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RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4338/01 3400707
ZNR UUUUU ZZH
R 060707Z DEC 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 2779
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS SECTION 01 OF 04 BEIJING 024338 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EB U/S SHEERAN, A/S SULLIVAN, EAP DAS 
CHRISTENSEN 
TREASURY FOR OASIA/CUSHMAN 
USDA/FAS/ITP FOR SHEPPARD 
 
E.O. 12958:  N/A 
TAGS: ECON EAGR PGOV SOCI CH
SUBJECT: The New Socialist Countryside One Year Later 
 
REF: (A) 05 BEIJING 20124 
 
(B) BEIJING 4224 
(C) BEIJING 5099 
(D) BEIJING 5874 
(E) BEIJING 19660 
(F) BEIJING 11704 
(G) BEIJING 23786 
(H) BEIJING 21970 
(I) BEIJING 10890 
(J) BEIJING 2661 
(K) BEIJING 13790 
(L) 05 BEIJING 20770 
(M) SHANGHAI 7090 
(N) CHENGDU 981 
(O) GUANGZHOU 30954 
(P) SHENYANG 697 
(Q) SHENYANG 618 
 
SUMMARY 
------- 
 
¶1. (SBU) One year after its launch in October 2005, 
officials at all levels emphasize that the Central 
Government's New Socialist Countryside policy -- 
tagged by the State Council as China's top policy 
priority for 2006 -- should be understood as a long- 
term endeavor that will not offer immediate relief to 
rural residents.  Rural experts welcome the focus on 
rural problems, but they worry that what are already 
insufficient resources are being misused by local 
officials for short-term political gain.  Compounding 
the funding problem is the recent elimination of the 
agricultural tax, a move that has greatly compromised 
the ability of county governments to deliver social 
services such as education and health care.  Officials 
and researchers maintain that non-farm income, derived 
from part-time work in urban areas or wage income in 
the countryside, provides the best opportunity for 
farmers to increase their incomes.  Observers 
uniformly agree that despite recent gains, government 
efforts to boost consumption in the countryside and 
achieve more balanced development are constrained by 
low incomes and high precautionary savings in rural 
areas.  END SUMMARY. 
 
The New Socialist Countryside One Year Later 
-------------------------------------------- 
 
¶2. (SBU) With the launch of the New Socialist 
Countryside in October 2005, the Central Government, 
as in previous years, has focused much of its 
attention on the rural economy.  Policymakers and 
rural experts emphasize that rural reform is a long- 
term endeavor, and that the current policy will not 
offer immediate relief to farmers.  The following 
policy pronouncements from Beijing over the past year 
indicate that the Central Government, with an eye 
towards maintaining rural stability and balancing 
regional economic growth, places a great deal of 
importance upon the success of the New Socialist 
Countryside policy: 
 
--October 2005:  The Eleventh Five-Year Plan draft, 
adopted by the Fifth Plenary Session of the 16th CPC 
Central Committee on October 11, launched the New 
Socialist Countryside policy, which has five basic 
elements:  (1) balancing urban and rural development, 
(2) developing modern farming techniques, (3) 
comprehensively deepening rural reforms, (4) 
developing public services in rural areas, and (5) 
increasing farmers' incomes (Ref A). 
 
--November 2005:  The Central Economic Work Conference, 
convened by the State Council and CPC Central 
Committee from November 29 to December 1, reiterated 
China's commitment to establishing the New Socialist 
Countrysie as one of its goals for 2006 (Ref A). 
 
--Feruary 2006:  China's State Council announced on 
February 21 that establishing the New Socialist 
Countryside would be the Central Governmet's top 
policy priority in 2006, unsurprisingly naming solving 
rural problems as its key objective for the third 
 
BEIJING 00024338  002 OF 004 
 
 
consecutive year (Ref B). 
 
--March 2006:  During the March session of the 
National People's Congress (NPC), the Central 
Government announced it would spend an additional RMB 
42.2 billion (USD 5 billion) for agriculture, rural 
areas, and farmers in 2006.  The 14 percent increase 
in expenditure prioritized rural infrastructure 
projects and subsidies for grain producers and farmers 
utilizing agricultural machinery (Ref C and D). 
 
--September 2006:  Premier Wen Jiabao declared at a 
rural reform conference that China is entering a third 
phase of reform that will build on the New Socialist 
Countryside and focus on local institution-building 
and governance (Ref E). 
 
¶3. (SBU) Critics suggest that budget support for the 
policy remains inadequate.  A researcher at the China 
Academy of Social Sciences (CASS) who also serves as a 
policy advisor to the Central Government said in June 
2006 that while Central Government funding for rural 
programs is increasing, the allocation as a percentage 
share of the total budget remains relatively unchanged, 
and the expenditures are insufficient (Ref F).  The 
advisor noted that the Central Government's budget to 
support agriculture, rural areas, and farmers 
increased to RMB 339.7 billion (USD 42.5 billion) in 
2006 from RMB 293.5 billion (USD 36.7 billion) in 2005, 
but he lamented that the Central Government's overall 
budget expenditure has been increasing at an average 
of 17-18 percent in recent years, and the rural 
account should be viewed in that context.  He also 
noted that 16 or 17 Central Government ministries and 
several layers of local government (county, township, 
and village) ultimately depend on New Socialist 
Countryside expenditures. 
 
Funding Shortages and the Public Finance Crisis 
--------------------------------------------- -- 
 
¶4. (SBU) According to provincial and local government 
officials, lack of funding and poor coordination 
between ministries is detrimental to the provision of 
social services.  County governments, primarily 
responsible for delivering social services such as 
education and health care, previously depended on the 
agricultural tax for their revenue.  Since the 
elimination of the agricultural tax, however, county 
governments complain that the Central Government 
allocates only 30 percent of the resources they need 
to provide social services.  The Director General of 
the Department of Rural Development at the State 
Council's Development Research Center (DRC) stated in 
June 2006 that recent studies by the DRC reveal that 
most county governments are not able to meet the 
modest funding levels required to implement the rural 
cooperative medical insurance program under the New 
Socialist Countryside.  (Note:  As outlined in Ref D, 
the Central Government announced it would spend RMB 
4.7 billion (USD 600 million) on rural health during 
¶2006.  The Central Government provides a subsidy of 
RMB 20 per capita for the program, with an additional 
RMB 10 from provincial governments, RMB 6 from 
counties, and RMB 4 from townships.  End Note.) 
 
¶5. (SBU) In Northeastern China's Heilongjiang Province, 
for example, rural watchers expressed concern that 
funding shortages for social programs at the local 
level may undermine rural policy initiatives (Ref Q). 
Throughout China, officials worry that the burden on 
local governments will lead to a public finance crisis, 
with local governments tending to compensate for the 
funding shortfall by borrowing money from financial 
institutions.  The Assistant Mayor of Chi Bi City in 
Hubei Province said in November 2006 that the public 
finance crunch is particularly acute in the rural 
areas in his district (Ref G). 
 
Misuse of Limited Resources Undermines Implementation 
--------------------------------------------- -------- 
 
¶6. (SBU) Further exacerbating the funding shortage 
 
BEIJING 00024338  003 OF 004 
 
 
problem is that New Socialist Countryside resources 
often are misused by local officials for their own 
short-term political gain.  Leaders in many localities 
have misappropriated funds to build model villages as 
"image projects" in an effort to help their promotion 
prospects.  Model villages -- with a cleaner 
environment, running water, renewable energy, and a 
more developed appearance -- are not necessarily 
misguided projects.  Most model villages, however, are 
constructed with a local official's political gain in 
mind, and media reports as well as our discussions 
with officials and researchers over the course of 
numerous visits to rural areas suggest that these 
projects are not sustainable. 
 
¶7. (SBU) The Central Government recognizes the model 
village problem and does not want local officials to 
abuse the New Socialist Countryside slogan for their 
own gain.  Early in 2006 a Xinhua News Agency report 
warned about the dangers of model villages, 
characterizing them as a "disturbing phenomena" and 
"an opportunity for cadres to vie with each other for 
political achievements" (Ref I).  Similarly, an 
editorial in the China Daily in November 2006 
criticized model villages, stating that local 
government leaders want to "make political 
achievements to boost their chances of promotion" or 
"make profit for themselves" (Ref G). 
 
¶8. (SBU) In Central Gansu Province, Emboffs visited a 
model village of 27 housing units that serves as an 
example of one project that may promote a local 
government official's career but does little to 
advance economic development in an extremely poor 
region.  The units are insufficient to house the 
nearly 300 families in the village, waste invaluable 
resources of the Provincial Poverty Alleviation Bureau 
(RMB 26,000 per house), and strain limited public 
finance coffers (Ref I). 
 
Non-Farm Income Best Opportunity for Rural Residents 
--------------------------------------------- ------- 
 
¶9. (SBU) Officials and researchers maintain that non- 
farm income, derived from part-time work in urban 
areas or wage income in the countryside, provides the 
best opportunity for farmers to increase their incomes. 
At the China Development Forum in March 2006, Liu He, 
Vice Minister, State Leading Group on Finance and 
Economic Affairs, stated that while implementing the 
New Socialist Countryside is an important task for the 
Central Government, policymakers must continue to 
promote urbanization in order to encourage surplus 
laborers to migrate to cities.  Liu stated that as 
much as 55 percent of rural income (approximately RMB 
1700) may be derived from part-time work.  (Note: 
Provincial government officials routinely state that 
non-farm income accounts for 30 to 50 percent of rural 
incomes.  End Note.) 
 
¶10. (SBU) China's urbanization drive is attracting 
rural residents to cities at a breakneck pace.  As a 
result, there are no figures to accurately reflect the 
size of the rural population.  Rural experts agree 
that the idea that there are 800 million Chinese 
farmers is outdated, and conditions in the countryside 
demonstrate that the official migrant population 
figure, ranging from 120 million to 200 million 
workers, does not reflect the current situation.  Our 
visits to the countryside in the past year suggest 
that most young men have departed to seek work in the 
cities, and interviews with farmers suggest that they 
are heavily dependant upon remittances from relatives 
living in urban areas. 
 
¶11. (SBU) In addition to providing surplus labor, many 
rural areas are attempting to cultivate non- 
traditional agricultural products and identify other 
opportunities for non-farm income.  Meetings with 
provincial government officials often focus on the 
need to modernize the agricultural sector, including 
promoting agro-processing.  Visits to the countryside 
usually reveal that farmers are growing non- 
 
BEIJING 00024338  004 OF 004 
 
 
traditional crops such as mushrooms or beans from 
which they can earn a higher return.  In some areas, 
in addition to farming, rural residents are engaged in 
the tourism sector to supplement their income (Ref H). 
 
Consumption Lagging in the Countryside 
-------------------------------------- 
 
¶12. (SBU) Observers uniformly agree that despite 
recent gains, government efforts to boost consumption 
in the countryside and achieve more balanced 
development are constrained by low incomes and high 
precautionary savings in rural areas.  The urban-rural 
income gap continues to grow, with urban incomes 
exceeding three times rural incomes in 2006.  Many 
economists believe the figure is really closer to six 
to one if account is taken of the reduced purchasing 
power caused by higher costs for services such as 
education, health care, and pensions in rural areas. 
Education and health care in particular continue to be 
a priority for farmers, and a major reason for 
precautionary savings in the countryside is that 
farmers save to pay for school fees or for medical 
care.  To alleviate these concerns, the New Socialist 
Countryside policy aims to provide free rural 
compulsory education for nine years and implement the 
rural cooperative medical insurance system, but 
anecdotal evidence to date indicates that the policy 
has fallen short. 
 
¶13. (SBU) In Central China's Hubei Province, for 
example, rural incomes remain low and government 
policies have failed to boost consumption, according 
to Provincial Government officials (Ref G).  Hubei's 
rural per capita income is below the national average 
at RMB 3099 (less than USD 400), and observers in 
Wuhan (Hubei's provincial capital) state that a sharp 
contrast exists between Wuhan, which is attracting 
large international retailers such as Wal-Mart, and 
Hubei's countryside, where branded companies are 
unwilling to venture due to a low rate of consumption. 
 
RANDT