CHINA: NEW AGRICULTURAL REFORMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000101210001-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: April 19, 2010
• Sequence Number: 1
• Publication Date: March 29, 1985
• Content Type: REPORT

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Central Intelligence Agency
Washington. D. C. 20505
DIRECTORATE OF INTELLIGENCE
29 March 1985
China: New Agricultural Reforms
Summary
Ill
Having spent the latter half of 1984 touting
urban industrial reform, Beijing has again made
agriculture the focus of its first major economic
policy statement of 1985. An authoritative party
document publicly addresses major problems that have
begun surfacing in the agricultural sector over the
past two years and significantly alters the
relationship between the government and China's
farmers. In an effort to reduce the increasing
surplus of grain and cotton and to limit growing
government subsidies to agriculture, Beijing has
announced that it will cut back on both the amount
and the average price of agricultural products it is
obligated to buy. From now on, production contracts
will replace state quotas, and Chinese peasants will
be required to sell any above-contract production on
a free market, rather than to the state. The new
policies stipulate more government incentives to
encourage peasants to produce better quality
products and to make more efficient use of their
land.
The price reductions and greater uncertainty
that accompany the government's call for peasants
themselves to market their surplus output may
already be having a dampening effect on grain and
cotton production, and farm incomes in areas
This memorandum was prepared byl I China Division, 25X1
Office of East Asian Analysis. Comments and questions are
welcome and should be addressed to the Chief, Domestic Policy
Branch on 25X1
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producing the two crops probably will fall this year
because of decreased acreage devoted to these
crops. Whether this downward pressure will result
in actual declines in output or merely reduced rates
of increase is difficult to determine. Recent
Chinese press reports indicate a serious concern in
the leadership that actual production declines could
occur, a development that could adversely affect
other important economic reforms. Whatever the
outcome for grain and cotton, we anticipate that the
new program will spark increases in the production
of livestock, chickens, and vegetables and may
encourage peasants to increase their involvement in
the transportation and storage of grain and cotton--
thus meeting Beijing's goals.
Central Document No. 1--Setting New Agricultural Policy
For the fourth consecutive year, China has focused priority
attentign--in the form of Central Document No. 1--on agricultural
reform. The full text, published in late March, and earlier
comments i n the Chinese press by Premier Zhao Ziyang and Vice-
Premier Wan L i indicate that major changes are planned in
relationship between the government and China's farmers. 25X1
The state will no longer fix mandatory quotas for farm
produce, including grain and cotton. Instead, peasants will
negotiate targets with state commercial departments and then sign
quantity and quality contracts. This year, for example, the
state plans to purchase 75-80 million tons of grain under the
contract system. The state will buy only the amounts contracted
for. Any excess will be retained by the farmer for his own use
or for sale in free markets. The state will no longer purchase
nonstaple products such as vegetables, pork, chicken, fruit, and
aquatic products. Inst market demand and supplies available
will determine prices. m 25X1
The pricing formula for grain, oil seeds and cotton will
also be changed. Depending upon the quality of the product,
there will be a single price set by the state, agreed to in
contract. Peasants will no longer receive a guaranteed bonus
price for increases in their output. In the past, this bonus
1Central Documents (zhong fa) are the most authoritative
party guidelines for particular areas of policy concern.
Published by the party's General Office, they are highly
classified and restricted in circulation. In a break with normal
procedure, however, China has for the last three years published
Central Document No. 1--on agriculture--after relatively open
discussion in the party press.
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price has been as much as 50 percent higher than the procurement
price, which was itself inflated to spur production. Some
observers have suggested this bonus price was in large part
responsible for the rapid growth in agricultural production the
last few years. The government has admitted that the practice
has caused China to have serious budget deficits.
The new pricing policy would appear to introduce greater
risks and uncertainties for the peasants, who now will have to
make production decisions against uncertain market conditions.
There are still, however, several safeguards: If market prices
fall below production costs, or below the old quota price, which
is in effect the new floor price, the state will buy all the
grain that is offered for sale until prices rise above the floor
price. The state also will try to regulate the market by
purchasing and selling commodities on the market in order to
stabilize prices and will now guarantee food supplies to farmers
switching from grain and cotton to forestry, animal husbandry, or
even nonagricultural pursuits.
The Motives for Additional Change
We believe Beijing had several motives for introducing the
new policies. First of all, they are attempts to alleviate the
few serious problems that have accompanied the otherwise highly
successful agricultural reforms of 1978-1981.
By forcing producers to market above-contract grain on their
own, Beijing hopes to lessen the strain that six consecutive
bumper harvests have placed on its centralized procurement,
marketing, and storage systems. Surplus grain has clogged rail
and water transportation networks and overwhelmed state
granaries. There have been reports of grain rotting in make-
shift storage facilities because local granaries are full and
peasants have neither the means of transportation nor the
commercial networks necessary to ship to local markets. The
problem has been compounded by state pricing practices, which--by
holding procurement prices above those on free markets--have
encouraged peasants to sell their entire output to the state
rather than trying to arrange commercial transportation on their
own. FI
The new procurement practices, and the policy of paying
lower average prices for grain, also represent an attack on
burgeoning financial problems that have come after recent
agricultural gains. Beijing's policy of holding retail grain
prices artificially low to protect urban consumers while raising
procurement prices to benefit farmers meant that output gains
automatically demanded increased subsidies. Bonus prices for
above-quota production exacerbated the problem. The gap required
subsidies of more 140 billion yuan between 1979 and 1983 and was
a major factor behind six consecutive budget deficits, totalling
about 80 billion yuan. F__1
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The decision to change agricultural pricing practices was
also driven by the party's commitment, formalized at the Third
Plenum of the 12th Central Committee last October, to undertake
comprehensive price reform. The regime evidently believes that
the agricultural sector is the easiest area in which to initiate
risky price reforms, owing to:
-- Successes achieved with earlier rural reform when peasant
enthusiasm for market-oriented programs resulted in quick
and positive responses to new policies.
-- The surplus grain and cotton crops, which ensure that
there will be no shortages and thus no spiraling upward of
prices.
-- Previous price adjustments that set state procurement
prices for agricultural crops much closer to their true
market value than those of industrial products or raw
materials. Further price changes in response to market
signals should be less than in some other sectors.
Beijing also intends the new policies to promote
agricultural "diversification," reduce reliance on subsistence
grain farming, and support the growth of a "socialist commodity
economy." Party leaders have long recognized the need to improve
the variety and nutritional value of the Chinese diet but have
resisted changing agricultural policies to avoid causing grain
shortages. The new policies, buttressed by agricultural
surpluses, are intended to encourage local areas to seek their
"comparative advantage" in agricultural production, rather than
trying to become totally self-sufficient in grain.
By contracting with peasants, the state can reduce grain
production in areas that are unsuitable to growing it, and
promote production of more appropriate crops. The long-range
plan is to create "commodity base areas" that will specialize in
raising particular crops. For example, instead of growing grain
inefficiently, mountainous areas will be encouraged to cultivate
forests, while grassland areas will be urged to raise more
livestock. The new policies stipulate that those peasants who
undertake conversion of the land they farm will be provided
subsidies by the state, in the form of loans, seeds, technical
advice, and insured grain supplies.
Finally, by lowering farm incomes of less efficient
producers Beijing reinforces its effort to push peasants into
nonfarming employment. Beijing wants to reduce the proportion of
its rural population engaged in agriculture from the current 80
percent to 30 percent by the year 2000. Under Beijing's plan, 40
percent would be engaged in industrial and commercial activities
in rural towns and the remaining 30 percent would be involved in
animal husbandry, forestry, fisheries, etc. F__1
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Getting the Program in Place
Although the regime's new policies appear to us to be well-
considered, and reportedly already have been tried experimentally
in some provinces, including Guangdong, potential problems remain
that could hamper implementation of the program. It may be
difficult to convince peasants to go along with the new
policies. In the past, farmers responded enthusiastically to
reforms--such as the responsibility system--that were obviously
to their benefit. The advantages of price reform may not be as
apparent, and the risks may appear worrisome. For example, in
areas of poor transportation and communi cation networks, it may
be difficult to induce peasants to risk open market activity. It
may also be hard to persuade conservative farmers in poor areas
to give up grain cultivation, even if inefficient, and de end on
state supplies and aid to develop other production. 25X1
I n our view, political problems also will have an effect on
the implementation of the agricultural price reform program.
There are probably still some in the Politburo who have serious
reservations about the ideological propriety and economic
advisability of the new policies. This attitude will be even
more prevalent at lower levels of the party hierarchy.
Provincial reaction to Central Document No. 1 has been relatively
slow and cautious, compared with previous years, suggesting that
there is both confusion about and possibl some resistance to
implementation of the new policies. 25X1
The Risk of Declining Output
Beijing appears to be quite concerned that peasants may
over-react to the new policies and bring on serious supply
problems. Articles in early March exhorted peasants and cadres
alike to adhere to state guidelines and avoid reducing the
acreage of good land sown to grain in hopes of gaining higher
profits by raising cash crops. The articles hinted that the
government is considering raising grain prices to insure that
steep declines in production do not occur. 25X1
Grain supply shortages would be a serious setback to all
other reform efforts in China. Not only would the ripple effect
complicate industrial price and wage reform efforts in the
cities, but political and personnel reforms planned by Deng
X i aopi ng for later t h i s year might also be affected. I n the
past, reformers justified calls for continued policy change by
citing successes achieved in agriculture. Declines in grain
production as a result of the most recent reforms would certainly
be used by opponents of reform as evidence that the program had
gone too far. The government, therefore, appears to be taking
preventive steps to insure that agricultural production does not
get out of control. F - I 25X1
The lifting of price controls on pork and vegetables may
create price and supply problems in urban areas. There are
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already numerous reports of hoarding and price gouging, and the
government has taken firm action to prosecute those who take
advantage of the new policies to make excess profits. In
expectation of short-term meat supply problems, ration coupons
were reintroduced in 21 major urban areas in late January. It
has also been reported that the state is prepared to increase
wages in some urban areas to offset higher farm commodity
prices. Although this will add to the government's subsidy
burden, it is indicative of the cautious approach Beijing
believes it needs to take to prevent any panic-driven reaction to
change. F_~
Prospects
Despite the short-term risks, we believe that the new
policies have good prospects for relative success. If
consistently implemented, they probably will:
-- Lower state subsidies. With state procurement limited and
bonus prices eliminated, average prices paid will st
growing, reducing government costs.
-- Ease storage. With the state paying less for grain, many
farmers will switch to other crops for better income,
easing pressure for additional grain storage facilities.
-- Increase vegetable and pork stocks. Although pork and
vegetable prices may rise sharply at first, increased
production will bring supplies up and prices back down
within a few months.
-- Get peasants involved in marketing, rural industry, and
scientific farming. Allowing peasants to sell their
surplus produce on the open market will encourage more
peasant interest in marketing and prices. Many others
will use more scientific farming to upgrade quality in
order to receive higher prices. More "specialized
households" and rural industries will appear as peasants
see enhanced income outside of farming.
-- Diversify transport. Private transportation services will
probably develop in response to increased market activity,
easing the burden on state transport systems.
Although the long-term intent of the policies is to diminish
government interference in rural production, the short term will
see considerable state activity. For example, agriculture
officials have indicated that, to control local hoarding and
price gouging, they are prepared to flood local markets with
state grain, if necessary. Moreover, the regime has demonstrated
repeatedly that it will take forceful action to punish those who
take advantage of reforms to speculate in commodities or take
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excess profits. Government spokesmen have made clear that they
expect many problems as the new policies take effect and are
prepared to assist and adjudicate wherever necessary.
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Subject: China: New Agricultural Reforms
Distribution:
Department of State
1 - Don Anderson, Director, Office of Chinese Affairs, Room 4318
1 - Howard H. Lange, Deputy Director for Economic Affairs, Office
of Chinese Affairs, Room 5321
1 - Clark Ellis, Director, Office of Investment Affairs,
Room 2533A
1 - Christopher Clarke, INR/EA, Room 8840
1 - Phillip Wall, Office of Chinese Affairs, Room 4318
1 - John Danylyk, Chief INR/EC, Communist Economic Relations
Division, Room 8662
Department of Commerce
1 - Kyaw Win, Confidential Assistant to the Deputy Assistant
Secretary for East Asia and Pacific, Room 3820
1 - Christine Lucyk, Director, People's Republic of China and
Hong Kong, Room 2317
1 - Nai-Ruenn Chen, International Economist, Room 2317
Other
1 - Catherine Furlong, Senior Statistician, Council of Economic
A A...
-
s or
Room 324 OEOB
1 - Fred Surls, Leader, PRC Section, Department of Agriculture,
Room 350
1 - Alva Erisman, Grain and Feed Divison/USDA/FAS, Room 5613
Central Intelligence Agency
1
- DDI (7E47)
1
- Executive Director
(7E12)
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- OEA/NA (4G43)
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- OEA Research Director (4G32)
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1 - OCR/ISG (1H18)
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5 - CPAS/IMC/CB (7G15)
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