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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 
 
BEIJING 00003857  002 OF 004 
 
 
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 
 
BEIJING 00003857  003 OF 004 
 
 
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 
 
BEIJING 00003857  004 OF 004 
 
 
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. 
 
------- 
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