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Policy

China's agricultural and rural policy is evolving rapidly. Strict central planning and taxation of agriculture (1950s to 1970s) has been replaced by reliance on markets and agricultural subsidies in the 21st century. China has an ambitious and challenging set of objectives. The government is using an array of subsidies, tax cuts, and infrastructure spending policies to boost lagging rural incomes, preserve social and political stability, encourage grain production, improve food safety, prevent environmental degradation, and increase agricultural productivity.

The following table provides a brief overview of the main agricultural policy measures used by the Chinese government. The measures are used by the national government unless otherwise specified.

Summary of China's Agricultural policy measures:

  • Direct subsidies: Provide small payments to grain farmers based on grain acreage; introduced in 2004. Subsidize purchase of high-quality seeds and agricultural machinery. Payments to compensate farmers for costs of fertilizer, fuel, and other inputs. Subsidies for breeding sows and large-scale breeding farms for hogs, dairy cattle, and poultry.
  • Agricultural tax cuts: Phased out the "agricultural tax" on farmers from 2004 to 2006. (A number of fees and levies are still assessed by local officials).
  • Procurement at minimum prices: Government-designated companies procure and stockpile rice, wheat, corn, soybeans, cotton, rapeseed, sugar, and rubber when the market price falls below a minimum set by the government.
  • Reserve management: Central, provincial, and local governments maintain reserves of grains, vegetable oils, cotton, and pork. Government intervenes in markets by purchasing or selling reserves.
  • Improved market infrastructure: Establish and support wholesale markets, commodity exchanges, and futures markets. Promote e-commerce and improve cold storage and transportation facilities.
  • Rural infrastructure investment: Fund water-efficient irrigation, drinking water, electrification projects, methane pits, a rural road network, antipoverty efforts, and develop "production bases" for grain or other commodities.
  • Loans for farmers and agribusinesses: Direct rural credit cooperatives and banks to extend more loans to farm households. Give preferential bank loans to selected agribusinesses that contract with farmers.
  • Land protection: Strictly enforce rules regarding conversion or sale of cropland for nonagricultural use.
  • Research: Consolidate and increase funding for research institutes developing crop and livestock varieties with improved quality and yields.
  • Food safety standards: Establish and enforce standards for chemical residues and other harmful substances in food. Establish animal disease monitoring and control systems and safe livestock feed production. Promote organic and "green" agriculture.

Market Stabilization Measures

China now allows most agricultural prices to be set by market forces, but the government intervenes in various ways to stabilize markets.

The following table provides a brief overview of the main agricultural market stabilization policy measures used by the Chinese government. The measures are used by the national government unless otherwise specified.

Summary of China's market stabilization measures:

  • Reserve management: Central and local authorities maintain large reserves of grains, vegetable oils, cotton, and pork to ensure food security and intervene in markets. Authorities try to stabilize markets via auctions or additional procurement.
  • Value added tax (VAT) refunds or waivers: At times, refunds of VAT payments are given for exports of specified commodities. Authorities also can grant a waiver of VAT on imports of commodities in short supply.
  • Transportation tax waivers: Taxes on rail shipments may be waived to reduce the cost of grain shipments. Authorities also can order railways to set aside cars for grain transport.
  • Minimum prices: Support prices may be established for selected grains, oilseeds, and cotton in important production areas.
  • Administrative guidance: Farmers are generally free to make their own planting decisions, but local government authorities sometimes issue directives or plans to increase production of certain crops.
  • Governors' responsibility system: Provincial governors are charged with ensuring that grain supply and demand is balanced within their province.

Policies Affecting Factors of Production and Inputs

Institutional constraints on agricultural production are an important feature of the Chinese rural economy that restrict the mobility of productive resources and influence the structure of agricultural production.

The following table provides a brief overview of the Chinese government's main policies that affect agricultural land, labor, and input use.

Summary of policies affecting China's agricultural inputs and factors of production:

  • Collective land ownership: Agricultural land is owned collectively by villages. Each household in a village is allocated a share of the village's land to cultivate. At present, households cannot sell their land but they are allowed to rent it to be cultivated by other farmers. Local authorities can sell farmland or convert it to nonagricultural uses. In such cases, compensation is paid to villagers.
  • Migration restrictions: China's national household registration system has historically limited rural-urban migration by preventing rural residents from legally residing in cities. In addition, cities often exclude migrants from social services and may have local regulations, taxes, or fees that discourage rural migrants. Cities are gradually relaxing these restrictions and the national government is encouraging migration to small towns and "satellite cities" on the outskirts of large metropolitan areas.
  • "Grain for green": Farmers cease cultivation of environmentally fragile land in exchange for in-kind payment of grain.
  • Seed subsidies: In 2004, the national government began giving subsidies for purchase of grain and soybean seeds that are considered "high quality." These include soybeans with high oil content, corn for industrial use, and wheat with high protein. Other commodities, such as cotton and rapeseed, are now eligible for seed subsidies. In most cases, the subsidy is a cash payment to farmers based on the area planted in the crop. In some areas subsidies are paid to seed companies, which should pass the savings on to farmers.
  • Machinery subsidies: In 2004, China began giving subsidies for purchase of farm machinery. Subsidies are paid to machinery dealers, which should pass the savings on to farmers.
  • Improved breeding stock subsidy: In 2005, the national government announced subsidies for purchase of dairy breeding stock. Discounted artificial insemination is available to promote improved breeds of swine, beef cattle and (in western regions) yaks and sheep.
  • Breeding sow subsidy: In some areas, farms can receive a fixed payment for each breeding sow.
  • Fertilizer and input subsidy: The national government attempts to control increases in fertilizer prices and pays a subsidy to grain farmers to compensate them for rising costs of fertilizer, fuel, and other inputs.
  • Water and irrigation policies: The national government provides preferential loans for construction of water-saving irrigation and water control projects, field irrigation, drainage works, and rural drinking water projects. Irrigation use of water is metered and controlled by quotas. The national government subsidizes purchase of water-saving equipment by farmers in selected areas.

International Trade Policies

China has done much to liberalize foreign trade since the early 1990s. The government has cut tariffs sharply and eliminated many state-trading monopolies, import licensing requirements, and export subsidies. However, value-added taxes raise the effective cost of imports and introduction or selective enforcement of regulations disrupts imports from time to time.

Summary of China's agricultural trade policies:

  • Tariffs: China cut most tariffs in the years preceding its accession to the World Trade Organization (WTO) in December 2001. The average agricultural tariff was cut from 31 percent to 15 percent.
  • Tariff-rate quotas (TRQs): As part of its WTO commitments, China established import quotas for key commodities (see table below). Imports up to the quota amount are subject to low tariffs, while over-quota imports are subject to much higher tariffs. A variable levy ranging from 5 to 40 percent is assessed on over-quota imports of cotton.
  • State-trading: For most commodities, China has reduced or eliminated import and export monopolies by state-owned trading companies. However, state-trading is still important for grains, sugar, and fertilizers. A share of each tariff rate quota is reserved for use by China's state-trading companies.
  • Value-added tax: Imported commodities are assessed the value-added tax (VAT) of 13 percent for agricultural commodities or 17 percent for processed foods or industrial products. The VAT is assessed on the value of the imported shipment when it arrives in China, including transportation costs and tariffs, thus raising the cost of imports. At times, policymakers exempt certain strategic imports from the VAT. China gives a rebate of VAT payments on exported products when policymakers want to encourage exports.
  • Nontariff barriers: As a WTO member, China committed to apply science-based sanitary and phytosanitary standards that apply equally to domestic and imported agricultural commodities. However, China's imports are at times disrupted by regulations with unclear details about implementation, testing, and certification requirements, and selective enforcement of regulations. It is not clear whether stringent standards applied to imports must also be met by domestic products.
  • Export subsidies: As a WTO member, China agreed to eliminate export subsidies.
  • Export taxes: In 2008, China introduced temporary taxes on exports of wheat, rice, corn, other grains, soybeans, seeds, flour and other milled grain products. Tax rates range from 5 percent to 25 percent.
  • Export quotas: Exports of corn and selected strategic commodities are limited by annual export quotas set by the national government. Quotas are not typically made public and the system for determining and awarding the quotas is not transparent.

China Tariff Rate Quotas for Agricultural Commodities

After joining the WTO in December 2001, China phased in tariff rate quotas (TRQs) for certain key commodities during the years 2001-04. The TRQ levels for 2004 remain in force for subsequent years. TRQs for vegetable oils expired after 2005. For most commodities, a share of the TRQ is reserved for state-owned trading companies. The remaining quota is distributed by government authorities to other end-user applicants who must meet certain criteria that include history of imports and minimum production capacity.

China tariff-rate quotas (TRQs)

Commodity

Quota
(1,000 metric tons)

State-trading share of quota
(Percent)

In-quota tariff
(Percent)

Over-quota tariff*
(Percent)

Wheat

9,636

90

1

68

Corn

7,200

60

1

50

Rice, short/medium grain

2,660

50

1

50

Rice, long grain

2,660

50

1

Cotton

894

33

1

**

Sugar

1,945

70

15

50

Wool

287

NA

1

38

Wool tops

80

NA

3

38

NA=not applicable. *Most Favored Nation tariff. **Variable levy based on domestic and imported cotton prices.
Source: ERS analysis.

History of Agricultural Policy

Historically, taxes on farmers were an important source of government revenue. During the 1950s, China pursued a collective approach to agriculture and taxed farmers implicitly by paying artificially low prices for commodities. The Household Responsibility System returned control of land to farmers in the 1980s, markets were gradually liberalized, and agricultural taxes were restored.

Concerns about shrinking grain production and price inflation led to a sharp increase in grain procurement prices during 1994-96 and the introduction of the Governors' Responsibility System (also known as the Governors' Grain Bag policy). These policies contributed to record grain production and a build-up of grain stocks in the late 1990s. Grain surpluses led to falling prices and authorities introduced price supports and subsidies for grain storage, marketing, and exports. These subsidies were paid to grain marketing bureaus and were very costly.

In the 21st century, Chinese policymakers began seeking ways to extend direct benefits to farmers. In 2004, China introduced the first national direct subsidies to farmers and announced elimination of agricultural taxes.

Brief history of China's agricultural policy:

  • Pre-1949: Taxes on agricultural land, often collected in grain, plus a variety of other excise taxes
  • 1950s-1970s: Socialized agriculture. Farmers organized into communes; government monopolized agricultural marketing. Implicit taxation through artificially low prices paid for commodities.
  • 1980s-1990s: Household Responsibility System implemented. Land leased to individual farmers; prices allowed to rise; agricultural land taxes restored; implicit taxation diminished; government monopolies and urban food rationing gradually eliminated. State grain-reserve system introduced.
  • Mid-1990s: Sharp increase in grain and cotton procurement prices and introduction of Governors' Responsibility System, requiring each governor to ensure balance between grain supply and demand within his province.
  • Late 1990s: "Protection prices" introduced to support agricultural prices. Subsidies paid to grain marketing bureaus for grain procurement, storage, and export.
  • 2000-03: Increased reliance on markets; privatization of grain and cotton marketing. Experimentation with rural tax reform and direct subsidies.
  • 2004: Nationwide direct subsidies and agricultural tax elimination initiated.

Last updated: Wednesday, May 30, 2012

For more information contact: Fred Gale

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