China’s 2014 State Policy on Rural Development and the Agriculture Industry: Investment Implications

May 27, 2014 Posted by China Briefing Reading Time: 4 minutes

By Camille Chen

SHANGHAI – Earlier this month, China’s Ministry of Agriculture hosted a conference in Gongan County, Hubei Province, to showcase a mechanized high-efficiency production method for the country’s high-demand canola crop.

This showcase exemplifies the Ministry’s recent efforts to encourage the adoption of modern farming machinery in lieu of traditional farming practices in China – a state policy initiative outlined in the Circular on Comprehensive Deepening of Rural Reform and Accelerating Agricultural Modernization (No.1 Central Document).

The No.1 Central Document outlines China’s plan for rural development by indicating where state resources and business opportunities should be allocated within the country’s agriculture sector.

Summary of Key Points

The overall aim of No. 1 Central Document is to ensure national food security by strengthening domestic agricultural production and closing developmental gaps between rural and urban regions. It outlines the following initiatives to achieve these two core goals:

Improve China’s national food security system
Intensify support and protection for the domestic agriculture industry
Establish state mechanisms for sustainable agricultural development in the long term
Deepen rural land reform
Establish new forms of agriculture management
Accelerate innovation in financial services for the agriculture sector
Balance rural and urban development
Improve rural governance

On a broader level, the Chinese government is aiming to ensure national food security by dedicating a certain proportion of the country’s land to agriculture (especially farming grain), improving the pricing and monitoring system for food and increasing safety standards and their enforcement. It is also planning to increase participation in international trade while strengthening cooperation with bordering countries in farming and agricultural development to augment China’s domestic food supply.

China’s No.1 Central Document also emphasizes the need to strengthen the country’s domestic agriculture industry and rural economy via a market framework.

Noting that the large gap between rural and urban development creates significant rural-to-urban migration and inequality that can result in societal instability, the document suggests that a stronger agriculture industry could help close China’s development gap.

The policy document states that the government additionally plans to maintain and build upon its current system of providing subsidies to farmers as well as environmental protection initiatives. It urges domestic businesses and local governments to invest in rural developmental initiatives, assist farmers in obtaining loans and cooperate with the central government to establish innovative agriculture projects.

The document also outlines the government’s intention to further modernize and industrialize the country’s rural areas. Currently, many farmers in China’s rural areas still rely on small plots and lack high-tech faming equipment. In order to transform these farms into larger mechanized production sites featuring high-tech farming equipment, the government is encouraging farmers, businesses and research institutes to work towards developing more innovative science and technology for agriculture. It also plans to build additional infrastructures for communication and transportation channels that can better connect rural farming sites to the market.

What this Means for Foreign Investors

The policy implications of the No.1 Central Document is positive news for foreign firms able to provide the machinery and technology needed to modernize farming methods in China. According to an official at the Ministry of Agriculture, China still relies heavily on foreign imports for high-tech farming machinery. Although China is the second largest manufacturer of farming equipment in the world, with over 1,800 medium-sized enterprises dedicated to farming machinery production, the country’s combined annual productivity is only equivalent to that of Deere & Company, an American producer of agricultural hardware.

Domestic firms have complained that foreign manufacturers limit industry growth, but China currently lacks the human capital, funding and infrastructure necessary to develop sophisticated farming machines able to compete with foreign products. Therefore, until domestic companies are able to manufacture high-tech farming equipment to replace foreign products, there are still plenty of opportunities for foreign businesses and investors.

China’s goal of increasing production efficiency and environmental protection simultaneously will require improved farming techniques that countries with highly mechanized agriculture industries are able to provide. In other words, the Chinese government’s plan to industrialize and modernize the agriculture sector is likely to generate higher demand for foreign machinery and technology in the short-run while creating numerous opportunities for industry investment in the long-run.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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