun, chatting on a village street near his home. “I have more freedom, and my income is less affected by the weather and other uncertainties.”
Almost four decades after Deng Xiaoping began reversing Mao Zedong’s disastrous experiment in rural collectivization, large commercial farms are back in favor in China. Jiangsu Meiyang rents almost half the 988 acres it tends in Shuanggou township from farmers like Sun. Instead of wheat and rice, the owners grow sweet potatoes and sakura tree saplings. Earnings now average more than 800 yuan per mu (a unit of land equivalent to 0.165 acres) from about 500 yuan before, according to Shuanggou Deputy Mayor Tan Qinglei.
In November of last year, policymakers in Beijing approved a rollout of the land reform tested in Sihong to the rest of the country. The changes are part of a drive to boost China’s agricultural output and turn its farmers into consumers, objectives that dovetail with the larger goal of curbing the economy’s dependence on debt-fueled investment to support growth. “China’s unlocking the underlying wealth in these land assets,” says Liang Hong, chief economist at China International Capital Corp. in Beijing, who previously worked for the International Monetary Fund. “We’re looking at 300 to 400 million people with more purchasing power, and that’s the size of the European Union.”
Land in China belongs to the state, and farmers contract to use it without owning it. The 2007 Property Law established a uniform registration system for so-called land-use rights. Two-thirds of the country’s arable land had been registered as of the end of last year, and the central government is aiming to have the task completed by the end of next year.
Farmers can now rent out their land-use rights and, in some parts of the country, can also use them as collateral for loans. Yet benefits for those like Sun are capped by prohibitions on leasing land to property developers and industrial enterprises, which would likely be willing to pay more for the acreage than agricultural cooperatives. Also, outright sales are still banned.
Impetus for reform is coming from a combination of challenges China faces, says Fred Gale, a senior economist for China at the U.S. Department of Agriculture’s Economic Research Service in Washington. One is to boost the country’s food production and reduce reliance on imports, which more than tripled in the past decade to $110.6 billion last year. Improving the lot of China’s subsistence farmers is also crucial to President Xi Jinping’s pledge to reduce poverty. The average plot size per rural worker is about 1.2 acres in China, compared with 180 acres in the U.S. and 385 acres in Australia, according to the Food & Agriculture Organization of the United Nations.
About 30 percent of the country’s 230 million rural households had already transferred their land by the middle of last year under various pilot programs, Agriculture Minister Han Changfu said late last year. “The economic impact of this could be huge,” says Liu Ligang, China economist at Citigroup Inc. in Hong Kong, who drew a comparison to former Premier Zhu Rongji’s landmark decision in the late 1990s to allow city dwellers to buy homes. That created a real estate industry that, with related activities, contributes about a quarter of gross domestic product, estimates UBS AG. “It’s a de facto transfer of wealth to rural households that will boost consumption and help generate more small businesses,” says Liu.
Some of that wealth, though, is pocketed by officials rather than farmers. In China, rent income on arable land averages about 12 percent of annual farm income, compared with 40 percent globally, according to a survey by the China Household Finance Survey & Research Center at Chengdu’s Southwestern University of Finance & Economics.
Loren Brandt, a professor at the University of Toronto who is an expert on China’s economy, says local officials often get in the middle of transactions, working with commercial investors looking to consolidate farmland. “On paper, it looks like a good thing,” says Brandt. “But you can see that the village cadres were taking advantage of this opportunity to serve as intermediaries—and probably doing so with the extraction of all kinds of rents.”
Despite these obstacles, it’s undeniable that some villagers have prospered as a result of the reforms. In Shiji township, also in Sihong county, Feng Jiafeng took advantage of a pilot program that allowed farmers to pledge their land-use rights as loan collateral and borrowed 100,000 yuan to open a supermarket. He used to earn about 10,000 yuan a year growing rice. Now he pockets 8,000 yuan annually from the land he rents to a commercial farm and makes up to 60,000 yuan more in profit from his store. The money has paid for a two-story extension to his house and a new pickup truck. “After this new land reform program, the living conditions of all of us took off,” says Feng. “All the farmers left the village to go out to work and moved to three residential compounds nearby, so I started this supermarket to cater to them.”—Kevin Hamlin, Dexter Roberts, and Pi Xiaoqing
To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net, Dexter Roberts in Beijing at droberts34@bloomberg.net, Xiaoqing Pi in Beijing at xpi1@bloomberg.net.
To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net.
©2017 Bloomberg L.P.
