Economic 

Information

Bulletin

Number 51

April 2009

United States 

Department 

of Agriculture

Economic 

Research 

Service

Bryan Lohmar, Fred Gale, Francis Tuan, 

and Jim Hansen

China’s Ongoing 

Agricultural Modernization 

Challenges Remain After 30 Years of Reform

Bulletin

Number 51

April 2009

Bryan Lohmar, Fred Gale, Francis Tuan, 

and Jim Hansen
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China’s ongoing agricultural modernization : challenges remain after 30 

years of reform.

(Economic information bulletin ; no. 51)

1. Agriculture—Economic aspects—China. 2. Produce trade—China.

3. Agriculture and state—China. 4. Farm produce—Marketing—China.

5. Economic development—China. 

I. Lohmar, Bryan Thomas. II. United States. Dept. of Agriculture. 

Economic Research Service. III. Title.

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Photo credits: William Coyle and Fred Gale of Economic Research

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Recommended format for citation: Lohmar, B., F. Gale, F. Tuan, and J. Hansen. China’s

Ongoing Agricultural Modernization: Challenges Remain After 30 Years of Reform,

Economic Information Bulletin No. 51, U.S. Department of Agriculture, Economic

Research Service, April 2009.
United States

Department

of Agriculture

www.ers.usda.gov

A Report from the Economic Research Service

Bryan Lohmar, Fred Gale, 

Francis Tuan, and Jim Hansen

China’s Ongoing 

Agricultural Modernization 

Challenges Remain After 30 Years of Reform

Economic

Information

Bulletin

Number 51

April 2009

Abstract

Thirty years ago, China began implementing a series of reforms to improve effi ciency 

in agricultural production. These, and subsequent, reforms reshaped China’s position 

in the world economy. China’s rapid economic development and transformation from a 

planned to a market-oriented economy, however, has reached a stage where further effi -

ciency gains in agricultural production will likely hinge on the development of modern 

market-supporting institutions. The development of market-supporting institutions in 

China will bring about long-term and sustainable benefi ts to producers and consumers in 

China and the global agricultural economy. This report provides an overview of current 

issues in China’s agricultural development, policy responses to these issues, and the 

effects of these policies on China’s growing role in international markets.

Keywords: China, economic reform, economic development, agricultural production, 

agricultural trade

Acknowledgments

The authors thank: Colin Carter from University of California-Davis; Jikun Huang 

from The Center for Chinese Agricultural Policy; Hui Jiang from USDA’s Foreign 

Agricultural Service; and Mary Anne Normile and Donna Roberts from USDA’s 

Economic Research Service for helpful comments on earlier drafts of this report. The 

authors also thank Angela Anderson and Chris Dicken for assistance with editing, 

production, and design. 
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Contents

Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Background: China’s Economic Development 

and Implications for Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

 The Reform Period: 1978-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

 The Household Responsibility System (HRS) . . . . . . . . . . . . . . . . . . . 3

 Marketing Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

 Industrial Reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

 Trade Reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

 The Effect on Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

 Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

 Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

 Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

 Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

 The Next Stage of Reforms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Challenges to China’s Continued Agricultural Modernization. . . . . . . 13

 Resource Management Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

 Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

 Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

 Agricultural Marketing Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

 Rural Income and Development Policies . . . . . . . . . . . . . . . . . . . . . . . . 25

 Eliminating Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

 Subsidies, Investments, and Price Supports . . . . . . . . . . . . . . . . . . . . 27

 Rural Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

 Technology Development and Promotion . . . . . . . . . . . . . . . . . . . . . . . 29

 Agricultural Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

 Biotechnology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

 Agricultural Extension Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

 Biofuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

 Biofuel Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Implications for China’s Future Trade . . . . . . . . . . . . . . . . . . . . . . . . . . 33

 Food Grains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

 Wheat. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

 Rice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

 Horticultural Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

 Livestock Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

 Oilseeds and Feed Grains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

 Oilseeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

 Corn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

 Cotton, Hides, and Skins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

 Cotton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

 Hides and Skins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
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Summary

China is the world’s largest agricultural economy, producing and consuming 

a wide range of agricultural products. This report summarizes China’s agricultural development over the past 30 years, the challenges facing China’s 

agricultural economy, the role policy plays in addressing the needs of this 

developing agricultural system, and how economics and policies interact to 

affect trade in agricultural products. 

What Is the Issue?

As the world’s largest agricultural economy and an important player in 

world agricultural markets, China’s role in international agricultural trade 

has implications for agricultural producers, consumers, and policymakers in 

the United States. While the establishment of markets for agricultural inputs 

and outputs has helped China raise agricultural production over the last 30 

years, the country faces several issues that will be more diffi cult to resolve. 

China is currently struggling to manage stressed land and water resources, 

to develop modern marketing institutions and infrastructure, to boost rural 

incomes to keep pace with urban incomes, and to develop or adapt agricultural technologies. 

What Did the Study Find?

Since adopting market-based reforms 30 years ago, China’s ability to meet its 

food and agricultural needs has exceeded the expectations of most observers. 

Domestic production has satisfi ed most of the growing food demands of 

China’s increasingly affl uent population. As China established and developed 

markets, farmers diversifi ed into livestock, aquaculture, and fruit and vegetable production while simultaneously increasing production of staple grains. 

In addition, millions of rural workers shifted out of agriculture to provide 

manpower for China’s broader economic resurgence.

The enormous across-the-board increases in production suggest that China 

was far below its production potential before it adopted market reforms. 

Allowing farmers to produce according to market incentives and relaxing 

production quotas and restraints on inter-regional trade enabled China’s 

farmers to use resources more effi ciently, to raise productivity, and to reduce 

waste. Today, nearly all farm commodities and inputs are traded at market 

prices.

Agricultural productivity growth in China has slowed in recent years, 

suggesting that China’s potential for achieving effi ciency gains from marketbased reforms is diminishing. Chinese agriculture also faces stiff challenges 

in allocating scarce natural resources and integrating small farms, which still 

largely use hand-held tools, into modern, global agricultural markets. Many 

of these challenges stem from carryovers of the collective period, such as 

collective land ownership, interventionist Government policies, or underdeveloped institutions to enforce property rights and settle land disputes. 

China has the potential to achieve further effi ciency gains; to do so, however, 

it must navigate another round of reforms addressing issues such as:
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Land Tenure: Collective ownership of farmland and its allocation by village 

offi cials has led to tiny plots that increase the cost of production, increase 

the cost of establishing modern marketing institutions and traceability, and 

diminish incentives to adopt modern technologies. Collective management, 

along with poorly defi ned and enforced rights to farmland, also diminishes 

incentives to engage in conservation practices and reduces farmers’ share of 

the wealth generated by economic development. 

Marketing Practices: It is diffi cult to regulate or monitor China’s fragmented and scattered farms, wholesalers, and input suppliers. Small-scale 

production and marketing also impede China’s ability to improve food safety 

and quality (features in high demand in China’s wealthier urban areas) in 

its rapidly growing food processing industries and in its expanding export 

markets. 

Rural Income Growth: While rural incomes in China were the fi rst to benefi t 

from reforms, they have lagged behind urban income growth since the early 

1990s. China has established many policies to increase rural incomes and 

promote rural development, including eliminating agricultural taxes and 

fees, establishing direct subsidies, input subsidies, and price supports, and 

reforming rural credit institutions with a focus on rural lending. 

Agricultural Technology Development and Adoption: Productivity growth 

in China over the last 30 years benefi ted greatly from advances in plant and 

animal breeding, but there is still ample capacity to improve yields and other 

crop characteristics through continued research and extension. China’s 

research system is dominated by public research institutions. Domestic 

private seed companies—most of them small scale—have limited capacity to 

engage in private research. Weak enforcement of intellectual property rights 

reduces private incentives to develop and market new seed varieties. 

Future Role in International Markets: The extent and nature of China’s 

agricultural trade will depend on fundamental economic forces and how 

effectively China addresses land tenure, marketing practices, rural income, 

and agricultural technology issues. As income growth and urbanization 

reduce demand growth for food grains, potential rice and wheat productivity increases may help China maintain near self-suffi ciency. China will 

continue to increase production of fruit, vegetable, and livestock products, 

with most of this production consumed by the more prosperous consumers 

in China—so long as they can be assured of its safety and quality. Exports 

of these products will also grow if China effectively addresses those same 

safety, quality, and consistency issues. China will continue to be a major 

importer of oilseeds to meet the growing domestic demand for high-quality 

vegetable oils and high-protein livestock feed additives and may also become 

an importer of corn as domestic demand for livestock products grows. 

Demand for cotton and hide imports has boomed as China’s exports of 

textiles, clothing, and shoes have expanded, but future export growth may be 

dampened by appreciation of China’s currency, rising labor costs, and slower 

growth in world demand.
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How Was the Study Conducted?

This report is a synthesis of past research fi ndings from studies conducted by 

the U.S. Department of Agriculture’s Economic Research Service and other 

research organizations. It builds upon the various fi ndings by providing a 

common theme to understand China’s current state of economic development, the role of agriculture, and the nature of policies and institutions 

affecting China’s production, consumption, and trade.
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Introduction 

A visitor to China today would have a hard time imagining what the country 

was like before reforms that began reshaping the agricultural landscape 30 

years ago. China in the 1970s was poor and isolated. Rural workers toiled 

on collectively owned farms in teams directed by local offi cials. Industrial 

workers staffed large State-owned enterprises where output targets and prices 

were determined by central planners. Each region and city was expected to 

be largely self-suffi cient in production of most goods. State-run marketing 

companies, subject to the decree of central planners, were in charge of the 

limited trade between the regions that existed. There was little private 

economic activity at this time, and millions of people survived on a diet of 

less than 2,000 calories per day. 

Today, China is one of the world’s largest economies, a major importer and 

exporter, and a sought-after location for multinational fi rms. Rural workers 

raise a variety of crops on individually managed plots, engage in household 

livestock and sideline production, and travel all over the country to work 

in thriving industrial and service sectors. Most manufactured goods are 

produced in coastal areas and marketed throughout the country. The Stateowned sector represents only about a third of economic output, and many 

remaining State-owned fi rms raise capital on stock markets and have joint 

ventures with foreign fi rms. Urban workers frequently change jobs, buy 

much of their food in modern supermarkets and convenience stores, and 

frequently dine in restaurants. Obesity has become a major public health 

issue.

Agricultural reforms played an important role in China’s economic 

resurgence over the past three decades (Rozelle and Swinnen, 2004). 

Re-establishing household agricultural production was the spark that ignited 

the process of establishing markets and relinquishing direct Government 

control over the economy. Responding to these changes, farmers immediately boosted rural incomes, lifted millions out of poverty, and improved 

the diets of Chinese citizens. By the 1990s, similar reforms took hold in the 

urban and industrial sectors, and their growth began to outpace agricultural 

and rural growth. But agriculture continued to play a critical economic role 

by meeting the growing demands of wealthier, mostly urban, consumers for 

fruit, vegetable, and livestock products as well as traditional staple grains. 

A seemingly endless supply of inexpensive labor released from collective 

agriculture fueled China’s booming manufacturing and urban construction 

sectors.

China is currently the world’s largest agricultural economy and a leading 

importer and exporter of agricultural products. China’s agricultural sector, 

however, is still changing as it responds to the rising and increasingly sophisticated demands of domestic and foreign consumers, adapts small-scale farm 

structure to global food markets, and competes with other sectors for labor, 

investment capital, and scarce land and water resources (Gale et al., 2002; 

Lohmar and Gale, 2008). While China has come a long way in its transition to a market economy, it still retains many of the institutional vestiges 

of the planned economy. Nearly all fi nal products are bought and sold at 

market prices, but collective land ownership, ambiguous water rights, and 
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weak legal and fi nancial systems confound market-driven resource adjustments, farm consolidations, and agricultural investment. In the absence of 

well-functioning market-supporting institutions, Chinese economic planners 

gravitate toward interventionist policies to resolve market failures. This, in 

turn, reduces the demand for market-supporting institutions that could resolve 

these issues in a more market-oriented and sustainable way. The path China 

takes and the policies chosen to address these issues will affect its longrun 

capacity to resolve them effectively.

Understanding China’s recent historical development is critical to assessing 

the implications for China’s role in world agricultural markets. The development of markets over the last 30 years, the remaining role of Government, 

and the emergence of market-supporting institutions are key issues underlying the evolution of China’s agricultural economy. An assessment of 

critical issues facing China’s agricultural economy—management of land 

and water resources, development of modern marketing chains, provision of 

food safety assurances, lagging rural incomes, and technology development 

and extension—illustrates how rapid economic growth is creating tensions 

stemming from the institutional legacy of the planned economy. How each 

of these issues is resolved will have important implications for China’s future 

agricultural production, consumption, and trade.
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Background: 

China’s Economic Development 

and Implications for Agriculture

At the establishment of the People’s Republic in 1949, China was still an 

agricultural economy in an industrializing and urbanizing world. By the late 

1950s, China’s leaders sought to catapult the semifeudal economy into the 

industrialized 20th century. Part of the plan relied on adapting Soviet-style 

collective agriculture to China by organizing hundreds of millions of farmers 

into a hierarchy of about 24,000 “Peoples Communes.”1 Except for limited 

cash crop production on small plots of land near individual households in 

some areas, all agricultural production decisions were made by local leaders 

in accordance with a production plan established by higher level leaders. 

Local leaders were obligated to deliver their quota of agricultural production 

to local stations run by State-owned marketing bureaus. Marketing bureaus 

made planned transfers of products from surplus to defi cit areas at prices 

determined by the central Government. Agricultural prices were set low and 

industrial prices high to extract resources from agriculture to invest in urban 

and industrial development.

The Reform Period, 1978-2008

The Household Responsibility System (HRS) 

When reform-minded leaders came to power in 1978, China began moving 

away from collective agriculture. Under a new policy, the Household 

Responsibility System (HRS), villages divided up collectively owned land 

and leased it to individual households to farm. In lieu of rent, farm households were obligated to deliver a fi xed quota of their production of “strategic crops” to the State and the farm households were paid a predetermined 

price.2 While many areas preserved elements of collective agriculture, and 

some villages required that certain strategic crops be produced on a portion 

of village land, households were largely free to farm the land as they saw fi t 

and any production beyond the quota was theirs to consume or sell. Most 

importantly, farmers could produce cash crops and livestock products and 

sell their surpluses in rural markets. To provide opportunities for farmers 

to market their products, traditional rural markets were re-established 

throughout the countryside, and free markets were re-established in urban 

areas.3

Re-establishing household agricultural production autonomy and independent markets for agricultural products was the initial step in China’s transition toward a market-based economy and rapid economic growth. Farmers 

were the fi rst to benefi t. Freed from the constraints of collective work teams 

and lured by high market prices, farm households shifted land and labor 

effort from grain production to cash crops and livestock production. Despite 

the shift in resources and effort, grain production rose because farmers allocated resources more effi ciently than central planners. Cash crop and livestock production also boomed. Income from nonagricultural sources began 

to grow after reforms as rural households allocated labor to small household 

enterprises, expanding rural industry (known as “township and village enter1 The hierarchy in the collective period 

was Commune-Brigade-Production 

Team, and these correspond roughly 

with today’s Township-Village-Xiaozu 

(team).

2 Strategic crops included grains, 

oilseeds, and cotton, but farmers were 

primarily obligated to deliver grain 

quotas, as well as quotas for cotton 

and oilseeds in some areas.

3 Traditional rural and urban markets 

were largely shut down during the 

collective period, except for a brief 

re-emergence in 1962-65.
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prises” or TVEs). As urban job opportunities grew, migration to urban areas 

offered another alternative to farmwork.

Marketing Reform 

Initial restrictions on marketing activity were eventually relaxed and interregional markets developed throughout the reform period. More liberal 

policies were intermittently reversed when they were blamed for bursts of 

infl ation and perceived grain shortages. Once private trading networks arose, 

however, they were hard to rein in. By the end of the 1990s, the expansion 

of traders, greater marketing freedoms for private traders, and investments 

into transportation and communication infrastructure led to the integration of 

domestic markets. As marketing shifted to the private sector, Government 

marketing bureaus lost money because they lacked strong incentives to 

improve effi ciency and were burdened with employment and other requirements imposed upon them, ultimately requiring Government subsidies. 

Many marketing bureaus were ultimately privatized and transformed into 

commercial agribusinesses.

Industrial Reform 

By the late 1980s, China’s urban industrial economy began to blossom under 

reforms similar to those applied to agriculture: managers of State-owned 

companies were given more decisionmaking autonomy. Ineffi cient companies were merged with more effi cient ones or shut down entirely. Moreover, 

the State-owned industrial sector had to compete with the more effi cient rural 

industrial sector that rose up in the 1980s and the foreign direct-invested 

enterprises from the 1990s. To fuel the subsequent growth in urban and 

industrial areas, restrictions on labor movement were relaxed, or less vigorously enforced, so that rural workers could staff the growing ranks of industrial enterprises, urban construction projects, or take other jobs in urban 

areas.4

Trade Reform 

To complement reforms to domestic production and marketing, China also 

liberalized trade policies to become more integrated with the world economy. 

Agricultural trade was long dominated by State-owned trading enterprises, 

monopolies for strategic products that imported and exported at the behest of 

State planners. For the most part, China sought to maintain self-suffi ciency 

in agriculture, particularly for strategic products. Throughout the 1990s, 

however, China lowered tariffs and other trade barriers to many agricultural 

products. By the end of the 1990s, China had rescinded State-trading companies’ monopolies on the import and export of some strategic products, such 

as soybeans and cotton. In December 2001, China became a member of the 

World Trade Organization (WTO), which lowered tariffs further, ended the 

remaining State monopolies on imports and exports of agricultural products, 

and locked in an open trade regime along with the reformed economic policies (Lohmar, Hansen, Seeley, and Hsu, 2002).5 

4 Many took jobs in the burgeoning 

service sector, such as in restaurants or 

transportation jobs, for which data are 

not well captured and almost certainly 

underestimated in offi cial economic 

statistics.

5 Government-owned trading enterprises still wield signifi cant infl uence 

in some crops, such as wheat and corn. 
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The Effect on Agriculture

China’s agricultural sector is key to the country’s astounding growth (Shane 

and Gale, 2004). Pre-1978 policies built up a reservoir of underutilized 

human resources in rural China with bans on labor movement and entrepreneurial activity, low farm prices, and farmer income not infl uenced by effort 

or output. In most countries, the share of population employed in agriculture 

plunged during the 20th century, but in China over 70 percent of workers 

were employed in agriculture in the late 1970s. Decollectivization released 

a fl ood of rural workers, fueling industrial growth while simultaneously 

boosting agricultural production to meet the food needs of a large population 

with rising living standards.

Production 

China’s agricultural production grew continually over the reform period 

despite competition for resources, particularly labor, from faster growing 

sectors of the economy and competition from imports as trade policies 

were liberalized. After reforms, grain production (rice, wheat, and corn) 

jumped from 247 million metric tons (mmt) in 1978 to 339 mmt in 1984 and 

exceeded 470 mmt in 2008 (fi g. 1).6 Corn production grew faster than other 

grains to maintain exports for hard currency and to feed the growing livestock sector. Livestock production increased in the reform period, primarily 

for meat (mostly pork) and eggs, but in recent years, dairy production has 

taken off (fi g. 2). For many products, China’s share of world production 

exceeds its share of world agricultural land and, for some products, its share 

of world production exceeds its share of world population (fi g. 3).

China’s agricultural production comes almost entirely from small-scale operations. According to China’s 2007 agricultural census, the country has 200 

million farm households and an estimated 122 million hectares (494 million 

acres) of cultivated land—an average of 0.6 hectare (1.5 acres) per houseFigure 1

China’s grain production increases, 1978-2008

0

100

200

300

400

500

Million metric tons

1978 1983 1988 1993 1998 2003 2008

Source: China’s National Bureau of Statistics (NBS) data.

Rice Wheat Corn

6 Rice volume is reported in unmilled 

weight. Rice loses approximately 30 

percent of its weight in the milling 

process.
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Figure 2

Indexes of grain and meat production, China, 1985-2008

Index (1985=100)

1985 1989 1993 1997 2001 2007

Source: China’s National Bureau of Statistics (NBS) data.

Meat 

Oil seeds 

Grain

0

100

200

300

400

500

hold. These small land holdings are typically divided into several noncontiguous parcels (see, Land on page 14). To coax production out of such small 

plots, farm households engage in intensive agricultural practices, including 

high levels of fertilizer application and raising two or three crops per year on 

a single plot (fi g. 4). China also relies heavily on irrigation to boost yields, 

with nearly 50 percent of its land supporting irrigation delivery facilities and 

extensive irrigation in the more arid, northern part of the country. The many 

crop varieties developed by China’s agricultural research institutes produce 

high yields with irrigation and fertilizer inputs. Some varieties are bred for a 

short growing season to facilitate multiple-cropping.

Figure 3

China’s estimated world shares of agricultural production, 2005

Percent

*Source: Food and Agriculture Organizaion data.

Source: Economic Research Service calculations based on USDA data (except where noted).

0 10 20 30 40 50 60

Pork

Fruits and vegetables*

Rice

Cotton

Corn

Meat chickens

Wheat

Beef

Soybeans

Milk

Agricultural labor*

Population*

Agricultural land*

Water*
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Markets for inputs are largely free and lightly regulated.7 Seeds are supplied 

by thousands of small seed companies that often repackage seed purchased in 

bulk and then sell under their own label through small seed and input supply 

stores located in villages and townships throughout the countryside. The 

pesticide industry is similarly atomized and diffi cult to regulate. Fertilizer 

is typically supplied by larger companies, but is frequently sold by private 

traders with shops in the county seat, rural townships, and villages or by itinerant traders who visit villages and sell from the back of their trucks. The 

widespread sale of counterfeit, adulterated, and poor quality farm chemicals, 

feeds, and veterinary drugs is a major concern for China’s agricultural and 

commerce offi cials. 

Marketing 

State-owned marketing bureaus no longer monopolize agricultural 

marketing. Many of the marketing bureaus were reborn as agribusiness 

companies or semioffi cial “industry associations.” Grain marketing includes 

small private traders and agribusinesses, as well as local and State government-owned companies. For grains, State marketing companies compete 

directly with private traders, but have preferred access to Governmentowned storage facilities and also are charged with purchasing grain under 

recently established price support programs.8 Market reports indicated that 

State-owned enterprises implementing a Government price support program 

accounted for 70 percent of rice purchases in late 2008. Recent surveys show 

that grain marketing channels vary from region to region. Many farmers 

prefer to sell grain to small traders who come into villages to pick up grain, 

saving them time and transportation costs. In some regions, large feed mills 

or food processors are the main purchasers.

Most horticultural and livestock products are marketed by a vast army of 

small traders and private marketing companies that sprang up as the production of these products grew (Huang, Otsuka, and Rozelle, 2008). Produce 

Figure 4

Indexes of agricultural use, China, 1985-2007

Index (1985=100)

1985 1989 1993 1997 2001 2007

Source: China’s National Bureau of Statistics (NBS) data.

Machinery 

Fertilizer 

Agricultural labor

All sown area

100

200

300

400

500

7 Excluding factors of production, 

such as land and capital; efforts are 

currently underway to regulate the 

pesticide industry.

8 Many of the local storage facilities 

formerly owned by the Grain Bureau 

have been sold off; however, local 

governments are often among the new 

owners so that these facilities become 

partly Government-owned, maintaining close relations with State marketing agencies.
8

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Table 1

Urban household annual consumption of food products, 1981-2006

Product 1981 2006 Change

kg per person kg Percent

Grain 145.4 75.9 -69.5 -48

Edible vegetable oil 4.8 9.4 4.6 95

Pork 16.9 20.0 3.1 18

Beef and mutton 1.7 3.8 2.1 125

Poultry 1.9 8.3 6.4 334

Fresh eggs 5.2 10.4 5.2 99

Aquatic products 7.3 12.5 5.2 71

Milk 4.1 18.3 14.2 343

Note: Table shows averages from national household surveys.

Source: Economic Research Service calculations based on China’s National Bureau 

of Statistics (NBS) data.

is typically purchased directly from farmers, often just after harvest and on 

the roadside, by hundreds of thousands of private traders who cruise villages 

and the surrounding countryside in small trucks. These traders then sell their 

load to larger traders or deliver it to wholesale markets where it is typically 

aggregated onto larger trucks for transport to faraway markets. Livestock 

products, particularly pork raised by farm households, are also marketed by 

multiple small traders, but there is also a growing contingent of large-scale 

farms and sophisticated agribusinesses. Small traders and brokers visit 

villages to buy pigs on behalf of local slaughterhouses that market most 

of their pork in local markets through a shrinking corps of small vendors. 

Supermarket chains require a more sophisticated supply chain that can 

guarantee refrigeration and lean pork free of banned substances. Large pork 

companies process frozen pork in some inland provinces, such as Sichuan, 

where it is then shipped to cities on China’s east coast. The volume of agricultural produce going through modern marketing channels appears to be 

growing, but traditional supply chains operate with lower costs and recent 

surveys found nearly all fruits and vegetables were still marketed through 

traditional channels (Huang, Wu, Zhi, and Rozelle, 2008). 

Consumption 

As income growth elevated millions of consumers from poverty, diets 

improved and diversifi ed (Lohmar, 2002; Gale, 2003; Gale and Huang, 

2007). Caloric intake rose and defi ciencies in vitamins and trace elements 

became less prevalent, but consumption of fats increased. The Chinese 

diet now includes fewer grain products like rice, bread, and noodles, while 

consumption of meats, eggs, and dairy has risen. According to fi gures 

published by China’s National Bureau of Statistics (NBS), annual grain 

consumption by urban households fell by nearly half, from 145 kilograms 

(kg) per person in 1981 to 76 kg in 2006, while consumption of vegetable oils 

and animal protein products rose by varying amounts (table 1). The diet of 

China’s rural population is following a similar trajectory as rising living standards spread to the countryside (Gale et al., 2005). Because rural residents’ 

food grain consumption is so much higher than urban residents (roughly three 
9

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times higher), urbanization is a primary driver of falling per capita food grain 

consumption in China.

Rising incomes and market liberalization are changing the way food is 

consumed in China (Gale, 2003). Meals consumed away from home are the 

fastest growing component of food spending (Gale and Huang, 2007). An 

increasing share of food is purchased in modern supermarkets, restaurants, 

cafeterias, and food stalls. Many urban consumers seek out quality, safety, 

and convenience over quantity and price. Organic food counters are now 

common in Chinese supermarkets, refl ecting concerns about health and 

safety. Analysis of NBS household consumption data shows that much of 

the increased food spending by urban consumers refl ects higher per-unit 

spending rather than larger quantities, an effect that is commonly attributed 

to preferences for quality (Gale and Huang, 2007). According to NBS data, 

the percent of household disposable income spent on food purchases has 

fallen consistently over the reform period from approximately 48 percent in 

1985 to just over 26 percent in 2006. 

Trade 

China’s agricultural imports and exports were relatively low over most of 

the reform period, but have risen rapidly since WTO accession.9 China 

became one of the world’s top four agricultural import countries as its agricultural imports jumped from under $11 billion (U.S. dollars) in 2002 to 

over $57 billion (U.S. dollars) in 2008. China’s agricultural exports have 

grown as well, but not as dramatically as imports. Agricultural exports rose 

from $13 billion (U.S. dollars) in 2002 to $29 billion (U.S. dollars) in 2008 

(fi g. 5). Moreover, the composition of agricultural trade has changed. Over 

much of the reform period, China exported corn and imported wheat, but 

imported only limited amounts of cotton and oilseeds.10 Today, China is 

largely self-suffi cient in wheat, corn and rice, but it imports large amounts 

Figure 5

China’s agricultural imports outpaced exports after WTO accession

0

10

20

30

40

50

60

Billion U.S. dollars

 1995 1997 1999 2001 2003 2005 2007

Source: Economic Research Service calculations based on China customs data.

China’s agricultural imports

China’s agricultural exports

China’s WTO accession

December 2001

9 Imports and exports were small relative to the size of China’s agricultural 

economy, but trade, both imports and 

exports, in specifi c products was at 

times large when compared with the 

world market for those products.

10 For most of the reform period, trade 

in all of these commodities was controlled by State trading monopolies.
10

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of soybeans and cotton. China has also become a major exporter of many 

fruit, vegetable, and livestock products, including apples, garlic, aquaculture 

products, poultry and pork. Since the United States is a major producer of 

cotton and soybeans, producers of those products have benefi ted greatly from 

trade with China. U.S. agricultural exports to China jumped from $2 billion 

(U.S. dollars) before WTO accession to $8.3 billion (U.S. dollars) in 2007. 

U.S. agricultural imports from China were only $2.9 billion (U.S. dollars) in 

2007.11

In addition to providing low-priced food for urban and industrial workers, 

agriculture played a direct role in China’s rapid industrial development. 

Rural labor contributed heavily to the growth of the industrial, construction, and service sectors in China. Between 1978 and 2007, the number of 

rural workers with nonfarm employment rose from an estimated 30 million 

workers to over 200 million, an increase greater than the entire labor force 

of the United States (fi g. 6).12 By some estimates, 80 percent of rural households have some form of nonfarm employment (de Brauw et al., 2002). On 

average, over half of rural household income in China is from nonagricultural 

jobs, remittances, and investments (fi g. 7). Income from nonfarm sources 

gives rural households funds to construct new houses, pay children’s school 

fees, and invest in agriculture. 

The Next Stage of Reforms

China’s transformation from a closed, planned economy into a dynamic 

market-driven economy has been dramatic. Production and marketing 

reforms allow farmers more choice in their production practices, marketing 

venues, and income earning opportunities. This fl exibility has allowed 

farmers to produce more staple grains while simultaneously shifting 

resources into livestock and horticulture production and supplying labor to 

the booming nonfarm economy. 

Figure 6

China’s rural employment in nonagricultural sectors grows, 1978-2007

Million people

Source: Economic Research Service calculations based on National Bureau of Statistics 

(NBS) data.

0

50

100

150

200

250

300

350

400

1978 1985 1990 1995 2000 2007

Farm, forestry, fisheries

Rural nonagricultural

11 This fi gure does not include the 

$2 billion (U.S. dollars) in fi sh and 

seafood imports from China or the 

roughly $3 billion (U.S. dollars) in 

wood paneling and fi nished wood 

products, two import categories that 

have been rising rapidly since WTO 

accession.

12 These estimates are widely believed 

to undercount millions of rural workers 

in the urban service sector.
11

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China was able to achieve enormous production gains in the three decades 

after reforms, in part, because the economy produced far below its potential 

under central planning. Giving farmers incentives and abandoning production quotas induced farmers to work hard and produce what consumers 

demanded. Looser provincial self-suffi ciency requirements allowed farmers 

to abandon crops that grew poorly in their region and specialize in products 

they could produce most effi ciently (Carter and Lohmar, 2002). Post-1978 

reforms brought forth a tremendous surge of output that showed China’s 

production potential was greater than most observers imagined.

Three decades after reforms began, China’s agricultural sector has succeeded 

in feeding and clothing its population, while also opening up to international markets and developing agricultural exports. But with land and water 

resources stretched to the limit and labor costs rising, it is unclear whether 

agricultural production in China can maintain its rapid growth. Future gains 

may require a new round of reforms that provide incentives to use land 

and water resources more effi ciently, incentives to develop and adopt new 

technologies to substitute for labor or enhance the productivity of land, and 

incentives to increase the quality of agricultural products, including food 

safety. Establishing market-supporting institutions, such as clear property 

rights and open contract and dispute settlement mechanisms, will provide 

institutional support for these incentives.13 As land, water, and other agricultural resources increase in value, the demand for more clearly defi ned 

property rights and dispute settlement mechanisms will increase as well. 

Independent suppliers and farmers alike will demand dispute settlement 

services as they seek out assurances of quality, safety, and consistency from 

thousands of independent producers and input suppliers. Users of collectively or State-owned factors, such as land and water, will benefi t from a 

more precise defi nition of their rights to these assets as their value increases 

in the rapidly growing economy. Developing a regulatory framework to 

Figure 7

China’s rural household income, by category, 1985-2006

Percent of total income

Source: Economic Research Service calculations based on China’s National Bureau

of Statistics (NBS) estimates of rural household “pure” (net) income.

0

20

40

60

80

100 Property income

Other household

businesses

Wages

Farming

1985 1990 1995 2000 2006

13 Economic historians often point to 

clearly defi ned property rights, particularly to land, and open contestable laws 

and courts as critical to supporting 

the function of markets in developed 

countries and helping to manage to 

reallocation of resources brought about 

by industrialization.
12

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defi ne property rights and resolve disputes, however, will be costly in both 

time and fi nances. 

China is only just beginning to establish a more modern, market-supporting 

institutional framework. Recent laws help clarify rights to important 

resources such as land and water.14 China is also graduating more students 

from law schools and expanding the jurisdictional authority of the courts, 

while farmers are increasingly turning to courts to settle disputes over land 

rights (Clarke, Murrell, and Whiting, 2008). 

China’s path toward modernization has implications for future production, 

consumption, and trade. Millions of China’s farm households will benefi t 

from more secure rights to productive assets and better assurances to the 

quality of agricultural inputs. These changes will help farmers increase yields 

and reduce production costs. Increasing the integrity of marketing channels and segregating commodities to preserve quality and other attributes 

will allow farmers to earn premiums for higher quality and safer production 

practices. A variety of other policies, including rural credit and agricultural 

technology development and extension, will help farmers in China compete 

in a global marketplace. Taken together, such policies could continue the era 

of increased productivity, generate more and better quality food for increasingly wealthy consumers, raise rural incomes, and support China’s successful 

integration into world agricultural markets.

14 Such as the 2002 Rural Land Contracting Law and the 2001 Water Law.

Photo by William Coyle, Economic Research Service.

Rice fi elds in Guizhou Province
13

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Challenges to China’s 

Continued Agricultural Modernization 

Over the last three decades, the Chinese Government has largely relinquished its direct role in setting prices, procuring, and marketing agricultural 

commodities. Yet, many of the institutions that manage and regulate markets 

in more developed countries are not fully established in China. China’s 

lack of market-supporting institutions, such as extensive property registration and a well-developed legal system to enforce laws and contracts, may 

impede the ability of the market to bring about effi cient, equitable outcomes. 

Establishing those institutions, however, is not feasible in the short term.

Consequently, China still tends to rely on interventionist policies that use the 

remaining apparatus of the collective period to address issues that are typically resolved by independent institutions in more developed countries. 15 

While markets for inputs and outputs are well established, the Government 

still plays an infl uential “behind the scenes” role by controlling key factors 

of production (land and formal credit), ownership interest in some agribusiness enterprises, and arbitration of disputes. In the absence of private 

property and open, contestable dispute settlement institutions, Government 

offi cials play a key role in managing property rights, resolving disputes, and 

addressing complex problems related to food safety, environmental protection, and resource allocation.

Understanding the continued direct role of the Government in agricultural 

policies is important when evaluating the policy responses to the critical 

issues that continually confront China’s leadership. Interventionist policies 

and practices can be implemented relatively quickly to address problems 

as they arise, but China’s consumers and producers may be missing out 

on bigger longrun effi ciency gains that could be achieved by establishing 

independent market-supporting institutions and allowing the private sector 

a greater role in investment and resource allocation. These more diffi cult 

reforms potentially could guide China’s continued transformation into a 

modern industrialized economy with a healthy, dynamic agricultural sector.

China faces several challenges as it modernizes its agricultural sector. 

Resources in China are showing signs of over use, prompting policies to 

reduce intensive use of chemical inputs and promote land and water conservation. Moreover, as labor leaves agriculture, demand for more fl exible 

land management institutions is rising. China faces several marketing challenges as consumers increasingly purchase products from supermarkets and 

other modern venues, expecting quality, safety, convenience, and variety 

similar to consumers in more developed countries. Providing additional 

income support to farm households as the industrial sector pulls ahead and 

leaves agriculture behind has become a central concern, as is common in 

countries at a similar level of development. Lastly, China seeks to catch 

up with developed countries in agricultural technologies, including biotech 

and biofuel technologies, which could prove vital for maintaining food and 

energy needs in the future.

15 There are also ideological considerations in China’s Government, which 

promotes a “socialist market economy,” that affect their policy responses, 

as well as political considerations 

regarding the employment of a large 

Government bureaucracy and overstaffed Government-owned enterprises.
14

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Resource Management Policies 

The impressive gains in agricultural and industrial production in China over 

the last 30 years were achieved, in part, by taxing land and water resources. 

Government offi cials and the growing urban middle class want to impose 

more stringent conservation practices to ensure the long-term health of these 

vital resources. Resources, including land, however, are owned and managed 

by Government-run entities, and the agents in charge of these resources 

do not typically have an incentive to use them conservatively. Reforms to 

improve land management and incentives to conserve could increase the effi -

ciency by which these resources are used, boost production beyond current 

levels, and maintain these resources for future generations. 

Land

Compared with the enormous changes in China’s economy and agricultural 

market development, land tenure practices have changed little since the 

adoption of HRS. Agricultural land is still collectively owned in China and 

village leaders manage land on behalf of the collective owners, resulting in a 

complex mix of locally defi ned rights and practices (Lohmar, Somwaru, and 

Wiebe, 2002). Unclear ownership rights discourage land-saving investments, 

raise the cost of aggregating land, and inhibit China’s capacity to deal with an 

expanding array of rural problems: rising labor costs, an aging rural population, chaotic supply chains, lack of traceability mechanisms, and soil erosion. 

China’s Government has established laws to clarify and secure farm households’ rights to land and allow them to rent land, without giving up collective 

ownership. In recent years subcontracting and rental of land use rights has 

become more common, encouraged by the departure of millions of farmers 

for urban jobs and commercialization of agriculture (see box, “China’s 

Evolving Land Management Practices,” page 15), and some farmers and 

companies have consolidated land into large commercial farms. Still, vague 

land ownership constrains land rental (Deininger and Jin, 2007), and most of 

China’s farm sector is characterized by small, fragmented plots of land.

Land Allocated in Small Plots 

Village leaders allocate 

the rights to several plots 

to farm households. 

Because leaders seek an 

egalitarian distribution, 

each household typically 

receives 4-6 separate 

plots: one or two plots 

for grain, one plot close to 

the village for vegetable 

production, one plot on 

the more marginal hillside area, etc.16 Plots for 

growing grain are usually 

allocated contiguously in 

a large fi eld where dozens 

Fields divided and cultivated by different households

Photo by Fred Gale, Economic Research Service. 

16 The 4-6 plots add up to only 1.5 

acres on average, so each individual 

plot averages 0.25-.4 acres in size.
15

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China’s national laws set a general legal framework, but specifi c practices for managing collectively owned land vary from village to village. 

Some villages periodically reallocate land among households, while 

others have kept the original allocation made in the early 1980s. Some 

villages impose strict controls on land transfers, while others have 

devised arrangements to consolidate land and rent or subcontract it. In 

some villages, members pool their land and distribute shares in a stockholding cooperative that pays dividends based on land rental payments. 

Some villages in areas with thriving industries hire migrants from other 

provinces to cultivate their land. 

Many observers expected major changes in land policies to emerge from 

an October 2008 meeting of the Communist Party that focused on rural 

issues and marked the 30th anniversary of landmark 1978 rural reforms. 

Announcements following the meeting gave a vague assurance that 

farmers’ land use rights would be secure for “a long time” and encouraged farmers to pursue various means of trading and transferring land 

use rights that were already widely practiced. Offi cials emphasized that 

farmers cannot sell their land, cannot change its use, and cannot use it 

as security for a mortgage. Offi cials have begun allowing farmers to 

mortgage timber or fruit orchard land in some regions, but it is not clear 

whether this practice will be extended to cropland. 

Policy announcements promised stricter controls on land seizures, but 

no new policies or legal institutions were created to settle disputes. 

Anecdotal reports indicate that some local governments are exploring 

ways to improve land transfer. In one prefecture of Zhejiang, the 

local government established village land transfer service stations to 

intermediate land rentals (Jiang and Ke, 2009). The Hunan Provincial 

government allocated funds to waive farmers’ fees for renewing land 

certifi cates and contract documents; in one prefecture of Hunan, less 

than half of land transfers involved a signed document, but this number 

was up 20 percentage points from previous years (Hou, 2008). 

The return of migrants highlighted the benefi ts and confl icts associated with China’s land tenure system. Following the 2008 downturn in 

the global economy, millions of rural migrants laid off from factories 

returned to their home villages where they had rights to land tended 

by family members or rented to others. Small-scale farming generates 

much less income than factory work, and anecdotal reports indicate 

that migrants were not inclined to return to farming. Still, land rights 

guaranteed at least a basic livelihood. Some anecdotal reports, however, 

noted potential disputes with lessees over land contracts and diffi culties 

returning plots that had been consolidated into large commercial farming 

operations. 

China’s Evolving Land Management Practices
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of households have rights to individual sections of the fi eld that, from the 

roadside, looks like any grain fi eld in the Midwestern United States. 

The atomistic production structure that results from China’s land tenure 

system raises the cost of production and of aggregating land for more 

commercial agriculture. Multiple trips to work on multiple small parcels 

add to the cost of production. Aggregating land through rental activity to 

obtain more commercially effi cient land sizes is costly, particularly when the 

size of each plot is small and available plots typically are not contiguous to 

those controlled by the farmer interested in expanding.17 Rental markets in 

most parts of China may be very thin, but are growing (Deininger and Jin, 

2005; Zhu et al., 2007). Village leaders may seek to coordinate some type 

of “unifi ed production” on portions of village land, but most households 

prefer to purchase their own inputs and make their own production decisions. 

Direct linkages with modern supply chains are expensive to develop because 

of the small plot sizes, and the Government has been slow to allow farmers to 

organize their own producer associations to coordinate linkages.18

Taking Village Land 

As the designated managers of collectively owned land, village leaders can 

take land away from households and allocate use rights to other households 

or convert it to nonfarm uses. Originally, village leaders had explicit rights 

to reallocate land to maintain an egalitarian distribution after births, deaths, 

and marriages, but village leaders no longer have explicit rights to reallocate 

land. Instead, households are entitled to 30-year written leases on the land 

allocated to them.19 Leaders still have some room to maneuver and take back 

land for other uses, but also do it illegally. In a 2005 survey of 1,962 farm 

households in 17 provinces, fewer than 1 in 5 farmers (19 percent) believed 

there would be no more reallocations over the 30-year period (Zhu et al., 

2007). The survey question only included village reallocations of agricultural land; land reallocation for nonagricultural use was not addressed. 

While policies have sought to end periodic land reallocations within agriculture, village leaders still have the right to take land from households for 

nonagricultural uses. Legally, village leaders must get farmers’ approval 

and authorization from the township to convert agricultural land and must 

pay compensation to households according to the discounted value of that 

land in agricultural production over a 30-year horizon. The various means 

to calculate this value provide ample opportunity to dispute the fi nal fi gure 

and, even if assessed correctly, it may be well below the value of the land in 

nonagricultural uses. Moreover, affected households may not be included in 

the deliberations to take land for nonagricultural use, and there is widespread 

belief that households sometimes receive only a fraction of their entitled 

amount. These land reallocations and perceived corruption or inadequate 

compensation are behind many incidents of rural unrest in China.

Land Improvement and Conservation 

To boost domestic food production, as well as employ its large rural population, China has stressed land resources by farming steep hillsides and areas 

that other more land-abundant countries do not farm, creating soil erosion 

problems. Land has also been degraded by intensive chemical applications 

and by rarely leaving land out of production to “rest.” As the agents of 

collective owners, village leaders have an obligation to maintain the long17 Rental activity may also be discouraged by reallocation policies in some 

villages where renting out land serves 

as a signal to village leaders that the 

land can be reallocated to another 

household.

18 In a 2003 survey of villages in 216 

townships in 6 provinces in China, 

researchers found that approximately 

2 percent of farm households belonged 

to a functional producer association 

(Shen et al., 2006). The Government 

has begun encouraging farmers to join 

cooperatives and producer associations 

since a 2007 law clarifi ed the legal status of such organizations, but associations are small, localized, and often led 

by village offi cials.

19 According to the 2002 Rural Land 

Contracting Law and previous directives and laws.
17

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term productivity of the land. As the direct benefi ciaries of the use rights 

to the land, farm households have an incentive to maintain and improve the 

productivity of the land. Uncertainty over their long-term rights to the land, 

however, dulls farmer’s incentives to make long-term productivity improving 

investments and rely more heavily on short-term productivity measures such 

as chemical fertilizers and pesticides.20 While village leaders manage the 

land under collective ownership, they are only appointed for a fi xed period. 

Increasing agricultural and nonagricultural production under their leadership benefi ts their performance evaluation, so they too do not have strong 

incentives to tradeoff short-term production for long-term productivity nor to 

prevent farm land from conversion into nonagricultural uses.

Evolving tenure security and mechanisms to pool land into more commercially viable plots will affect China’s competitiveness on world markets and 

ensure land productivity for future generations. Lowering the cost of aggregating plots will facilitate adjustments as labor becomes more expensive 

and the current cohort of farmers ages. Larger commercial plots will raise 

farmers’ incentives to carefully select and verify the quality of inputs from 

China’s fragmented input providers to maximize profi ts and implement practices to ensure quality and safety. 

Collective ownership is also linked with social welfare issues. Land provides 

social security for the elderly and acts as a safety net for rural workers who 

have trouble fi nding employment outside of agriculture. Many farmers 

support collective ownership and favor land reallocations that maintain an 

egalitarian distribution of land (Kung, 1995).21 While using land as an 

income security institution has served China well thus far, it distracts from 

establishing institutions to use land more effi ciently in agricultural production. Establishing separate, viable institutions to provide income security 

will help China establish more effective land tenure policies. In Cixi prefecture, the land rental system is paired with a social security system; elderly 

villagers can receive land rental and social insurance payments of 400-500 

yuan per month, enough to cover basic needs (Jiang and Ke, 2009). More 

importantly, institutions to register and enforce farmers’ land rights are still 

underdeveloped but will be critical to further reform. Recent reforms to 

increase farmers’ rights to land, such as the 2002 Rural Land Contracting 

Law, are undermined by an inability to independently register land rights and 

settle disputes according to the law. 

Water

Like the United States, China’s water endowment is unevenly distributed. 

Water is relatively abundant in the south, but it is scarce in the north (fi gs. 

8-9). Extensive irrigation is key to China’s capacity to maintain agricultural 

production. Important crops in water-scarce areas that rely on irrigation 

include wheat, corn, and cotton, as well as China’s increasing production of 

horticultural crops.22 But in the reform period, rapid demand for water in 

the industrial and urban areas generated intense competition for limited water 

resources. Rising water demand is causing rivers to run dry and groundwater 

tables to fall.

20 Several studies found that farmers 

decrease their investments when tenure 

is less secure in China (Jacoby, Li, 

and Rozelle, 2002; Deininger and Jin, 

2007; Zhu et al., 2007)

21 Taking land for nonagricultural use 

has been much more contentious, but 

confl icts appear to focus more on the 

closed-door nature of the process and 

farmers’ share of the proceeds than 

with the transfer of the land out of 

agriculture itself.

22 Although rice is heavily reliant on 

irrigation, most of it is produced in the 

water-abundant southern part of China. 

Much of northern China receives 

suffi cient rainfall for agriculture in 

an average year, but 70 percent of the 

rainfall comes in the summer months 

(July-September), the primary growing 

season for corn and cotton. Winter 

wheat production in northern China 

occurs from October to June and relies 

heavily on irrigation during this period.
18

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Note: Highlighted areas represent regions of greatest water scarcity.

Source: Economic Research Service analysis based on ESRI, Inc. data. 

Figure 9

Areas of water scarcity in China, by region

Figure 8

China’s per capita water resources are below the world average,

northern China even lower

 World China Northern China

Note: Northern China refers to the Hai, Huang (Yellow), and Huai River Basins, areas 

where water scarcity is most serious (see map below).

Source: China’s Ministry of Water Resources.

Cubic meters per capita

0

1000

2000

3000

4000

5000

6000

7000

8000

Xinjiang

Xizang

Qinghai

Inner Mongolia

Heilongjiang

Hainan

Guangdong

Sichuan

Yunnan

Jilin

Liaoning

Gansu

Ningxia

Shaanxi

Shanxi

Hebei

Henan

Chongqing

Hubei

Hunan Jiangxi

Guizhou

Guangxi

Shandong

Jiangsu

Anhui

Zhejiang

Shanghai

Tianjin

Beijing

Fujian

Hubei

Huai River Basin

Hai River Basin

Huang (Yellow)

River Basin
19

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Water Policies 

All water in China is owned by the State, and, in northern China, roughly 50 

percent comes from surface sources and the remainder from ground water.23 

Surface water is managed by the Ministry of Water Resources and its local 

water resource offi ces that oversee a network of large and small irrigation 

districts (Lohmar et al., 2003). Efforts to promote more effi cient use of 

surface water include management reforms that typically involve providing 

water managers with incentives to use less water and improve delivery 

services (Huang et al., 2007).24 Surface water prices, however, are set by the 

Government and, despite price increases over the last decade, water prices 

remain too low for most districts to recover operating costs, much less additional revenue for investments in infrastructure improvements.25

Many farmers have turned to ground water for irrigation in water-scarce 

northern China, but groundwater management policies are neither clearly 

defi ned nor vigorously enforced. China had the means to control ground 

water withdrawals during the collective period because wells were dug by 

Government-owned enterprises and owned by Government-run local collectives. Recently, there has been a proliferation of privately owned wells that 

serve irrigators and collect payments from farmers based partly on the costs 

of pumping and delivering the water (Wang et al., 2006). The private wells 

are diffi cult to regulate and the State, which nominally owns the water, does 

not receive payment for the water extracted. Since pumping costs rise as the 

water table falls, volumetric prices increase as ground water becomes more 

limited, providing some incentives to use water more effi ciently. 

Incentives To Conserve 

China’s water management policies do not provide strong incentives to 

conserve water.26 For surface water and nearly all ground water, farmers are 

charged a fraction of what the water is worth in agriculture, which is a fraction of its value in other sectors.27 For most ground water, the price is still 

low enough that farmers have little incentive to invest in improvements or 

adopt technology to improve irrigation effi ciency (Blanke et al., 2007). For 

surface water, farmers typically do not pay for water by volume, but instead 

pay a fi xed amount based on the area they irrigate. With Governmentdetermined prices, irrigation districts earn income from the amount of water 

they sell, so they are not encouraged to conserve or to invest in conveyance. 

Some local water managers have an incentive to use surface water effi ciently, 

but the incentive is typically to invest in and manage conveyance to the 

fi eld more carefully so that more farmers receive irrigation. This increases 

fee remission from farm households, from which the manager may get a 

percentage, but does not necessarily reduce overall water use in agriculture 

and can reduce the return fl ow of water to streams or water tables, thereby 

reducing water availability to downstream users. 

Rising water prices for farmers are a hotly debated topic in China. While 

raising water prices would induce farmers to conserve water, current policies 

are focused on reducing water costs to farmers to raise their incomes (see, 

rural income discussion on page 25). Moreover, water conservation confl icts 

with another Government priority—maintaining near (95 percent) self-suffi -

ciency in grain (see box, “China’s Agricultural Policy Dilemma,” page 20). 

Higher water prices may lead to lower grain yields as farmers reduce water 

use. Some farmers abandoned grain production when ground water pumping 

23 In southern China, far more comes 

from surface water than in northern 

China.

24 Reforms include contracting canal 

management out to an individual to 

manage or setting up a Water User 

Association (WUA) that identifi es a 

manager to take over selected tasks. 

Some, but not all, of these managers 

have a direct incentive to reduce water 

use and improve fee remission.

25 For all State-owned assets, national 

offi ces of the Price Bureau still determine price guidelines and ranges, and 

local Price Bureau offi ces set prices in 

accordance with these guidelines.

26 China is not unique in this regard.

27 The exception is when the ground 

water table falls deep enough that 

charges rise to levels where farmers 

choose to either conserve or switch 

crop patterns.
20

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China’s agricultural policies are intended to achieve multiple objectives that often confl ict. While the balancing 

of strategic, consumer, and producer welfare objectives present tradeoffs for policymakers in all countries, the 

confl ict between these goals has become especially clear in China. 

For decades, achieving self-suffi ciency in food production has been a primary strategic goal for China’s agricultural policymakers. The leadership mobilized resources to increase production of grain, cotton, and other 

strategic crops during the collective period and this carried over into the reform period, most visibly during a 

campaign to boost grain output in the mid-1990s. As China further integrated into the world economy, selfsuffi ciency goals were relaxed for most products, but leaders still maintained near-self-suffi ciency goals 

(95 percent) for rice, wheat, and corn.

Since the late 1990s, policymakers have sought to 

simultaneously increase grain 

production and farm incomes. 

These two objectives confl ict 

since producing grain is less profitable than other types of farming. 

Net cash returns earned by 

Chinese farmers from vegetables 

and fruits are several times higher 

than returns from rice, wheat, and 

corn (see fi gure at left). 

Recent events show that rural 

income objectives can also 

confl ict with urban consumer 

welfare objectives. International 

prices for most commodities rose 

sharply between 2007 and 2008, 

but Chinese offi cials sought to 

limit domestic price increases 

by shutting down exports of 

grains, cutting soybean tariffs, 

and importing vegetable oil. 

Domestic prices for some types 

of Chinese grain were almost 50 

percent lower than international 

prices. Limiting the rise in prices 

protected consumers, but denied 

Chinese farmers a potential 

windfall. 

China’s Agricultural Policy Dilemma

China’s farmers receive relatively low returns from grain

Source: Economic Research Service calculations based on China’s National Development 

and Reform Commission data.

Net cash returns per acre, 2006

Soybeans

Wheat

Sorghum

Millet

Corn

Rice

Potatoes

Rapeseed

Sugar beets

Peanuts

Sugar cane

Tobacco

Cotton

Green tea

Oranges

Tangerines

Silkworms

Apples

Okra

Chinese cabbage

Radish

Cauliflower

Bell pepper

Eggplant

Cucumber

Tomato

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

U.S. dollars/acre

Crops considered staple food 

grains by the Chinese Governemnt

Other field crops

Orchard and 

perennial crops

Vegetables
21

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costs rose. Establishing viable water trading regimes might allow farmers 

to benefi t by selling their water rights to higher valuing users, but this too 

may cause farmers to forego grain production. Experiments in water trading 

regimes fi nd that they are diffi cult to establish because farmers are wary of 

losing their water rights altogether if they begin selling it to more powerful 

nonagricultural interests (Zhang, 2006). Thus, as with land, establishing 

more effi cient water allocation regimes is hamstrung, in part, by underdeveloped property rights enforcement institutions.

The lack of regulation for ground water withdrawals also affects the severity 

of water scarcity. In the Hai River Basin and other parts of northern China, 

ground water tables are not only falling rapidly, but there is scant policy 

enforcement to curb the expansion of private wells. The falling water table 

increases the price of water beyond its economic value in wheat or other 

fi eld crop production, inducing farmers to either use water more effi ciently 

or switch to crops that bring higher returns to water. Alternatives include 

relatively water-intensive fruit and vegetable crops, which are both more 

profi table and more suited to effi cient irrigation delivery technology, such as 

drip or micro-sprinkler irrigation (fi g. 10).28

While many observers see water shortages as a threat to China’s agricultural 

production capacity, there is little evidence that systemic water scarcity has 

adversely affected production to date, and China could avert future effects 

by improving water conservation. Conservation is occurring, albeit slowly, 

in surface water systems. It is also occurring somewhat inadvertently in 

ground water systems as the water tables are drawn down to the point that 

farmers switch out of grain and into crops that bring a higher return to water. 

If these trends continue, water shortages will likely not bring about a surge in 

Figure 10

Farmers move into cash crops as pumping costs rise

 1-25 percent 26-50 percent 51-75 percent 76-100 percent

 4.7m 8.8m 40m 79m

Source: Survey by the Center for Chinese Agricultural Policy, Chinese Academy of Sciences, 

of 400 villages in Hebei and Henan Provinces.

Share of high-value crops in total sown area (cash crops, vegetables, fruits)

0

10

20

30

40

50

Percentile, ranked 

by water depth

Average depth 

of water table

12.8%

15%

22.4%

40.6%

28 Horticultural crops that bring a 

higher value to water may also be 

riskier than grain crops and require 

some initial investment that discourages farmers from producing them when 

water is less costly.
22

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demand for grain imports. Because China’s water shortages occur primarily 

in northern China, and China is a large country, a regional shift out of grain 

and cotton production would cause prices for these commodities to rise, 

consumers to consume less, and producers in other parts of China to produce 

more, dampening the demand for imports (Lohmar and Hansen, 2007).29

Agricultural Marketing Challenges

China’s traditional agricultural marketing system is extremely effi cient, fl exible, and low cost, but these effi ciencies come at the expense of providing 

strong incentives for producers or marketing agents to achieve quality 

or safety. However, quality and safety characteristics are increasingly 

demanded by the growing food processing sector, modern retailers, middle 

class consumers, and export markets. The atomistic nature of production 

and marketing, the lack of effective contract enforcement mechanisms, 

and the scarcity of farmer organizations make it diffi cult and costly for 

traders, packers, and suppliers to ensure food safety and consistent quality. 

Investments in higher quality storage, transportation, and cold chain infrastructure would reduce waste through spoilage, allow for more regional 

specialization, and facilitate the distribution of imported products throughout 

the country. 

Improving food safety has become the central challenge in China’s marketing 

reform efforts. The Government has taken a leading role in addressing 

food safety issues in China, in part, because the institutional framework 

for markets to provide safety assurances is not yet developed. Benefi ts to 

farmers providing food safety assurances are limited because their products 

are typically aggregated with products from other producers in the marketing 

chain, often at the point of sale. Companies that institute costly measures 

to ensure food safety cannot recoup these costs because counterfeiting and 

other mislabeling are so widespread that consumers lack the confi dence in 

private assurances to pay a high premium for them. Companies producing 

unsafe products have little risk of being caught and, if they are caught, they 

are typically not fi ned or liable for damages, but instead shut down and may 

even reopen somewhere else.30 In this environment, the market will lag in 

providing the safety assurances that consumers demand, creating a role for 

Government intervention. Resolving obstacles to more market-oriented solutions, however, could provide more sustainable solutions and allow farmers 

to receive more of the price premiums for producing safe and high-quality 

products.

A weak marketing system constrains the supply of products with special attributes. Because the marketing system is not conducive to segregating higherquality products, it prevents the farmer from producing high-quality products 

and selling them at a premium. Unlike food safety, high-quality fruit and 

vegetable products can be determined largely by consumers at the point of 

purchase, so there is some incentive for marketing agents and suppliers to 

specialize in higher quality products. In more modern economies, suppliers 

and processors often contract with producers or producer groups to provide 

products based on set guidelines to obtain specifi c quality and safety characteristics. In China, however, contracting for production is limited and not 

particularly effective because few contract enforcement institutions exist. 

The large number of farm households needed to produce commercially viable 

29 The extent to which production falls 

in one region and causes prices to rise 

depends critically on import policies.

30 The majority of food processing 

businesses are small, often family 

owned, enterprises operating out of 

households or rented facilities with 

very little capital investment and are 

relatively mobile (Thompson and Hu, 

2007).
23

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quantities of product also raises the cost of contracting directly with farmers. 

The limited contracts that do exist are typically with village leaders or 

producer associations that coordinate production among members or village 

farmers. Producer associations, in particular, could facilitate adoption of 

technologies and good agricultural practices to produce safe and high-quality 

products, but the establishment of truly independent producers’ associations 

in China has been limited to date. 

Marketing issues also extend beyond horticultural products.31 In the past 

decade, China has established a program to increase wheat quality because 

the competitive food processing industry seeks wheat with specifi c quality 

characteristics that domestic producers have little incentive to produce. The 

effectiveness of this program, however, is also reduced by the atomistic 

nature of wheat marketing and the few incentives to segregate wheat by 

quality characteristics. Milk marketing and quality assurance issues stemming from the large number of small producers came to the fore in 2008 (see 

box below, “Food Safety Setback: Infant Milk Production”).

Food Safety 

Improving food safety is a major issue among both China’s domestic 

consumers and food export industries, but poses many challenges (Calvin et 

al., 2006; Ellis and Turner, 2008). An atomistic farm sector, coupled with 

In 2008, a number of infants in China died and thousands were sickened 

after consuming powdered infant formula tainted with melamine, an 

industrial chemical that can cause renal failure. The milk powder incident highlighted the lack of institutional mechanisms to monitor and 

enforce standards in an atomistic supply and processing sector. The milk 

found to be adulterated came from large companies with internationally recognized food safety certifi cations selling well-known brands, but 

they procured much of their raw milk from small farmers who brought 

their milk to local purchasing stations operated by independent contractors. Melamine was allegedly introduced by merchants and handlers to 

boost the apparent protein content after the milk was watered down. In 

2007, a representative from one of China’s two biggest dairy companies presented the company’s detailed food safety management system, 

which appeared to build in adequate safeguards (Zhang, W., 2007), yet 

its products were among those found to be adulterated in 2008. The 

incident also revealed apparent complicity between a company and local 

offi cials to cover up the problem and pay off victims to forestall legal 

action. 

Following the milk powder incident, some companies began sourcing 

more of their milk from large company-owned farms, while others 

required small farmers to bring their cows to be milked at central locations. Companies also began posting their own employees at milk 

stations to monitor transactions. Government subsidies funded increased 

testing of raw milk at the point of purchase and at processing plants.

Food Safety Setback: Infant Milk Production

31 Grain marketing in China is infl uenced more by State-owned or Stateaffi liated companies than horticultural 

marketing, refl ecting remnants of the 

former State-owned marketing monopolies in grains and strategic crops.
24

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high agricultural chemical use on crops and in livestock production, increases 

the risks and the costs of monitoring. China’s marketing and food processing 

sectors are also fragmented. Some estimates report that approximately 1 

million food processing companies—70 percent of which have fewer than 10 

employees—and probably millions more traders and merchants handle food 

and agricultural products. The agricultural chemical industry in China is also 

fragmented and without effective regulation. Counterfeiting and mislabeling 

products is not uncommon. Farmers’ knowledge of these products, and how 

to use them to reduce residue at the point of consumption, is also limited. 

To combat these problems, China has established a complex set of standards 

(central and provincial government standards; industry and private safety 

standards) and assigned food safety responsibilities to a number of agencies. Keeping track of the various standards is confusing to producers and 

consumers alike. Many Chinese standards were adapted from international 

models, often with modifi cations, and they can vary from province to province. Food safety enforcement and monitoring responsibilities are divided 

among several Government agencies. The Ministry of Agriculture (MOA) 

supports programs for improving the safety of produce and meat and testing 

fresh products in wholesale markets. Provincial-level offi ces of the General 

Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) 

oversee domestic food processors, and the national AQSIQ offi ce oversees 

safety of exported (and imported) products. The Ministry of Health inspects 

food service establishments. Testing of agricultural produce occurs after 

the fact and, with no viable traceability system in place, its effectiveness is 

uncertain. Monitoring hundreds of thousands of small, often family-owned 

food processing businesses falls on local offi cials who lack the incentive and 

training necessary to enforce laws and standards.

Many food companies wanting strict safety assurances maintain their own 

safety assurance programs instead of relying on Government safety standards, programs, and labels. Assuring safety, however, is relatively costly 

compared with China’s effi cient but unregulated domestic marketing. 

Instructing the thousands of households that produce for a given processor/

supplier, monitoring their actions over the growing season, and monitoring 

the integrity of the marketing chain is costly. Companies with a high stake in 

safety assurances often resort to a vertically integrated model. This model 

may include leasing land from village collectives to produce products with 

hired labor and technical managers. This can be a tiresome process that 

involves negotiating with village offi cials, who act as agents for farm households to aggregate land into fi elds to form a viable production base. For 

products consumed fresh and prone to safety issues, such as leafy vegetables, 

these bases may be fenced off to reduce animal or other contaminations and 

monitored by around-the-clock hired workers. The produce is typically 

harvested by hired workers and shipped directly to company facilities to be 

processed.32

While the vertically integrated production and marketing model is much 

more expensive than relying on the traditional marketing system, produce 

from China under this system is still competitively priced in export markets 

such as Korea and Japan. For companies producing for the domestic market, 

such practices are still too expensive. Acquiring production bases and 

producing products with hired workers entails premium prices to cover the 

32 Hired workers may come from the 

very households renting their land to 

the company; often this is part of the 

rental arrangement. 
25

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costs of added safety assurances that exceed what most domestic consumers 

are willing to pay. 33

Chinese offi cials have adopted a version of the vertically integrated model 

to promote as a safety system for domestic production. This version links 

a processing or packing company with a “production base” of small farm 

contractors. Many of the links are established by Government agencies 

who select the processing or packing company according to certain criteria, 

including the capacity to provide agricultural technology and training to 

farmers, and these companies get preferential treatment from local governments (i.e., loans and access to land) in establishing production bases. The 

companies provide or specify seed varieties, livestock breeds, chemical 

inputs and application practices, and veterinary drugs to the production 

bases, and production from the bases is delivered to the company. This 

“company + production base + standard” model may be easier to monitor 

and allow traceability compared with traditional supply chains. It is also 

less expensive than the model used by many exporters, in which land is 

rented and farmed by hired workers. China’s AQSIQ requires that exported 

products vulnerable to safety hazards be produced in the vertically integrated model, inspecting and certifying export companies and their production bases, although most exporters have already adopted such practices.34 

Authorities are also cracking down on production of substandard agricultural 

chemicals and feeds, banning production of some foods in areas that fail 

environmental testing, promoting farm record-keeping, and establishing 

product traceability systems.

The policy whereby the Government selects fi rms for loans and assistance 

in developing production bases means the Government rather than market 

competition is choosing which fi rms will be successful. As such, it will not 

be as effi cient as market outcomes, but it does provide coordination in an 

environment where coordination comes at a high premium. 

China’s ability to control food safety hazards and increase confi dence in 

its products—for both domestic and export markets—has implications for 

producers and consumers in the United States. When products from China 

suffer food safety-related setbacks in other countries, U.S. producers of those 

products may have an opportunity to supply those markets.35 Alternatively, 

successfully reassuring consumers of the safety of products from China 

will help China compete with U.S. producers in both third-country markets 

and in the United States.36 As China increases the stringency of its food 

safety enforcement, however, the costs of producing and marketing its 

agricultural products will rise, eroding China’s cost advantage in international markets. It will also take time to establish confi dence and integrity in 

China’s marketing and safety system, which gives U.S. producers a niche by 

promoting their products as safe and high quality.

Rural Income and Development Policies

Rapid economic development invariably brings about changes in agriculture, and China is no exception to this rule.37 While rural China was fi rst to 

benefi t from economic reforms due to the take-off of agriculture and rural 

enterprises, the locus of growth shifted to urban areas in the late 1980s. By 

the mid-1990s, urban incomes were roughly three times higher than rural 

33 Again, the price companies can 

charge for safety assurances is limited 

by consumers’ confi dence in these assurances in China, where counterfeiting and mislabeling are not uncommon.

34 Many of the foreign-owned companies or joint ventures with foreign 

companies have much more stringent 

standards than China’s own certifi cation requirements.

35 Sometimes food safety-related setbacks, however, reduce overall demand 

for those products in the affected countries and adversely affect all imports 

regardless of origin. 

36 U.S. imports from China would 

also compete with U.S. producers, but 

benefi t U.S. consumers as well.

37 Economically, agriculture suffers 

from declining relative prices as a 

country develops and industrializes 

because additional income is spent on 

nonagricultural products over agricultural products. In addition, agriculture 

must compete for resources from the 

faster growing sectors. 
26

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incomes (fi g. 11).38 Policymakers responded with a series of programs to 

narrow the income gap. Each year between 2004 and 2009, China’s State 

Council issued a series of documents offering an array of policy measures 

and plans to improve incomes and living standards in the countryside. Rural 

income growth accelerated during this period but urban incomes grew even 

faster, and the policies were not able to narrow the urban-rural income gap. 

Eliminating Taxes 

In the fi rst two decades after reforms, China taxed farmers through price 

policies as well as explicit taxes and fees. Prices paid for grain quota deliveries to State marketing bureaus were well below market prices, implicitly 

taxing farmers.39 In the late 1990s, China reversed this policy by paying 

above-market prices for quota deliveries—an implicit subsidy for farmers. 

Ultimately, by the early 2000s, China eliminated the grain quota system 

altogether. 

China also established local taxes and fees after HRS to help fund village 

government, infrastructure, schools, and health care facilities.40 As with 

most rural policies in China, the level and means of assessing taxes and fees 

varied widely from village to village. Fiscal changes in the 1990s eliminated 

many intergovernmental transfers, and a slowdown in the rural economy 

in the late 1990s and early 2000s left many rural governments with a thin 

tax base. Many villages began assessing various fees and taxes on farmers 

to fund local services (fi g. 12). The rising tax burden on farmers became a 

major policy issue. After several years of experimentation, China began a 

nationwide push to phase out agricultural taxes in 2004, and taxes on farmers 

were eliminated by 2006 (fi g. 12).41 

Figure 11

Urban incomes exceed rural incomes in China

1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Source: Economic Research Service calculations based on China's National Bureau of Statistics (NBS) data.

CNY (yuan)

0

5,000

10,000

15,000

20,000 3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Ratio

Urban-rural ratio Urban 

per capita income

Rural per capita income

38 Rural residents must pay fees for 

education and health care services that 

are of inferior quality compared with 

subsidized services provided to many 

urban residents.

39 China also provided some inputs, 

however, such as fertilizers, at subsidized prices over some of the period.

40 Farm households in China have a 

long history of paying local taxes and 

fees based on land area and other factors and activities. 

41 There is some evidence that the 

elimination of taxes accelerated land 

reallocation for nonagricultural development as a means for local government to generate revenue to replace the 

lost tax revenues.
27

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Subsidies, Investments, and Price Supports 

In recent years, China initiated a wide range of programs and subsidies 

aimed at rural areas (Gale, Lohmar, and Tuan, 2005). In 2004, China began 

to pay direct subsidies to farmers and expendtitures have grown rapidly 

(table 2). Subsidies now include payments to grain producers, subsidies for 

improved dairy breeds, hog breeding farms, and large poultry farms, insurance for breeding sows, quality seeds, and machinery purchases. A subsidy 

to compensate farmers for rising fertilizer and fuel prices was initiated in 

2007. More general rural development programs include construction of 

rural roads, irrigation projects, support for rural schools, a new rural cooperative health care system, worker training, support for elderly and low-income 

households, and subsidies for the purchase of household appliances and electronic items. The central Government reported spending nearly $87 billion 

on rural programs in 2008, a 37 percent increase from 2007.

An increase in grain production coincided with the establishment of a 

subsidy program. Since prices also rose over much of this period, it is 

unclear what the net effect of subsidies was on farmers’ crop choices and 

yields. Moreover, oilseed production dropped over the last few years, in 

part, because oilseed acreage was drawn into grain production. This contributed to a surge in soybean and vegetable oil imports. 

In addition to direct subsidies, China introduced price supports for wheat 

and rice in key grain-producing provinces in 2004.42 If the market price 

falls below a minimum price set by authorities, designated grain enterprises 

(mostly State-owned) will purchase grain from farmers at the minimum 

price. Loans from the China Agricultural Development Bank to fi nance 

these purchases exceeded $9 billion (U.S. dollars) for 2006. The grain is 

stored and later offered for auction at provincial grain exchanges. Wheat 

Figure 12

China’s grain taxes have given way to subsidies in recent years

 1997 1999 2001 2003 2005 2007

Note: Ratio of tax and subsidy to cash production cost for producers of rice, wheat, and corn.

Source: Economic Research Service calculations based on National Development 

and Reform Commission data.

Percent of cash costs of producing grain

-15

-12

-9

-6

-3

0

3

6

9

12

Subsidy Tax 

42 The minimum procurement price 

was fi rst implemented for rice in 2004 

and extended to wheat in 2005.
28

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accounted for most of the purchases under this program until the Government 

announced large purchases of corn, soybeans, cotton, rice, sugar, and rubber 

to support prices in late 2008.

Rural Credit 

Rural fi nancial institutions are riddled with bad loans that were extended to 

rural businesses, governments, and grain bureaus, but most farmers in China 

do not participate in formal credit programs (Gale and Collender, 2006).43 In 

recent years, the Government has made reform of the rural fi nancial system 

a priority. One goal of the reforms is to restore fi nancial health to nearly 

insolvent rural institutions. The over-arching goal of rural fi nancial reform is 

to push more capital to farmers through a massive increase in rural loans to 

farmers, agribusinesses, and rural development projects (Gale, 2009).

Since 2003, a complex program was put in place to reorganize, rename, and 

consolidate 40,000 tiny rural credit cooperatives into credit unions, cooperative banks, and commercial banks. Thousands of offi cials have been mobilized to conduct village-wide credit checks and organize borrowing groups to 

ensure that small, short-term loans of roughly 5,000 yuan ($715 U.S. dollars) 

each are repaid. A postal savings bank that opened in 2007 was expected to 

engage largely in rural micro-lending. Pilot programs are formalizing heretofore illegal underground lenders, who account for most rural lending, and 

allowing city commercial banks and foreign banks to open small “village 

banks” and loan companies. Statistics show large increases in rural lending, 

yet farmers seem to have little access to formal fi nancial markets.

Many rural investments have the potential to increase agricultural productivity, particularly livestock production. However, household-level investment is hampered by the absence of markets for land and housing. Since 

land cannot be bought and sold, it cannot function as collateral for loans.44 

Consequently, most farmers have few assets to secure loans, and rural lenders 

resort to elaborate credit guarantee schemes for short-term loans of a few 

Table 2

China’s national Government increases agricultural subsidies

Year

Direct grain 

subsidies

Quality seed 

subsidies

Agricultural 

machinery 

subsidies

Input 

subsidies Total

billion dollars

2004 1.4 0.3 0.01 - 1.8

2005 1.6 0.5 0.04 - 2.1

2006 1.8 0.5 0.08 1.5 3.9

2007 2.0 0.7 0.26 3.6 6.6

2008 2.2 1.5 0.58 9.2 13.9

2009* 2.2 1.8 1.46 10.4 17.5

Notes: Values converted to U.S. dollars at average exchange rate for each year. 

Subsidies for inputs other than seeds and machinery did not begin until 2006.

*Announced February 2, 2009.

Source: Economic Research Service calculations based on Ministry of Agriculture 

data.

43 It is not clear whether this is because 

they have diffi culty obtaining formal 

credit or whether they prefer other 

means to support investments.

44 Houses can technically be sold, and 

the lease to the collectively owned land 

they occupy can be transferred to the 

new owner, but houses are explicitly 

not allowed as collateral in rural China. 

New initiatives allow forest rights, orchard land, and agricultural marketing 

contracts to be used as loan collateral. 
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hundred dollars. Small farmers and entrepreneurs typically rely on their own 

savings, underground lenders, and relatives for small short-term loans.

Technology Development and Promotion

Investments in agricultural research and technology contributed to China’s 

agricultural production gains. Since employment of land and labor in agricultural production has been stagnant or negative over the last 30 years, a 

large portion of China’s agricultural growth has come from productivity 

growth due to new technologies or specialization that uses resources more 

effi ciently.45 Studies show that research and new technologies released 

by the national agricultural research system were important components of 

productivity growth (fi g. 13), particularly since specialization has only just 

begun in China (Fan and Pardey, 1997; Colby, Diao, and Somwaru, 2000; Jin 

et al., 2007).

While agricultural research spending has taken off in recent years, a number 

of factors may constrain further development and adoption of new varieties, 

breeds, and techniques. China’s large agricultural research expenditure is 

almost entirely publicly funded; private research has been slow to develop. 

This cautious approach since 2002 has delayed approval of a number of 

seed varieties developed using biotech techniques. Only Bt cotton and a few 

varieties of tomatoes and fl owers have been approved for commercial use. 

China’s agricultural extension service is weak, and extension stations that 

are expected to be self-supporting pursue a mix of commercial and educational objectives that sometimes confl ict. China has a portfolio of biofuel 

technology research, but grain-based biofuel development has been capped 

due to food security concerns, and most nongrain biofuel projects are still in 

experimental stages. Biofuels are heavily subsidized and licenses to sell it 

have been tightly controlled; private companies have mostly been excluded. 

Figure 13

Agricultural research expenditures are rising in China

 1991 1994 1997 2000 2003 2005

*Constant 2005 Chinese yuan (CNY) – total spending does not include private enterprises, 

but includes funds raised by universities and Government research institutes outside of 

direct Government outlays.

Source: Hu et al., 2007.

Billion CNY (yuan)*

Total spending Government allocations 

30

60

90

120

150

45 In addition to increased applications 

of fertilizer and other inputs, which in 

many cases go hand-in-hand with the 

use of high-yielding seed varieties.
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Agricultural Research 

China’s agricultural research system is dominated by public funding. During 

the 1990s, only about 1 percent of all research funding came from private 

sources. That percentage has likely increased since then, but is still small. 

While China has as many as 10,000 seed companies, less than 100 have 

enough resources to carry out their own research. Counterfeiting and inadequate property rights protection diminish incentives for private companies 

to develop new seeds. These concerns also discourage multinational seed 

companies from entering China’s large market. Government efforts in livestock breeding are part of the country’s overall investment in agricultural 

research, but fall far behind that of plant technology development (fi g. 13). 

China has been active in importing foreign genetic stock for cross-breeding 

with domestic animals. Increased use of manufactured feed provided by 

foreign-invested and other private enterprises has contributed to signifi cant 

feeding effi ciency of China’s livestock production in recent years. 

Biotechnology 

China benefi ts from investments in biotechnology and recently established a 

program to boost development of biotech varieties. In the late 1990s, farmers 

began to adopt Bt cotton, and today nearly two-thirds of China’s cotton is 

a Bt variety. Because Bt cotton is resistant to bollworm and requires only 

about half the pesticide applications of nonbiotech varieties, adoption of Bt

cotton lowers pesticide and labor costs and provides clear health benefi ts to 

farmers from lower exposure to pesticides (Huang et al., 2002). China has 

also commercialized biotech varieties of several horticultural crops, but the 

area sown to these crops is very small.46 

Despite having invested funds into the development of biotech varieties, 

which resulted in promising varieties, China is still hesitant to release biotech 

seeds for basic food crops due to concerns about their reception in export 

markets and potential effects on human health.47 Recent surveys, however, 

indicate that less than 40 percent of China’s urban consumers had any understanding of what biotechnology was, but 50-65 percent (depending on the 

food product) supported using such technology (Lin et al., 2006). Food security concerns may push the Government to approve more biotech crops. 

Agricultural Extension Services 

After reforms, China established a vast network of agricultural extension 

offi ces at the county and township levels that continued to expand and 

specialize. By the mid-1990s, the system employed over a million agents. 

Most counties have crop, livestock, agricultural machinery, aquaculture, 

and economic management stations, or centers, and many have established 

specialized substations for plant protection, horticulture, and soil and fertilizer technology. But China’s agricultural extension network suffers from 

effi ciency problems. Programs established in the late 1980s to make the 

extension stations partially self-supporting have caused many agents to spend 

time on administrative and commercial activities not related to extension, 

such as work on family planning, budget management, fi re protection, village 

elections, and legal matters (Hu et al., 2008).

46 Including varieties of tomatoes, 

sweet peppers, chili peppers, and 

petunias.

47 Including corn, which is a food crop 

for some people in China.
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Agricultural land is limited in China, so the development and extension 

of agricultural technologies will be critical for China to continue productivity gains. China has an extensive research system that has contributed to 

productivity growth both inside and outside its borders.48 Further development of new varieties, including biotech varieties, will help China continue 

production gains. Improving the link between the technologies developed in 

the research institutes with the needs of farm households through reforms in 

the extension system will benefi t overall system performance. Strengthening 

intellectual property rights would likely spur private investment for developing new varieties in China and operationalize the technologies developed 

in Government institutes. 

Biofuel 

China initiated its biofuel program in the early 2000s to use up surplus grain 

held in Government reserves, but the program is now viewed as a source 

of alternative fuels and clean energy. China does not want to miss out on 

technologies that could provide renewable fuel supplies. China is now the 

world’s fourth-largest producer of fuel ethanol with production from four 

Government-designated plants, using predominantly corn, but also some rice 

and wheat, as feedstocks. A fi fth ethanol plant using cassava was opened 

in 2008, and multiple small biodiesel plants are in operation using waste 

cooking oil. 

Because of the confl ict with grain self-suffi ciency goals, China has scaled 

back on the ambitious biofuel production goals set out in the 11th Five-Year 

Plan (2006-2011) and may produce only 2-3 mmt of ethanol annually by 

the end of that period. China is investing in research to develop cellulosic 

ethanol production technology that utilizes nonfood materials (i.e., urban 

waste) or coproducts of food production (i.e., corn stover or straw). Until 

cellulosic technology is economically viable, China is emphasizing production of ethanol and biodiesel from crops, such as cassava, sweet sorghum, 

sweet potatoes, and jatropha, that can be grown on marginal land unsuitable 

for grain production. A number of demonstration projects using these feedstocks are in operation and many others are planned.

Biofuel Policy 

China manages domestic fuel ethanol supply by controlling access to the 

State-owned petroleum industry through a quota system coordinated by 

China’s National Development and Reform Commission (NDRC). These 

quotas are mandated for selected ethanol production facilities to deliver a 

fi xed amount of fuel ethanol to the two State-owned petroleum companies 

(Sinopec and PetroChina) in return for a Government subsidy. All new 

production facilities will use nongrain feedstocks, and the current facilities 

using grain are expected to convert to nongrain feedstocks.49 Some ethanol 

production is exported out of this State-authorized system (both fuel grade 

and hydrous ethanol that is sometimes dehydrated in the receiving country 

or a third country).50 The demand for ethanol is managed by programs in 

selected cities and provinces to use blended E10 (gasoline blended with 10 

percent ethanol) within their jurisdictions. In 2008, E10 was used provincewide in 6 provinces and in 27 selected cities of 4 other provinces.

48 Many of the traits found in the highyield dwarf rice varieties that led to the 

“Green Revolution” in rice throughout 

Asia were initially isolated and developed in China. 

49 One plant reported switching to cassava in 2008, but then reduced production due to high cassava prices.

50 In 2006, China exported 268.9 million gallons of ethanol (roughly 0.8 

mmt), about 60 percent of the authorized amount sold to the domestic petroleum industry. Exports fell sharply 

in subsequent years after export tax 

rebates for ethanol were rescinded.
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The Government controls the development of biofuels. Commercial production of biofuels is only profi table when it receives a subsidy. State-owned 

petroleum companies constitute the only market for biofuel, and the 

Government has so far issued licenses to sell biofuels only to other Stateowned companies. China is increasingly concerned about the competition 

between biofuel feedstock and food production and has scaled back plans to 

develop noncellulosic biofuels. Future changes will depend on China’s estimation of the effect of biofuel production on grain availability and prices.

A plant that distills alcohol from cassava in Guangxi Province

Photo by William Coyle, Economic Research Service.
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Implications for China’s Future Trade

China can have a major impact on world commodity markets, but its trade 

has evolved in surpising ways. Before market-based reforms were initiated 

in 1978, China consistently imported wheat and exported modest amounts 

of rice each year. Beginning in the 1980s and 1990s, domestic market fl uctuations were refl ected in fl uctuating imports of wheat and exports of corn. 

(fi g. 14). Trade in soybeans and cotton cycled between exports and imports. 

Swings in commodity trade, coupled with the opaque nature of China’s 

State-trading monopolies, contributed to uncertainty in world markets. 

It was widely anticipated that China’s WTO accession in December 2001 

would lead to rising grain imports as the Government opened low-tariff 

import quotas for rice, wheat, corn, cotton, sugar, and wool and established a 

more transparent trading process (Lohmar, Hansen, Seeley, and Hsu, 2002). 

However, China remained a net exporter of corn, wheat, and rice in most 

years following WTO accession (Gale, 2005). Corn exports declined as 

excess stocks accumulated in the late 1990s diminished (Gale, 2002; 2004), 

and rice and wheat trade remained small (Lohmar, 2004). China has defi ed 

most forecasts by becoming an net exporter of grain since the late 1990s. 

China’s impact on world markets has been felt primarily in the soybean 

and cotton sectors. (Tuan, Fang, and Cao, 2004; Gale, 2007). China’s trade 

in these two commodities was modest until the late 1990s, but after WTO 

Figure 14

China’s net exports of grains have fluctuated since 1978

Notes: Negative numbers indicate net imports. Years are “market years” for each commodity.

Source: U.S. Department of Agriculture, Foreign Agricultural Service, Production, Supply and Distribution Data, November 2007.

Available at http://www.fas.usda.gov/psdonline/psdHome.aspx.

Million metric tons

Corn

Wheat

Rice

-20

-15

-10

-5

0

5

10

15

20

25

1960196219641966

1968197019721974197619781980

1982198419861988199019921994199619982000200220042006

Market reforms

initiated 1978

Entered WTO

December 2001
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accession, imports of soybeans and cotton exploded (fi g. 15). Their combined 

import total was close to 50 million metric tons (mmt) in 2007/08. Soybean 

imports reached a record 37 mmt in calendar year 2008. In comparison, net 

exports of corn, wheat, and rice totaled 4 mmt that year.

Fundamental economic forces like resource scarcity, urbanization, and income 

growth will be the main drivers of China’s future trading patterns. China’s 

resource endowment favors import of land-intensive crops and gives it a 

comparative advantage in labor-intensive goods like vegetables, fruits, and 

aquaculture products. The impact of basic economic forces on trade will be 

infl uenced by the issues described in the preceding section. China’s liberalization, openness to trade and investment, and effi ciency in meeting its growing 

demand for food and fi ber will be infl uenced by how these issues play out. 

The combined forces of economic growth and shifting production toward 

more labor-intensive products will dampen future import and export growth 

in some products. Continued urbanization and income growth will result 

in lower per capita consumption of food grains such as rice and wheat, but 

greater demand for horticultural products such as fruits and vegetables. Since 

horticultural products are typically labor-intensive, China is well suited to 

produce them for its domestic market, relying less on imports.51 In addition, wheat and rice are relatively land-intensive and not produced effi ciently 

in China relative to other more land-abundant countries.52 But China’s per 

capita demand for these products is falling, and total demand is beginning to 

decline as population growth slows. Thus, future imports of food grains will 

likely remain small. 

51 China’s export capacity of these 

products will also be affected by domestic consumption growth.

52 Particularly wheat; rice is more 

labor-intensive.

Figure 15

China’s cotton and soybean imports surged after WTO accession

Notes: Negative numbers indicate net imports. Years are “market years” for each commodity.

Source: U.S. Department of Agriculture, Foreign Agricultural Service, Production, Supply and Distribution Data, November 2007.

Available at http://www.fas.usda.gov/psdonline/psdHome.aspx.

Million metric tons

Cotton

Soybeans

Market reforms

initiated 1978

Entered WTO

December 2001

-50

-40

-30

-20

-10

0

10

1960196219641966

1968197019721974197619781980

1982198419861988199019921994199619982000200220042006
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Economic growth and urbanization in China has increased demand for livestock products as well as textile and clothing products. Increasing demand 

for these products will drive demand for imports of land-intensive inputs into 

their production: oilseeds, feed grains, cotton, and hides.53 The net effect of 

China’s economic growth on the derived demand for imports of land-intensive inputs into livestock and textile production, however, will be affected 

by a number of contingencies. Demand for livestock products will continue 

to grow, but the extent to which additional demand is met with imports of 

livestock products depends on effi ciency improvements in China’s livestock 

sector and other issues, such as disease outbreaks (both in China and abroad). 

While most observers agree that China’s domestic textile, clothing, and shoe 

consumption is rising, there is scant information on domestic consumption 

for these products. Thus, the extent to which China’s domestic economic 

growth drives cotton and hide imports is unknown. Moreover, rising wages, 

the appreciating Yuan (CNY), and slowing growth in the world economy 

threaten China’s rapid growth in textile, clothing, and shoe exports.

On top of these fundamental economic trends, issues in resource management, market development, improvement of rural incomes, and the development and adoption of technology will play a role in China’s production, 

consumption, and trade in agricultural products. Improving land and water 

management practices will affect production of nearly all crops. Marketbased prices for land and water that refl ect the scarcity of these resources 

would raise agricultural production costs and induce producers to plant crops 

that use these resources less intensively or crops that bring a higher return.54 

Marketing reforms will improve China’s capacity to produce and market 

crops and livestock products that satisfy market demand with quality, safety, 

standardization, and other attributes that consumers want. Price support and 

subsidy policies have emphasized grain production at the expense of cash 

crops, dampening market signals to farmers. Rural investment programs 

are improving basic infrastructure and human capital. Increased machinery 

subsidies are encouraging substitution of capital for labor as it becomes more 

expensive. Technology development and extension would increase the technological sophistication of all aspects of agriculture in China.

In this section, we examine the factors that will determine China’s future 

trade in key commodities. Looking at food grains, horticultural products, 

livestock products, feed grains and oilseeds, cotton, hides, and skins separately, we briefl y touch upon past trends and the drivers of those trends, 

including how these drivers may be altered as China’s overall economy 

changes. The discussion of future trade refers to underlying economic fundamentals, as well as resource management policies, development of modern 

marketing practices, efforts to improve rural incomes, and technology development, relating them to trends in production and consumption of specifi c 

commodities. Moreover, we note China’s past emphasis on the self-suffi -

ciency of key strategic crops, but also that many formerly strategic crops are 

now fully liberalized and sourced from abroad. Past liberalization of policies for formerly strategic crops, such as soybeans and cotton, indicates that 

China is willing to forego self-suffi ciency when costs are high and the crop is 

not “too strategic.”55 

53 China’s livestock production, predominantly pork and poultry products, 

is relatively labor-intensive because 

most is backyard production from farm 

households. Modernization will serve 

to replace labor with capital, but still 

allow China to maintain production 

of livestock products. Hides from the 

United States are relatively land-intensive because they are produced from 

beef cattle raised on rangeland before 

entering feedlots.

54 Recall how farmers are responding 

to high water pumping costs by moving to more water-intensive, but also 

more profi table, horticultural crops--a 

phenomenon that has occurred in other 

regions of water scarcity in the world.

55 Products that are not necessary to 

maintain people’s daily life.
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Food Grains

Food grains, such as rice and wheat, are fundamentally land-intensive. China 

can utilize its resource base more effi ciently by devoting more of its limited 

land base to activities that produce greater economic value per unit of land. 

That would entail importing more grains from land-abundant countries and 

exporting more labor-intensive products. While China has expanded production of labor-intensive commodities, it remains self-suffi cient in rice and 

wheat. Many observers expected rising imports of grain after China’s accession to WTO, but imports of land-intensive commodities were channeled into 

crops viewed as less vital to food security. The prospects for rice and wheat 

imports are attenuated by stagnant or falling domestic demand as consumers 

shift diets to fi sh, livestock products, fruits, vegetables, and processed foods. 

As incomes improve beyond a subsistence level, consumers substitute 

other foods for staple grains. Urbanization is also slowing rice and wheat 

consumption. On average, China’s urban residents consume roughly a third 

the level of food grain as their rural counterparts. 

China’s grain production and demand for imports will be affected by 

improving the resource management and marketing policies discussed previously. Policies that pool land to achieve economies of size and scale will 

improve productivity and facilitate mechanization. Improved water practices will mitigate stress on water resources, allowing farmers to continue 

irrigated rice and wheat production. Using land and water resources more 

effi ciently, however, will induce farmers to move these resources into more 

profi table crops and may slow the growth of grain production. While food 

grain products are less vulnerable to the food safety issues that have rocked 

China’s horticultural and livestock product markets, improved marketing will 

enhance the value of high-quality varieties by segregating them from generic 

grains. Food grain producers are the primary targets of Government policy 

support in the form of direct subsidies, price supports, and publicly supported 

research.

In general, the infl uence of economic and policy trends is more pronounced 

for wheat than for rice. We will discuss how these trends affect wheat 

production, consumption, and trade, then follow up with a brief discussion of 

their effects on rice markets.

Wheat 

China is the world’s largest wheat producing country and, in some years, it 

is also a major importer.56 Imports have fallen in recent years due to slow 

consumption growth and a boost in production from yield improvements 

and policy support (Lohmar, 2004). China’s role in international wheat 

markets will depend on a variety of factors. Expanding the scale of farms, 

which could result from changes in land policies, may improve effi ciency 

since wheat production is more easily mechanized than most other farm 

enterprises. Much of China’s wheat production also depends on irrigation 

in some severely water-stressed regions in northern China, and water has 

much higher value in other uses than irrigated wheat, which could be easily 

purchased from international markets. China still seeks to maintain near selfsuffi ciency in wheat production. Given that China has committed to a more 

liberalized TRQ trade regime than other countries faced at this stage of their 

56 The European Union, which is made 

up of 27 countries and has a common 

agricultural policy, produces more 

wheat than China.
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development, it is turning to subsidy and price support policies to maintain 

domestic wheat production at levels close to domestic demand.57

China’s wheat production could gain from efforts to reform the land tenure 

system.58 Pooling land facilitates mechanization and standardization and 

reduces farmers’ transportation time to multiple fi elds and other production 

costs. Large plots would also facilitate more commercial, rather than semisubsistence, production practices (e.g., use of purchased seed rather than 

saved seed).59 More commercial production would induce farmers to investigate input quality more carefully and demand quality guarantees, which 

would help shake-out counterfeiting and other abuses in the under-regulated 

seed and chemical input industries and improve yields overall. Larger plots 

would also facilitate the substitution of capital for labor (such as harvesting 

with combines), increasing overall effi ciency, while larger plots with more 

secure rights would increase farmers’ incentive to invest in long-term productivity enhancement. For example, investing in land leveling would improve 

water conservation and yields in China’s irrigated wheat production.

While both wheat and rice production in China is heavily irrigated, wheat 

production is concentrated in areas with greater water stress and will be more 

vulnerable to water shortages. Wheat yields in China are much higher than 

world averages and the United States because of widespread irrigation. The 

Hai, Huai, and Huang (Yellow) River Basins are China’s primary wheat belt, 

with as much as 70 percent of wheat production occurring in that area.60 

Not only does this area have limited water supplies, but the rainfall that does 

occur is concentrated between July and September and cannot support winter 

wheat that grows from October to June. Thus, most wheat production in the 

region requires supplemental irrigation.61 As surface water systems dry up 

or become more unreliable, farmers are turning to ground water to irrigate 

wheat as ground water tables fall in large parts of the region. Since wheat is 

a low-valued user of water, falling groundwater tables or other conservation 

policies that raise the cost of water for irrigation will decrease wheat production in the region.

Reforming marketing policies to establish segregation, traceability, or more 

integrity of the overall system will have some effect on wheat trade, but not 

large. Grains are, by nature, less vulnerable to contamination from pesticide residues or organic material because they are covered by a husk and 

grow well above the ground. The State-owned grain marketing system in 

China, however, was costly, ineffi cient, and believed to lose a signifi cant 

percentage of the grain crop through inadequate storage practices that led to 

spoilage.62 The system was also geared to homogenous quality, and China’s 

rapidly expanding food processing industry increasingly demands specifi c 

qualities, such as protein and gluten characteristics, to make its food products, particularly for wheat (Lohmar, Wilson, and Bu, 2006). In the past, the 

demand for wheat with specifi c quality characteristics resulted in demand 

for imports since those characteristics could not be reliably procured from 

domestic producers. Future marketing reforms, particularly the increasing 

role of private grain traders, will help establish niche marketing for wheat 

with specifi c quality characteristics. China’s seed breeders are also developing more varieties with the characteristics in demand by food processors.63 

Marketing reforms may encourage more open attitudes toward reporting 

stock levels. Private traders can benefi t from information on local and 

57 Other countries, such as South Korea and Japan, raised tariffs and other 

import barriers for grains to maintain 

domestic production when they were 

at similar stages of economic development. But China is committed to a 

TRQ regime and also appears more 

sensitive to high grain prices, causing increased reliance on subsidies. 

China’s TRQ on wheat, however, is the 

most restrictive of all the products under TRQs (see box, “China’s Historical Grain Trade and WTO Accession”). 

58 This is true for the production of all 

grains and even horticultural products 

and cash crops in China.

59 Farmers in China are increasingly 

producing for the market rather than 

for their own consumption. Roughly 

40 percent of China’s wheat is marketed some time over the year, with the 

remaining 60 percent consumed by the 

household or traded with neighbors.

60 And an even higher percentage of 

wheat that goes to market in China.

61 An estimated 60-70 percent of wheat 

sown area is irrigated in this region 

and, since irrigated yields are much 

higher than rainfed yields, a far higher 

percentage of production depends on 

irrigation.

62 The grain marketing system has 

long suffered from overstaffi ng and 

fi nancial losses. China Grain Bureau 

statistics show that State-owned 

grain enterprises cut employment by 

2.36 million from 1998 to 2006, but 

still employed 948,500 in 2006 and 

incurred losses of over 3 billion yuan 

($375 million) (Nie, pp. 39-40). Stateowned grain marketing companies now 

carry out price support programs.

63 Farmer’s purchases of these seeds 

are typically subsidized by the seed 

subsidy program.
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national stock levels and make more informed buying and selling decisions. 

Stock level information will also help reduce the uncertainty that has long 

characterized China’s participation in international grain trade.

Agricultural policy will still play a role in China’s wheat trade. Direct subsidies and price supports have encouraged farmers to keep producing wheat 

even though it consistently brings the lowest profi ts among major crops 

in China. The Government accumulated large reserves when it purchased 

wheat to support prices during 2006-08. In the spring and summer of 2008, 

when world wheat prices were 40 percent above China’s wheat price, China 

held large wheat reserves that could have been exported at a substantial profi t 

without disrupting domestic markets. Instead, offi cials cut off most grain 

exports by restricting export quotas, eliminating an export tax rebate, and 

assessing a temporary export tax on wheat and other grains. China’s wheat 

exports plunged from 2.3 million metric tons during calendar year 2007 to 

125,000 metric tons in 2008, the lowest total since 1999.

Rice 

China is the world’s largest rice producer and consumer and net rice exporter 

in most years. This trend is projected to continue. China generally imports 

high-quality Jasmine rice and exports relatively low-quality Indica rice. 

When rural people move to cities, they tend to reduce their rice consumption 

as their diets become more diversifi ed. Rice production uses large amounts 

of irrigation water, but it is mainly grown in southern China where rainfall 

and surface water are abundant. Rice is more labor-intensive than other 

grains, and rice production may be affected by continued rising labor costs in 

China. 

Japonica rice produced in northeastern China is preferred by many urban 

consumers, and some is exported to Korea and Japan where it competes 

with exports from California. Some Chinese rice is also exported to Puerto 

Rico. China’s primary rice exports are low-quality Indica varieties that go 

to markets in West Africa, Southeast Asia, and Central Asia. China’s rice 

imports consist mainly of premium-priced Jasmine rice from Thailand.

Horticultural Products

China’s horticultural production has boomed in the last 10 years (Huang 

and Gale, 2006). Growth in horticultural production is largely in response 

to China’s growing domestic demand for these products, but exports have 

increased as well, particularly since WTO accession (fi g. 16).64 China is 

fi nding markets for its fruit, vegetable, and processed products exports all 

over the world, including Japan, South Korea, the EU, the United States, 

Russia, and Southeast Asia.65 The growth in China’s horticultural exports 

has been slowed by food safety concerns in recent years. Continued food 

safety concerns may dampen China’s capacity to continue export growth 

of fruit, vegetable, and processed products, particularly to more lucrative, 

higher income countries.66 Developing modern marketing chains that can 

provide greater safety assurances will help China overcome problems in 

export markets and increase domestic consumers’ confi dence in horticultural 

products.

64 Exports are still a small fraction 

of China’s total production of these 

products.

65 Many exported horticultural products are processed products, such as 

juices and canned, dried, pickled or 

frozen fruits and vegetables.

66 Exports to Japan—China’s largest 

food export market—plunged in 2008 

after pesticide-contaminated dumplings sickened Japanese consumers and 

eroded confi dence in foods imported 

from China.
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Other issues may serve to slow growth in horticultural production. China’s 

continued economic growth increases wages in rural areas, eroding the profitability of labor-intensive crops. In other countries, horticultural production often relies on migrant labor: workers that arrive in time for the busy 

season, typically for harvest and processing, then move away until the next 

year. These types of periodic labor markets have yet to develop in China, 

constraining many regions to cultivate only as much labor-intensive crops 

as they can harvest with local, sometimes household, labor resources.67 

Subsidies provided to grain producers may serve to limit land going into 

horticultural production, but thus far these subsidies are insuffi cient to make 

grains, on average, even remotely as profi table as horticultural crops.

Other policy changes may promote horticultural production in China. 

Reforming land tenure and credit policies may increase the effi ciency of 

China’s horticultural production, cause farmers to shift production to horticultural crops, and even help China resolve food safety issues in horticultural 

products. Clarifying land rights to make land transactions more marketbased would raise the opportunity cost of the land and induce farmers to 

shift land to higher value uses (similar to water). Land tenure policies that 

allow farmers to specialize and aggregate land into horticultural production 

will reduce costs and improve standardization. The development of farmer 

organizations could also serve this role. Both larger farms and farmer organizations, independently or together, would help producers bargain with 

marketing agents and processors to receive a larger share of the value of their 

production, facilitating rural income goals. Policies to provide credit for farm 

households may also help facilitate more modern production practices.

Livestock Products

As with horticultural products, China’s consumption of livestock products 

has grown rapidly in recent years, and these products are predominantly 

67 This also causes households and regions to produce multiple horticultural 

crops with different harvesting and 

processing needs so they can sequence 

these busy seasons, rather than specialize in one or two crops. 

Figure 16

China’s exports of horticultural products grew rapidly after 2001*

 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

*Date of China’s WTO accession.

Source: Economic Research Service calculations based on China customs statistics.

Billion U.S. dollars

Processed 

fruits, 

vegetables, 

juices

0

2

4

6

8

10

12

Fruits

Vegetables
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supplied by domestic producers. China’s consumption of pork, poultry, 

beef, and fi sh will continue to grow as incomes and urbanization increase. 

Per capita meat consumption by China’s wealthiest households, however, 

appears to have peaked at relatively low levels (Gale and Huang, 2007). 

These low levels of consumption in China’s high-income groups suggest 

that the potential for greater meat consumption may be weaker than indicated by forecasts that used per capita consumption in other developed Asian 

countries as their benchmark. Food safety concerns and outbreaks of animal 

diseases periodically disrupt meat, poultry, dairy, and fi sh consumption and 

could be a limiting factor for growth in both production and consumption.68

Despite growing domestic demand, China has been a net exporter of livestock products in most years (fi g. 17). China imports mostly livestock products that are low-value in the United States, such as chicken feet, wing tips, 

and offal. Pork imports surged temporarily between 2007 and 2008 when 

China’s hog sector experienced a severe downturn, but pork imports are 

minimal in most years. China also imports some dairy products. Demand for 

beef is growing, but China has not imported beef directly from the United 

States since the December 2003 discovery of BSE in a dairy cow in the 

United States. China also exports poultry, pork, and aquaculture products. 

Production tends to expand and contract cyclically in response to price fl uctuations and periodic disease outbreaks. Offi cials in many areas promote 

livestock production as a rural development program, but many farmers 

are abandoning traditional “backyard” modes of livestock production. The 

emergence of large Chinese meat and dairy companies in recent years has 

pushed development of more modern livestock production by large- and 

small-scale farms. 69

68 The 2004 outbreak of avian infl uenza in China caused Chinese poultry 

consumption to fall signifi cantly, even 

though humans cannot contract the 

disease from eating cooked poultry 

products.

69 A recent report by China’s Ministry 

of Agriculture states that roughly half 

of China’s pork production comes 

from producers with 50 head or more, 

a much larger percentage than only a 

few years ago. 

Figure 17

China’s net exports of beef, pork, and poultry

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Note: Negative numbers indicate net imports.

Source: U.S. Department of Agriculture, Foreign Agricultural Service, Production, 

Supply and Distribution Data, November 2007, accessible at 

http://www.fas.usda.gov/psdonline/psdHome.aspx.

1,000 metric tons

-600

-400

-200

0

200

400

600

800 Beef Pork Poultry meat 
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China’s transformation from predominantly backyard production to more 

modern production facilities operated at the village level will be facilitated 

directly by the availability of rural credit and development and extension 

of technology. A small share of livestock production is produced in large, 

fully modernized production facilities with temperature-controlled buildings, 

compound feeds, and use of growth hormones, particularly in poultry production.70 Household production is increasingly seen by policymakers as ineffi cient, and the waste from these operations contributes to environmental and 

water quality issues in rural areas. Thus, the Ministry of Agriculture (MOA) 

is engaged in a program to facilitate the consolidation of these efforts at the 

village level to improve their technological sophistication and curtail environmental effects. Increased availability of rural credit will assist in these 

efforts.

Other efforts to improve livestock production effi ciency include development and importation of improved breeds. China’s research institutions put 

less emphasis on developing livestock varieties than on seed varieties, but 

China has imported breeding stock to cross with domestic breeds in an effort 

to improve their weight gain performance and meat quality. These enhancements, along with the MOA’s attempts to improve the sophistication of 

production at the village level, will increase China’s production effi ciency in 

livestock products.

Oilseeds and Feed Grains

As China’s livestock production grows and develops, the demand for feed 

grains and protein meals will almost certainly increase. Given China’s 

emphasis on maintaining self-suffi ciency for food grains, the production of 

food grains will likely take precedence over the production of feed grains and 

oilseeds. Oilseed imports are already large after skyrocketing over the last 

decade. China has long been a corn exporter, but corn exports have fallen 

and imports could occur more regularly.

Oilseeds 

Oilseeds and vegetable oils are among China’s most important imports. 

China’s soybean imports were negligible in the mid-1990s and reached 37 

million metric tons during calendar year 2008. Soybean imports totaled 

$21.8 billion in 2008, including $8.4 billion from the United States, and 

imports of fats and oils totaled $10.8 billion (U.S. dollars). Vegetable 

oil imports include palm oil from Southeast Asia and soybean oil from 

Argentina, Brazil, and the United States. China’s soybean import boom has 

been driven by demands for vegetable oil and soymeal as a high-protein 

component of animal feed.71 The rising demand for vegetable oil and livestock feed is expected to continue, and China will rely on imports to meet 

this demand. 

Research institutes in China are developing biotech soybean varieties, 

but unlike the United States and Brazil—the world’s two largest soybean 

producers and China’s primary suppliers for soybeans—China’s Government 

has yet to approve any of these varieties for production. Yields for China’s 

domestically developed biotech soybeans lag behind internationally available varieties, and this lag is one reason why China has yet to approve 

70 Many of these hormones are legally 

banned in China, but illegal use is 

common. 

71 Until recently, China was a net exporter of soymeal, but still an importer 

of soyoil, indicating that the recent 

growth in soybean imports was driven 

more by demand for soyoil than for 

soymeal. 
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domestic varieties. There are also concerns, however, over the effects of 

biotech soybeans in direct human consumption. Most of China’s domestically produced soybeans are used to make tofu and other food products.72 

Once China improves its domestic biotech varieties to match internationally 

available biotech varieties, these varieties will likely be approved for production. If China were to adopt biotech varieties that match current yields, the 

adoption of these varieties would lower production costs and make soybeans 

more profi table, resulting in expanded acreage, higher domestic production, 

and lower demand for imports. The expanded acreage, however, would 

divert acreage from corn production, possibly increasing the demand for corn 

imports.

Policy support for grains affects China’s production of oilseeds. Price 

supports and subsidy policies for grain shifted crop plantings from soybeans 

and rapeseed to corn, wheat, and early rice in 2007. Thus, support for grain 

is one factor behind the surge in oilseed and vegetable oil imports. In 2008, 

China expanded price supports and subsidies for soybeans and rapeseed to 

spur a recovery in oilseed production.

Corn 

China is the world’s second largest corn producer (the United States is 

largest). Its corn consumption for animal feed and industrial uses has been 

growing faster than that of rice and wheat.73 Production has risen as well, 

as grain area shifted from food grains to corn. Despite growing demand, 

China has not imported signifi cant quantities of corn since the mid-1990s. 

China’s corn exports fl uctuate from year-to-year, depending on Chinese policies and trends in international versus domestic prices (Gale, 2002; 2004). 

Chinese corn competes directly with U.S. corn in South Korea and other 

Asian markets. China’s continued increase in corn consumption for feed and 

industrial uses will curb China’s corn exports and may turn China into a corn 

importer. 

Industry estimates suggest that corn use for animal feed has been growing at 

a moderate pace. Livestock feed accounts for about two-thirds of China’s 

corn demand. Revised statistics released in 2008 by China’s National 

Bureau of Statistics indicate that meat production rose about 3 percent per 

year from 1997 to 2007. Farmers in China primarily raise hogs and poultry, 

which convert grain to meat more effi ciently than beef cattle. Corn accounts 

for approximately 30 percent of total livestock feed. Chinese farmers use a 

variety of other feeds, including wheat, rice, bran from milling these grains, 

sweet potatoes, fi sh meal, oilseed meals, and byproducts from starch and 

alcohol production. Chinese cattle and sheep graze in pastures, at the edge 

of fi elds, and near roadsides, consuming relatively little grain. Because 

of the variety of feeds used, farmers are sensitive to corn-feed prices. 

Livestock production, however, is modernizing and the share produced by 

individual households is falling as China shifts to more commercial operations. Commercial operations rely more on corn and soybean feeds, but 

also improve the conversion ratios to reduce feed demand per unit of meat 

produced. Current policies to extend credit to rural areas may facilitate the 

modernization of the livestock sector and have spillover effects in the corn 

and soybean markets. 

72 China also exports a small amount 

of soybeans for human consumption, 

including those exported to the United 

States. 

73 In recent years, the fastest growing 

component of corn demand in China 

has been for industrial production of 

starches, corn sweetener, and alcohol.
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Corn yields in China have signifi cant capacity to improve, much more than 

for wheat and rice. China’s corn yields are less than 5 metric tons per hectare 

(2 mt/acre), far below the United States with yields closer to 9 metric tons per 

hectare (3.6 mt/acre). Thus, the development and adoption of new, higher 

yielding varieties could signifi cantly improve China’s total corn production.74 Improved agricultural technologies, including biotech varieties of 

corn, could boost corn yields and stave off import demand.75 Improved 

extension services and seed industry regulation could facilitate the development and dissemination of newly developed varieties. Larger plots or development of viable producer associations could also facilitate the adoption of 

improved varieties by lowering research costs or raising the aggregate benefi t 

of selecting improved varieties.

Cotton, Hides, and Skins

Another major area of agricultural imports for China in recent years has 

been inputs into the world’s largest textile, clothing, and shoe manufacturing 

industry. China’s production of these products not only serves the growing 

demand of 1.3 billion increasingly wealthy consumers, but also produces the 

world’s largest exports of these products. China’s export of these products 

grew throughout the 1990s, then surged after WTO accession in 2001.76 

While China is by far the world’s largest consumer of these inputs, it is 

unclear how much goes into products sold domestically versus how much is 

re-exported, and this is a major component of uncertainty on international 

markets for these agricultural inputs.

Exchange-rate adjustment, rising labor costs in China, and slowing growth 

in the global economy, may affect imports of cotton, hides, and skins. After 

holding its exchange rate fi xed for over a decade, China began allowing its 

currency to fl oat upward against the dollar in July 2005 (Gale and Tuan, 

2007). In the ensuing 3 years, the Chinese Yuan (CNY) gradually appreciated about 20 percent against the dollar, raising the cost of exports from 

China. At the same time, China’s labor costs have been rising at double 

digit rates and enforcement of labor and environmental regulations has been 

tightened, further eroding China’s international competitiveness in laborintensive industries like textile and shoe manufacturing. These factors could 

slow China’s export growth and temper China’s demand for cotton and 

hide imports. A lack of reliable statistics on domestic Chinese textile and 

shoe production, however, has made it diffi cult to assess whether growth in 

demand by China’s domestic consumers will keep its production boom going.

Cotton 

China has been a major cotton importer since WTO accession in late 2001, 

particularly since the end of the MFA in 2004. Under China’s WTO obligations, cotton is imported under a Tariff-Rate Quota (TRQ) regime similar to 

grains. Starting in 2003, however, China has imported cotton well beyond its 

890,000 mt TRQ without imposing the prohibitive 40 percent out-of-quota 

tariff, providing support to its surging textile industry.77 Cotton imports were 

2 million mt or more each year from 2004 to 2008, and peaked at 3.6 million 

mt in 2006.

74 Much of China’s corn on the North 

China Plain, however, is doublecropped with winter wheat or vegetable crops and planted in June rather 

than in the spring, creating a much 

shorter growing season than U.S. corn.

75 China has developed biotech corn 

varieties, but has yet to release them.

76 China’s WTO accession in 2001 

allowed China to be included when 

the Multifi ber Arrangement (MFA) 

was lifted in December 2004 which, 

until that time, imposed quotas on 

China’s and other WTO member’s 

exports of textile products to developed countries. Since 2001, China’s 

textile exports have tripled, resulting in 

soaring demand for cotton, hides, and 

skins as inputs into this manufacturing 

bonanza.

77 China has instead applied a complex “sliding scale” tariff on imports 

beyond the TRQ, which in practice has 

ranged from 5 to 25 percent.
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China’s domestic cotton production has little capacity to expand unless it 

encroaches on area sown to other crops. Conversely, grain subsidies and 

other policies to maintain grain production could limit the expansion of 

cotton production in many areas. China’s cotton production has already 

benefi ted greatly by biotech Bt cotton varieties that are relatively resistant 

to bollworm, so future gains from technology development will be lower 

than for other crops where such technologies have yet to be adopted. Cotton 

production in China depends on irrigation, but cotton uses less water than 

grain crops and also grows through the summer rainy season in the eastern 

production region, so it is less sensitive to disruptions in supplemental irrigation than wheat. Cotton production in the western Xinjiang region depends 

on water from snow pack in the surrounding mountains, and this snow pack 

is widely believed to be threatened by climate change (see fi g. 9). 

Hides and Skins 

In recent years, China has imported more than 2 mmt of hides and skins 

annually. The value of hides imported from the United States exceeds 

$800 million annually. Like cotton, these products go into the manufacture of consumer items, primarily shoes and clothing, much of which are 

re-exported. Since China’s beef industry is signifi cantly smaller than the 

United States’, demand for hide imports will likely continue. Processing 

hides and skins, however, can have negative environmental consequences, 

particularly on water quality. Recent efforts to improve environmental stewardship threaten the continued processing of hides and skins in China.

A ship loaded with containers is berthed at Qingdao, 

China’s leading port for trade in agricultural products

Photo by Fred Gale, Economic Research Service.
45

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Conclusion

China has come a long way in the last 30 years. Since reforms began in 

1978, China has risen out of the ineffi ciencies of planned production and 

marketing to experience one of the longest and most robust periods of 

sustained economic growth in world history. This fact is even more impressive given China’s large size, and the implications of its rising affl uence 

reverberate around the world. As the world’s largest agricultural economy 

with 1.3 billion increasingly wealthy consumers and 200 million farm households, a ripple in China’s agricultural production or consumption can translate into a wave on world agricultural markets. 

China is entering a new stage in its reform of markets and production practices. Agriculture now must supply quality, safety, and other attributes 

rather than just quantity. The environmental and natural resource costs of 

maintaining high agricultural output are becoming increasingly evident. The 

objective of maximizing economic growth has given way to a more nuanced 

set of goals that focus on income distribution and eroding physical and social 

infrastructure in rural areas. Offi cials now emphasize the importance of 

spreading technology, investment, and education to rural areas. 

These issues stem from China’s enormous success at generating wealth and 

industrial development over the last 30 years and are not unique to China. 

Many of these problems also have market-based solutions, but require more 

modern market-supporting mechanisms, such as clearly defi ned property 

rights and open, contestable, dispute settlement institutions. Such modern 

market-supporting institutions, however, are still in their infancy in China. 

The urgency of these problems, coupled with Government’s continued 

tendency toward interventionist solutions that carry over from the collective 

era, results in policy solutions that could be effective, but are not necessarily 

effi cient, and may not be adaptable to future problems. Establishing modern 

marketing institutions can help resolve current and future issues; however, 

establishing these institutions is costly and time consuming. The cost of 

interventionist policies is less expensive, in the short run, because the institutional legacy of the planned economy lends itself to such policies.

China’s future agricultural production, consumption, and trade will depend, 

in part, on how these issues are resolved. Interventionist policies intended 

to address short-term crises may have unintended long-term consequences. 

In the 1990s, China sharply raised grain prices and pressured farmers to 

increase grain output. The resulting production surge depressed grain prices 

and disrupted markets during 2000-03. Such policies can also postpone 

needed economic adjustments, consequently building up greater pressure. 

Restrictions on rural-urban migration in past decades facilitated urban 

income growth and kept cities free of slums, but it built up a huge reservoir 

of surplus rural labor. The land tenure system preserved short-term stability 

and equality, but it has prevented adjustments needed to commercialize agriculture and generate higher per capita farm income.

Establishing independent market-supporting institutions will allow those 

affected by problems to address them as they arise. In addition, the path 

taken by policymakers in China will affect the distribution of the economic 
46

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value of production. With interventionist policies, local leaders and their 

agents in Government-invested businesses will want a portion of the 

economic returns as compensation for their efforts, dulling the incentives 

for producers and other businesses to respond effectively. Modern marketsupporting institutions, on the other hand, will provide more opportunities for 

producers or more effi cient processors and traders to organize themselves and 

directly reap the benefi ts of these actions.

The economic and agricultural production growth China has achieved thus 

far has been relatively easy to produce by establishing incentives, marketbased trading, and allowing regional specialization. In order to achieve 

further growth, China will need to confront the more diffi cult issues outlined 

in this report. China’s offi cials recognize many of these issues and are experimenting with many innovative policies, reforms, and plans. While many 

policies remain interventionist and were established by bureaucratic decree, 

China is tentatively increasing the authority and activity of the courts and the 

sanctity of laws passed by the National People’s Congress, strengthening and 

clarifying property rights, establishing a land registration system, and experimenting with water rights trading. Reforms are evolutionary and exploratory 

rather than revolutionary. Continued movement to establish these institutions 

bodes well for China’s ability to guide itself through the more complex issues 

that face such a large, diverse, and rapidly developing economy. 
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Lohmar, B. and J. Hansen, “Interactions Between Resource Scarcity and 

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Zhang, W. “Application of Food Safety Management System in Dairy 

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