Monthly Archives: April 2009

When the Communist Party announced last October that it was reforming rural property rights, it was initially greeted as a radical move that would finally set Chinese farmers free from the shackles of the state.

The Party communiqué was actually far less revolutionary than the headlines suggested – largely ratifying existing practices and assuring farmers that their land rights would be solidified. Most importantly, Beijing remained opposed to granting individual farmers the right to mortgage their land.

But a new pilot project in the northeast province of Liaoning, where 151 rural households have been allowed to use their land-use rights as collateral for mortgages, shows that change may be afoot. By giving farmers practical access to credit for the first time, the pilot project has the potential to turn rural households into economically significant players.

Liaoning’s Faku county is the first to be selected as part of an experiment launched by the People’s Bank of China to allow a handful of rural counties in nine provinces to pilot new financial products. Whether this experiment is extended to other counties will indicate whether a breakthrough in rural financing is likely.

Extending the project nationwide would boost agricultural productivity and increase rural household incomes. Beijing wants to expand credit to help farmers weather the economic downturn in the short term and to boost rural consumption in the long term.

Under current law, farmers are allowed to transfer their individual land-use rights but cannot use them as collateral for mortgages. This massively restricts farmers’ ability to invest and consume.

The legal regime for rural land developed over the past three decades. After decollectivisation in the early 1980s, farmers received 15-year individual cultivation rights for a set amount of agricultural land. These were subsequently extended to 30 years in the 1990s.

Since then, various laws have gradually turned these informal use-rights into much more formal and secure property rights. Together, these laws supposedly grant individual farmers an indivisible, perpetual property right to their land – including the ability to lease out or transfer their use-rights.

However, Beijing views land reform as a trade-off between economic development and social stability: privatising land would create huge assets and increase agricultural productivity and rural incomes, but it would also risk separating farmers from their ultimate source of financial security – their land.

Although the broad trajectory of land reform supports more flexible rural land-use rights, Beijing has opposed granting individual farmers the right to mortgage their land for social and, therefore, political reasons.

Partly, the government fears a return to the dark old days of pre-Communist China when, according to Party propaganda, peasants were rent slaves bound to unscrupulous and rapacious lenders. But today’s prohibition on mortgaging farmland, which prevents farmers from improving their circumstances through better access to capital and credit, amounts to an alternative form of economic servitude.

If Liaoning’s pilot project were extended nationwide, it would boost agricultural productivity and increase rural household incomes – a vital step towards shifting the economy to a more sustainable, consumption-based model.

Fears that landless farmers potentially pose a risk to social stability could scupper any genuine reform – but any loosening of the shackles that tie farmers to the land is a positive development. Watch this space.

By Tom Miller and Arthur Kroeber

A couple of months ago, a number of excitable reports predicted that mass lay-offs in China’s export heartlands could spell social chaos. Twenty million angry migrant workers had lost their jobs and revolt was in the air, we were told.

So just how bad is the labour situation? Not nearly as bad as many people feared.

According to a recent survey of 68,000 migrant households in 31 provinces by the National Bureau of Statistics, 23m of 140m migrant workers failed to find jobs after this year’s lunar New Year in January. While 11m returned to the cities to look for work after the holiday, 12m stayed at home.

Since then, reports from individual provinces suggest that many of those workers have also returned to the factories and building sites.

In Guangdong province – a major export region that is home to around 20m migrant workers – the local government estimates that of the 10m migrant workers who went home for the lunar New Year, 9.5m have returned to the province. Of these, about 5 per cent (or 460,000 people) had not found jobs. As the FT’s South China correspondent Tom Mitchell pointed out, in the context of a province with a total population of 110m, half a million migrants is a sizeable but manageable army of unemployed.

Evidence from Henan province, one of the biggest sources of migrant labour in the country, confirms this trend. Many more migrants stayed at home after the New Year than in past years, but most have since returned to work or found local employment.

According to one survey of migrants in Xinyang, a prefecture-level city in southern Henan, 500,000 of the 650,000 migrants who returned home for the holiday had left again by mid-February. Of the 150,000 who remained, 50,000 found local work, leaving 100,000 – or 4 per cent of the total 2.7m area migrants – temporarily unemployed.

Aside from some localised protests directed at a handful of individual factories, laid-off workers have been far busier finding new jobs than venting their rage. This is unsurprising: migrants working in export factories and construction sites are accustomed to finding work where they can get it and many have been laid off before. Chinese migrant labourers are among the most flexible in the world.

Past experience also suggests that temporary economic hardship may provoke isolated protests but is unlikely to cause widespread social or political tensions. Between 1995 and 2005, China’s state enterprises shed 50m jobs. The laid-off workers lost what they had believed were jobs for life, which also provided them with food, education, health care and pensions. They had no skills and were effectively unemployable elsewhere.

Inevitably there were riots, particularly in the hard-hit northeast – but these were aimed at specific factories rather than the government or political system in general. And there was no serious, long-term damage done to China’s social fabric.

This is not to make light of the current situation: millions of vulnerable migrants have lost their jobs and times are tough. But the resilience of China’s workers should not be underestimated, and fears of social unrest caused by unemployed migrants have been greatly exaggerated.

By Tom Miller and Will Freeman

“Rebalancing the global economy” is the mantra of the day – and China, we are told, must play its part. That means shifting China’s economy away from an unhealthy reliance on exporting goods to foreign consumers and instead boosting consumption at home.

Last week, we argued that China’s fast pace of urbanisation, which is projected to see the urban population rise from 600m today to more than 1bn by 2030, would keep demand for commodities high. It seems a small leap of logic to conclude that growing urbanisation – and the accompanying rise of an “urban middle class” – will have a similar impact on consumer goods.

Last autumn’s sudden collapse in commodity prices left a lot of China bulls with egg on their faces. Didn’t China’s insatiable demand for stuff, driven by a long-term process of urbanisation and rising incomes, guarantee the good times would roll for another two or three decades?

For the past seven years, commodity prices were essentially considered a simple function of Chinese demand. As the world’s top consumer of aluminium, copper, lead, nickel, tin, iron ore, steel, coal, wheat, rice, palm oil, cotton and rubber, China was thanked (and blamed) for heralding a new era of inflated raw material prices. After the commodities crash, this theory appears in tatters.

Indeed, over the next two or three years China is likely to play only a small role in setting global commodity prices: even if Chinese demand recovers, markets will be overwhelmed by shrivelling demand everywhere else.

But after the rest of the world stabilises and excess production capacity is absorbed – somewhere between 2010 and 2013 – China will again emerge as the key driver of global demand. Assuming that Beijing maintains economic and social stability – and there is no evidence to suggest that it will not – the pace and scale of industrial and urban development in China should drag up commodity prices. China’s enormous size renders its urban growth even more significant for global markets than was Japan’s in the 1960s and 1970s.

The pace of urbanisation in China, largely driven by rural migrants fleeing the penury of the fields for a better life in the city, is unprecedented. In 1980 a paltry 20 per cent of Chinese citizens lived in urban areas, a figure associated with the poorest countries on earth. By 2030, when more than 1bn Chinese citizens will live in towns and cities, that figure will reach 70 per cent – a higher proportion than in Japan or Italy today.

A recent study by the McKinsey Global Institute forecasts that 100 new cities with populations of 500,000 to 1.5m will mushroom across the country over the next 15 years; these will be joined by a further 60 new mid-sized cities with populations of 1.5m to 5m. By 2025, current trends suggest that six new cities – Tianjin, Guangzhou, Shenzhen, Wuhan, Chongqing and Chengdu – will join Beijing and Shanghai with real urban populations exceeding 10m.

As China’s growth and urbanisation continues for another couple of decades, Chinese demand for commodities will rise substantially – especially hard commodities used for building houses and roads. China has only just reached the most commodity-intensive stage of urbanisation, with metal intensity four times higher than in developed countries and twice as high as in other developing countries, according to the World Bank.

The uptick in metal intensity, which began in the mid-1990s and accelerated at the beginning of the 2000s, correlated with an increase in the urbanisation rate from 30 to 40 per cent. In 2007, more than 50 per cent of Chinese steel and 44 per cent of copper demand was gobbled up by the construction and infrastructure industries. Metal intensity growth is projected to peak along with the population growth rate around 2015, but remain high through 2030.

Global commodity markets have tanked and Chinese demand has stuttered. But the hungry dragon is not yet sated – he’s just pausing between courses.

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