Section I　Reform and Development of the Rural Economy: A Great Experiment of 800 Million Farmers

I. Introduction: The “Life-and-Death” Agreement of 18 Farmers in Xiaogang Village

In the 1970s, Xiaogang, a small village in Fengyang County, Anhui Province, was notorious for relying on “grain sold back to communes, cash subsidies, and loans for farming”, and the average annual income was a mere RMB20. In 1978, a severe drought struck Anhui, ravaging the summer crop, exacerbating food shortages. On the night of November 24 of that year, Yan Hongchang, head of Xiaogang’s production team, gathered the male heads of 18 local households inside a mud hut. Under the faint light of a kerosene lamp, the 18 men, all gaunt and in rags, nervously put their thumbprints in red ink onto an agreement that they vowed never to divulge. The “life-and-death agreement” read: “We agree to divide the collective farmland by household, and the heads of all households will put their signatures and stamps on the agreement. If this works, the households guarantee they will fulfill their quotas for the state and do not ask the state for money or grain. If this doesn’t work out, we cadres will have no regrets even if we are sent to prison or executed. If this happens, all other members of the Commune must help bring up our children until they are 18 years old.” Back then, under the People’s Commune system, there were no incentives to work hard and productivity remained low. By dividing collective farmland based on households, all households would get to keep whatever remained after they delivered the quota to the government; with clear goals and responsibilities, everyone would become much more motivated. Still, they felt tense about the agreement as it ran counter to the People’s Commune system. In the following year, Xiaogang Village had a bumper harvest and the average annual income soared to RMB400. Who could have imagined that the agreement, which even contained some typos, would lead to China’s rural reform, and eventually the nation’s comprehensive reform and opening up?

II. The Reform Process

1. An institutional innovation changing the lives of 800 million farmers: the household contract responsibility system

China is a densely populated country with limited arable land. In 1978, China, with a population of 962.59 million, had 120.587 million hectares of grain sown, averaging 0.13 hectares per person. During the same period, the world had a total population of about 4.18 billion, with 1.37 billion hectares of total cultivated land, averaging 0.33 hectares of cultivated land per person. China’s per capita cultivated land was 39% of the global average, 15% of the USA’s, and 52% of India’s. Farmers made up the bulk of the Chinese population. In 1978, the world had a total agricultural population of around 1.96 billion, accounting for 46.2% of the world’s economically active population, compared with 2.4% in the US and 64.6% in India. In contrast, in the same year, China had an agricultural population of approximately 790 million, constituting 82% of the nation’s total population.2

An immense population and limited arable land, coupled with the lack of incentives in a rural labor system under a centrally planned economy, led to low productivity in agriculture. In 1978, China’s grain, wheat and corn yields per hectare were about 2,527 kilograms, 1,845 kilograms and 2,803 kilograms, or roughly 60%, 87% and 44% of that of the US. The nation’s per capita output of agricultural produce was also below the global average. In 1978, China’s total grain output was about 305 million tons for a population of around 963 million. This included 53.84 million tons of wheat, 55.95 million tons of corn, 2.17 million tons of cotton, 8.56 million tons of pork, beef and mutton, and 0.88 million tons of milk. On a per capita basis, there were 316 kilograms of grain, about 72% of the global average; 56 kilograms of wheat; 58 kilograms of corn; 8.9 kilograms of pork, beef and mutton, or about 27% of the global average; and 0.9 kilograms of milk, less than 1% of the global average.3 In 1978, China’s agriculture was suffering from stagnation. Agricultural produce, in such severe shortage, was available only with ration tickets.

In this dire situation, hunger was widespread. While large-scale collective production under the People’s Commune system had failed to feed the population, Xiaogang Village blazed a new trail. Its practice was subsequently elevated into the “household contract responsibility system”, which was replicated across the country as a model of rural reform. The Central Government’s No. 1 Document of 1982, entitled“Minutes of the National Conference on Rural Work”, stated that all responsibility systems currently implemented in rural areas, including pay by contracted work quota, remuneration for professional contracted work, and contracting output quotas to households and to groups, would all be production responsibility systems of the socialist collective economy. By the end of 1982, about 80% of farming households had been given fixed output quotas, and good harvests followed year after year.

In early 1983, the practice was officially named the “household contract responsibility system”, which means that the collective organization contracted out land, other resources and output quotas to individual households. Under the system, the collective ownership of farmland was retained while the households farmed independently and kept what remained after delivering the output quota to the state. The common practice was to assign a tract of farmland to each household, based on the size of the household, under a contract that defined responsibilities, rights and benefits. The Land Administration Law of 1986 clarified the system. In late 1991, the Chinese government released the “Decision to Further Strengthening Agricultural and Rural Work”, stating, for the first time, that the household contract responsibility system and the double-tier operating system would be the basic operating systems for rural areas. On March 29, 1993, the first session of the Eighth National People’s Congress passed a constitutional amendment that enshrined the two systems. On July 2 of the same year, the second session of the same Congress passed the Agriculture Law, affirming that “the State implements a contracted land operation system in rural areas, safeguards the long-term stability of rural land contracting according to the law, and protects the rights of farmers to use their contracted land plots.” On November 5 of the same year, the Chinese government announced a set of policy measures for the development of agriculture and the rural economy, extending the term of land contracts by another 30 years.

The household contract responsibility system replaced the People’s Commune system, which had hindered the development of productive forces. Instead of privatizing land, it separated land use rights from land ownership rights. This not only retained the advantage of unified operation as a collective but also motivated farmers to work harder; it was an agricultural system well adapted to China’s realities.

It is worth mentioning that when the system was being implemented across the country, the Chinese government spared certain rural areas from the policy. For example, Huaxi Village in Jiangsu Province and Liuzhuang Village in Henan Village were allowed to retain their collective ownership. In a 1980 speech on rural policy, Deng Xiaoping affirmed the practice of contracting output quotas to households. He also said, “It is important to proceed from the specific local conditions and the wishes of the people. When it comes to setting role models, we should not talk about only one practice and ask all localities to follow suit. When publicizing good examples, we must make it clear under what conditions and how they have come into existence. We should not say they are good in all aspects and can solve all problems; moreover, we should not ask other regions to copy the practice mechanically without considering their own conditions.” Proceeding from the specific local conditions and the wishes of the people was an important principle to which the Chinese government adhered in rural reform.

2. The road to prosperity: rural enterprises

While rural reform centering on the household contract responsibility system was in full swing, township and village enterprises emerged across the country. TVEs originally referred to collectively owned agricultural enterprises set up by rural collective economic entities or farmers in villages and towns; later, they became a generic term for rural enterprises. Prior to reform and opening up, there were also small-scale enterprises owned by people’s communes in some rural areas, known as “team enterprises”. Workers at these enterprises used to “eat out of the same big pot of rice” – obtaining equal pay regardless of labor contributed. After the output quotas were contracted to households, farmers’ productivity increased, as did surplus labor time. Nevertheless, the situation of an immense population, limited arable land and widespread poverty remained largely unchanged. Some farmers began to engage in small-scale industrial activities in their leisure time. In the early 1980s, inspired by the household contract responsibility system, while maintaining collective ownership, some TVEs introduced “contracting” into their operations, separating operating rights from ownership rights. This eventually ended the practice of everybody getting equal pay regardless of contribution at enterprises.

Taking notice of this phenomenon, the Chinese government quickly took steps to encourage it. In the No. 1 Document of 1984, the Chinese government proclaimed, “enterprises owned by communes and production teams are an important pillar of the rural economy and some of them are indispensable assistants to large industries in the cities.” Shortly afterward, the Chinese government officially renamed these enterprises as “township and village enterprises” and affirmed the significant role of TVEs in supplementing agriculture through industrial activities. All this greatly inspired innovation and entrepreneurship among farmers, and more TVEs sprung up and thrived. Thus, 1984 is often referred to as the “inaugural year” of the development of TVEs. Initially, TVEs were mostly collective investments by township dwellers or villagers. Over time, with the relaxation of policy, a large number of TVEs invested and managed by households emerged. Huaxi and Liuzhuang, two villages mentioned earlier, exemplified collectively owned TVEs, while Wenzhou was a hotbed of family-owned TVEs.

TVEs swiftly flourished, and many of them were privatized with the backing of local governments. Later, as the nation opened wider to the outside world, foreign-invested TVEs, which were export-oriented, also appeared across the country, especially in the Pearl River Delta. The development of TVEs tremendously inspired rural residents, and changed the smallholder production mindset which had resided within Chinese peasants for thousands of years. It also led to an enormous improvement in the competence of workers, helped absorb large numbers of rural laborers, and unleashed productive forces. The vigorous growth of TVEs further liberated rural productive forces. Deng Xiaoping hailed the development of TVEs as the “biggest unexpected gain from rural reform”4.

The path of Huaxi Village in Jiangsu Province and the development model of TVEs are interesting case histories in China’s rural reform and development. In the early 1980s, when the household contract responsibility system was rolled out across the countryside, Huaxi Village already had a vibrant collective economy with sizable industrial operations. Secretary of the village Party committee Wu Renbao was convinced that the household contract responsibility system was a means to an end rather than an end in itself. After consulting with fellow villagers, he decided on a path different from that of Xiaogang Village. Thus, farmland in Huaxi was still collectively cultivated as then accustomed, and was not divided among the households; even today, the village follows strictly collective economic operations. It was precisely for this reason that Huaxi managed to accumulate large amounts of capital, which enabled it to dramatically grow its TVEs in the 1980s and eventually achieve an annual output value of more than RMB100 million. While adhering to public ownership, Huaxi never wavered in its efforts to promote the development of non-public economic entities and consistently encouraged its residents to acquire a stake in collective enterprises. This allowed Huaxi to enjoy a smooth transition from a public-only ownership system to a mixture of ownership systems. Later, the village established itself as a commercial corporation under the name of Huaxi Holdings, and went public on the Shenzhen Stock Exchange, forming a mixed economic system with the collective owning a controlling stake and individuals taking a minority stake. In the process, Huaxi created a series of renowned brands, notably“Huaxi” and “Renbao”. The case of Huaxi exemplifies China’s rural reform characterized by a singular focus on the development of productive forces, as well as by flexibility and diversity.

Although TVEs injected fresh vitality into the rural economy, in the rush for growth many problems surfaced, such as poor infrastructure and mismanagement. TVEs were soon dwarfed by state-owned enterprises (SOEs) and urban enterprises which were growing rapidly amidst reforms. Many TVEs ran into great difficulties and ended up acquired by or merged with foreign-invested enterprises or urban enterprises.

3. Reform of the rural market: support for contracting output quotas to households and the development of TVEs

In the 1980s, the development of TVEs and commodity production in rural areas entailed freedom of trade and liquidity of factors of production, including capital, land and labor. However, these factors of production were constrained by public ownership of the means of production and by segregated urban and rural household registration systems. Until the 1980s, China implemented “unified procurement” and“fixed procurement” systems. The state procured all major agricultural products produced by farmers, such as grains, cotton and edible oils; it also purchased fixed amounts of most agricultural sideline products, including live pigs, eggs, sugar, mulberry silk, silkworm cocoons, jute, fluecured tobacco, and aquatic products. In many categories, more than 90% of the products were procured by the state. The trading of agricultural products was a state monopoly, and farmers could not trade freely. With agriculture reforms and the upsurge in agricultural production in the 1980s, not only were farmers able to keep their pots boiling, but they also had surplus grain in their hands, so many hoped they would be allowed to trade their surplus grain for other daily necessities. Obviously, the “unified procurement” and “fixed procurement” systems could barely cope with the new demands of rural economic development, and the circulation system of agricultural products lagged far behind agricultural production.

On January 1, 1985, the Chinese government announced 10 policy measures aimed at further invigorating the rural economy. One of the measures was the introduction of a contract-based ordering system to replace the “unified procurement” and “fixed procurement” systems. With the exception of grains, cotton and edible oils, which would continue to have prices set by the state, the prices of all agricultural products would be liberalized and regulated by the market. The introduction of this policy measure marked the beginning of a “dual-track system” for the trading of agricultural products, in which prices were set by the state on the one hand, and regulated by the market on the other hand. In 1990, the Chinese government set out to establish a special national grain reserve system. On June 6, 1998, the State Council released its No. 244 document, entitled “Regulations on Grain Procurement”. The document stipulated, “only state-owned grain procurement and storage enterprises approved by a people’s government at the county level, in accordance with the conditions set forth in Article 6 of these Regulations, may engage in grain procurement activities according to the relevant provisions of the State. Unless approved, no entity or individual may directly procure grain from farmers or other grain producers.” However, the policy of procuring all surplus grain from farmers at protected prices was not strictly enforced; and rejection, restriction and under-pricing, as well as rent-seeking, were not uncommon during the peak season of procurement. And procurement often ceased immediately after the peak season, meaning farmers would be unable to sell their output all year long. On April 23, 2004, the State Council released the “Opinions on Further Deepening Reform of the Grain Circulation System”, implementing protected baseline prices for grain procurement, and introducing fully market-driven grain trading. This concluded the reform of the circulation system for agricultural products, and ushered in a grain distribution system operating completely on market principles.

4. Urban-rural segregation removed: farmers migrating to cities for jobs

The implementation of the household contract responsibility system led to a dramatic improvement of agricultural productivity, which in turn freed up a large number of rural laborers. Surplus laborers then flocked to cities to pursue job opportunities opened up in the transition from a centrally planned to a market-driven economy, becoming known as“farmers-turned-migrant workers”.

With reform and opening up underway, Chinese products made their way into the international market, as manufacturing enterprises mushroomed on China’s southeast coast. Their assembly lines required a tremendous amount of low-cost labor, but for migrant workers, their labor was not “cheap” as they could earn far more than they did in farming. Moreover, TVEs in the underdeveloped central and western regions were far less competitive than urban enterprises on the southeastern coast; as a result, rural laborers kept flocking into the coastal cities in search of jobs. The inflow of capital, coupled with the influx of migrant workers, resulted in a remarkable expansion of urban production capacity. Furthermore, as the nation’s economy became more export-oriented, exports steadily increased, as did the income of urban residents and early migrant workers, leading to greater demand for consumer goods. This in turn further stimulated production and created a stronger demand for labor. As a result, even more migrant workers arrived in the cities.

The massive migration of rural residents into the cities fundamentally changed the traditional look of rural areas, as urban and rural labor markets became increasingly integrated. The existing segregated urban and rural administration systems soon proved inadequate in the face of the new changes. Some migrant workers settled down in the cities, becoming urban residents, but the majority of migrant workers retained their rural resident status and were technically still the contractors of farmland under the household responsibility system.

The influx of migrant workers also dramatically accelerated urbanization, which, along with the reform of the household registration system, led to a steadily declining share of the agricultural population in the total population. The absolute number of the agricultural population peaked in 1995, before declining year after year.

In 2016, China had a total of 281.71 million migrant workers, including 112.37 million local workers and 169.34 million non-local ones (Fig.1.1). From 2011 to 2015, as the demographic dividend diminished, the growth of the total number of migrant workers declined year after year. In 2015, migrant workers accounted for 35.8% of China’s labor force. Providing low-cost labor for the nation’s manufacturing and export industries, they helped raise the overall income of rural residents.

5. Stronger emphasis on rural areas, agriculture and farmers

On December 29, 2005, the Chinese government announced a decision to abolish Agricultural Tax Regulations on January 1, 2006. The agricultural tax, which had existed in China for almost 3, 000 years, became a thing of the past. For countless years, peasants had faced heavy levies. After the founding of the PRC, the government was dedicated to developing industry and national defense, with agriculture on the back burner. In the early 2000s, as the nation grew much stronger, the Chinese government realized that it needed to do everything possible to raise the income of farmers. It not only abolished the agricultural tax altogether, but also offered subsidies to farmers. Before the introduction of market forces, China established a grain risk fund system in a bid to control grain prices. After grain prices were completely liberalized in 2004, the use of grain risk funds became a topic of debate. The Chinese government decided to allocate half of such funds, amounting to RMB15 billion, to farmers as direct subsidies. Afterward, various other subsidies were given to farmers in major grain-growing regions for the purchase of grain seeds, heavy-duty farming machinery, and means of production.

In recent years, the Chinese government has exempted about 150 million students from tuition and fees over the course of their nine-year compulsory education (elementary and secondary education). Boarding students also receive subsidies for living costs. The new rural cooperative healthcare scheme covers all farmers, and the government has significantly increased subsidies for farmers participating in the scheme, greatly easing the financial burdens of healthcare. Infrastructure in rural areas has also improved dramatically. Except for a few extremely remote villages, all rural areas have road, electricity, tap water and internet access. Moreover, cash subsidies are offered to poverty-stricken families to ensure basic living standards, and subsistence allowances for low-income families have been further improved.

The Chinese government attaches great importance to agriculture. A basic reality of China is that it has an enormous population, the bulk of which is rural. As such, the rural population and farmers are the focal points of China’s rural reform and its drive to build socialism with Chinese characteristics. All of the five annual No. 1 Documents issued by the Chinese government between 1982 and 1986 were related to rural areas. The No. 1 Document of 1982 summed up rural reform after 1978, and affirmed the practice of contracting production quotas to individual households. The No. 1 Document of 1983 spoke highly of the household contract responsibility system, and called on officials at all levels to emancipate their minds and lend strong support to rural industry and commerce. The No. 1 Document of 1984 extended the term of land contracts to 15 years, removed restrictions on the flow of rural funds, and expanded the business scope for farmers. The No. 1 Document of 1985 abolished the 30-year-old “unified” and “fixed” procurement systems, further advanced the market-based pricing of agricultural produce, and stimulated the growth of TVEs. The No. 1 Document of 1986 reaffirmed the fundamental position of agriculture in the national economy, set the goal of increasing agricultural incomes, and called on government officials and departments at all levels to work more closely together to ensure the success of rural reforms. These five documents collectively formed a blueprint for rural reforms.

During this period, the income of farmers increased dramatically, and the income gap between urban and rural areas narrowed. However, in the 1990s, with urban reforms in progress, the income of urban residents kept rising rapidly, while the financial burden on farmers remained heavy despite repeated efforts to reduce it. With rural areas lagging in development, the incomes of farmers kept growing at a sluggish rate and the income gap between urban and rural residents kept widening. Faced with such a situation, the Chinese government issued another five No. 1 documents from 2004 to 2008. The No. 1 Document of 2004 called for efforts to advance market-driven pricing for agricultural produce, and to reverse the trend of widening income inequality between urban and rural residents. The No. 1 Document of 2005 stressed the need to bolster the development of agricultural infrastructure, and to speed up scientific and technological innovation in agriculture, with the aim of improving the productive forces of agriculture. The No. 1 Document of 2006 stated that agriculture, rural areas and farmers would remain the government’s top priority, and announced plans to build a long-term mechanism for promoting agriculture through industry and for stimulating rural development through urban development to ensure balanced urban and rural socioeconomic development. The No. 1 Document of 2007 reiterated the fundamental position of agriculture, rural areas, and farmers, and called for efforts to enhance the agricultural subsidy system. The No. 1 Document of 2008 again stressed the need to increase the incomes of farmers, and to speed up efforts to remove the separated urban-rural structure. The thread running through all five documents was balanced urban and rural development for the goals of raising the incomes of farmers and narrowing the urban-rural gap.

These documents, which spoke volumes about the Chinese government’s commitment to rural areas, played a significant role in steering reform efforts and ensuring stability for further reform. Even today, agriculture, rural areas and farmers remain the top priority of the Chinese government, and by and large, the nation has entered into a phase of development focused on promoting agriculture through industry and stimulating rural development through urban development. The past few years have seen a continuous improvement of the policy system for agriculture, rural areas and farmers, as a “golden period” with the strongest government commitment, the most vigorous reform efforts, the largest expenditures, and the best results for rural reforms.

III. Remarkable Achievements of Rural Reform

The grain issue is of particular significance in China. In a country with nearly 1.4 billion people, food has always been a top concern. In the first few years of the PRC, the annual grain output was a little over 100 billion kilograms. This figure reached 150 billion kilograms in 1952, then took 14 years to hit 200 billion kilograms in 1966. It rose to 300 billion kilograms in 1978, and 400 billion kilograms in 1984 thanks to increased productivity resulting from rural reform and the household contract responsibility system. This six-year period saw the increase of the figure by 50 billion kilograms twice. It took nine years for the figure to reach 450 billion kilograms, in 1993. In the subsequent 14 years, the figure hit 500 billion kilograms three times, but was not sustained. It was not until 2007 that the figure held steady above 500 billion kilograms. During the term of the 12th Five-Year Plan (2011-2015), annual grain output exceeded 550 billion kilograms for five years in a row, and surpassed 600 billion kilograms for three consecutive years, surging by 50 billion kilograms for two straight years, an unprecedented feat since the founding of the PRC.(Table 1.2)

It is particularly worth mentioning that since 2004, China’s grain production has increased for 11 years continually, a rare feat around the world. Among the world’s top six grain producers, only the US and India have enjoyed growth for five consecutive years. After the founding of the PRC, China secured growth for nine consecutive years in the 1950s, and growth for seven consecutive years in the 1960s. Grain production typically followed cycles of four or five years, with roughly two years of good harvest, one year of average harvest, and one year of poor harvest. Since the reform and opening up process, China’s grain production has only had two wild swings, one in the late 1980s and the other in the late 1990s. As the world’s most populous nation and largest grain producer, China has set new records by securing grain output growth for 11 successive years, hailed as a Chinese miracle.

At present, China has a self-sufficiency rate of more than 98% in rice, wheat and corn, higher than the world’s average levels. Its grain production contributes significantly to global food security. China produces a quarter of the world’s grain, and feeds nearly one-fifth of the world population with less than one-tenth of the planet’s arable land. Since 2006, China has no longer received food aid from the UN World Food Program (WFP); instead, it has gradually become an important donor of food aid. Moreover, China has consistently had bumper harvests, and adequate supply of agricultural and livestock products. In 2014, China produced 6.16 million tons of cotton, 35.17 million tons of oilseeds, 13.32 million tons of sugar, 760 million tons of vegetables, 150 million tons of fruits, 87.07 million tons of meat, 28.94 million tons of eggs, 37.25 million tons of milk, and 64.5 million tons of aquatic products. Its outputs of meat, eggs, vegetables, fruits and aquatic products have consistently ranked first in the world. To place this in perspective, China produces two out of every three fish and one out of every two apples in the world.

The direct result of China’s rural reform and opening up has been dramatic increases in labor productivity and agricultural produce. In 2015, the average Chinese consumed 445 kilograms of grain, 65 kilograms of meat, 550 kilograms of vegetables, 30 kilograms of milk, 20 kilograms of poultry and eggs, and 47 kilograms of aquatic products. With the exception of milk, China’s per capita consumption of agricultural products exceeded the global averages, having come a long way from its low levels in 1978. Compared with 1978, the per capita quantity of grain owned by the Chinese increased by 40%, of meat by 630%, and dairy products by 3, 200%. All major agricultural products saw incredible increases in output and were available in abundance, greatly enriching the“vegetable baskets” and “fruit plates” of both urban and rural residents, and earning China a reputation for its sheer abundance. Today, across the entire width and breadth of China and in all seasons, wherever there is demand, there is supply. In the past people worked hard all year round until Chinese New Year’s Eve, and then feasted on dumplings for one day before going back to work. Today, food is abundant despite a larger population. People eat their fill, with a vast array of quality foods, testifying to the nation’s tremendous capacity for agricultural production.

Furthermore, agricultural modernization has accelerated, with the standards of technology and equipment rising constantly. At present, 52% of farmland is under effective irrigation. By the end of 2014, approximately 162 million acres of farmland were under effective irrigation. Advance in agricultural technology contributed up to 56% of agricultural output growth. The total acreage of farmland boasting soil testing and formulated fertilization, covering almost all major grain crops, reached 180 million acres in 2010 and 247 million acres in 2014. The coverage rate of improved crop seeds now holds steady at over 96%, and all varieties of crop seeds used in agricultural production have been upgraded, with quality seeds utilized for all grain crops. The mechanization rate of cultivation and harvesting for main crops exceeds 61%. Agricultural production, once powered by humans and animals for thousands of years, is now largely mechanized, so the scenes of “peasants toiling away with backs bent” is becoming a thing of the past. In 2014, the total power of agricultural machinery reached 1.08 billion kilowatts, with wheat cultivation entirely mechanized, and corn and rice cultivation more than 75% mechanized.5 China today is also the world’s largest manufacturer of agricultural machinery.

IV. China’s Rural Reform Experience and Outlook

The success of China’s rural reforms can be attributed to appropriate separation of ownership rights and use rights on the basis of a deep understanding of the nation’s realities, while public ownership of land is maintained to ensure social equity and stability. This practice has mobilized farmers’ enthusiasm, and facilitated labor flow and the integration of industries. It also allowed rural reforms and urban and industrial reforms to complement each other and grow together.

China’s land system reform has “three red lines”: (1) the collective land ownership system for farmers is not to be changed; (2) the designation of basic farmland for cultivation purposes is not to be altered; and (3) the fundamental rights and interests of farmers are not to be infringed upon. The first red line was set out of concern that land privatization would mean unfettered land transfer and resulting concentration of land into the hands of big businesses, which would threaten the livelihoods of numerous farmers displaced.

The second red line is intended to ensure an adequate grain supply for a vast population in a country with very limited cultivated land per capita, thereby preventing potential grain crises. Grain security is also the fundamental reason why a private land system is out of the question. Without a collective ownership system and government administration, there would be no guarantee that sufficient land would remain devoted to agriculture, and grain security concerns would become a sword of Damocles hanging over the heads of the Chinese people.

Rural reform, including land system reform, is all about the protection of farmer interests. The maintenance of the collective land ownership and the preservation of basic farmland are in the best interests of farmers. If the superiority of the socialist system is to be sustained and common prosperity realized, innovative practices must be introduced for large-scale rural business operations on the basis of the collective ownership system, in order to achieve efficient distribution of land.

On the basis of the conditions of agricultural development and the outlook for rural reforms, Deng Xiaoping envisioned the “two leaps”. The first entails the establishment of a management system centered on the household contract responsibility system, while the second entails the introduction of large-scale intensive rural production in order to cope with the needs of socialized agricultural production. The first goal has been achieved, enabling farmers to feed and clothe themselves. The second goal is more complex and difficult, with exploratory efforts still underway.

Although the household contract responsibility system was suited to China’s characteristic smallholder production at that time, stoking farmer enthusiasm, labor-intensive smallholder production also has inherent drawbacks. In the long run, increasing productivity by deploying more labor power was not sustainable, and productivity growth in agriculture could only be achieved with large-scale mechanized operations. Take the US, for example, where farms use mechanized production and large-scale management, dramatically improved agricultural productivity. Given its realities, China does not have to follow the farming model of the US, but large-scale operation is an emerging trend.

At present, with rural land use rights transferred, large-scale intensive agricultural production is taking hold. Meanwhile, as deep processing of agricultural products and new forms of business such as eco-farming and leisure farming expand, we see the increasing integration of agriculture, industry and services. And, with the migration of rural labor to the cities and rising urbanization, the urban-rural divide is closing. Agriculture and rural areas are modernizing amidst the industrialization of agriculture, and the deepening reform of the household registration, employment and entrepreneurship systems.

In October 2016, China released the policy paper, “Measures for Enhancing the Separation of Ownership Rights, Contracting Rights and Management Rights for Rural Land”. The document stated that the government would allow farmers to retain land contracting rights and transfer land operating rights, and would split contracted land operating rights into contracting rights and management rights, parallel to ownership rights. The previous practice was to keep land ownership rights and contracted operating rights, with the former belonging to the collective and the latter to individual farmers. The latter was not split into contracting rights and management rights. After reform the land system remains a public ownership system, but the form in which it is manifested may differ. With the separation of three types of rights, the land system differs not only from the private land ownership system in capitalist countries but also from the previous Chinese- or Soviet-style public land ownership system. It represents a new land system with Chinese characteristics.

As another major institutional innovation after the household contract responsibility system, the separation of these three types of rights outlines the vision for the next wave of reform. To facilitate rights separation, confirmation of land rights had already been underway for a while. On July 8, 2015, Xiaogang Village, in Fengyang County, became the first locality in Anhui Province to issue land rights certificates, spearheading a new wave of rural reform. Confirmation of land rights involved the issue of certificates akin to identity cards which identify the owner, user and contractor of the land plot. Although arable land in rural areas is collectively owned, use rights can be awarded to individuals. Contracted operating certificates constitute the legal basis for farmers to safeguard the interests of their contracted land plots and to lease their plots to third parties for a fee, become stakeholders of modern farming businesses, or secure mortgages from banks with their contracted operating certificates, which has stimulated the development of rural finance.

By the end of July 2017, the rights of approximately 1.73 billion acres of contracted rural land had been confirmed, with the pilot program covering 28 provinces. The land rights confirmation and registration certificates give farmers peace of mind, as their land contracting rights are now enshrined in law. At the same time, the government has made efforts to facilitate the orderly transfer of land use rights and encouraged farmers to keep their plots circulating, through subcontracting, leasing, swapping, and transfer or joint-stock ventures, to increase the scale of operations. At the end of 2015, household-contracted arable land in circulation topped 66 million acres, more than double the figure in 2010 and accounting for over 30% of the total arable land.6

The separation of these three types of rights, as an initiative to improve the basic rural operating system, is in line with the growth of productive forces in the countryside. It plays a significant role in straightening out ownership relations for rural land, and optimizing the allocation of land resources. It has also been conducive to the formation of new types of operating entities, and to increasing scales of operation. It is a solid institutional guarantee for the development of modernized agriculture and for the increase of farmer incomes. However, as mentioned earlier, the system is merely an outline of the vision for the next wave of rural reform; and for specific cases in specific areas, more exploratory efforts are needed. In practice, farmers’ wishes must be respected and local conditions have to be considered, as the system is not a one-size-fits-all solution. Besides confirmation of land rights, many other supporting reforms, including the improvement of the land transfer administration system, and the creation of a policy system in support of new types of operating entities, are proceeding in a step-by-step process.