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Cablegate: The New Socialist Countryside One Year Later

VZCZCXRO7370
RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4338/01 3400707
ZNR UUUUU ZZH
R 060707Z DEC 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 2779
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS SECTION 01 OF 04 BEIJING 024338

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB U/S SHEERAN, A/S SULLIVAN, EAP DAS
CHRISTENSEN
TREASURY FOR OASIA/CUSHMAN
USDA/FAS/ITP FOR SHEPPARD

E.O. 12958: N/A
TAGS: ECON EAGR PGOV SOCI CH
SUBJECT: The New Socialist Countryside One Year Later

REF: (A) 05 BEIJING 20124

(B) BEIJING 4224
(C) BEIJING 5099
(D) BEIJING 5874
(E) BEIJING 19660
(F) BEIJING 11704
(G) BEIJING 23786
(H) BEIJING 21970
(I) BEIJING 10890
(J) BEIJING 2661
(K) BEIJING 13790
(L) 05 BEIJING 20770
(M) SHANGHAI 7090
(N) CHENGDU 981
(O) GUANGZHOU 30954
(P) SHENYANG 697
(Q) SHENYANG 618

SUMMARY
-------

1. (SBU) One year after its launch in October 2005,
officials at all levels emphasize that the Central
Government's New Socialist Countryside policy --
tagged by the State Council as China's top policy
priority for 2006 -- should be understood as a long-
term endeavor that will not offer immediate relief to
rural residents. Rural experts welcome the focus on
rural problems, but they worry that what are already
insufficient resources are being misused by local
officials for short-term political gain. Compounding
the funding problem is the recent elimination of the
agricultural tax, a move that has greatly compromised
the ability of county governments to deliver social
services such as education and health care. Officials
and researchers maintain that non-farm income, derived
from part-time work in urban areas or wage income in
the countryside, provides the best opportunity for
farmers to increase their incomes. Observers
uniformly agree that despite recent gains, government
efforts to boost consumption in the countryside and
achieve more balanced development are constrained by
low incomes and high precautionary savings in rural
areas. END SUMMARY.

The New Socialist Countryside One Year Later
--------------------------------------------

2. (SBU) With the launch of the New Socialist
Countryside in October 2005, the Central Government,
as in previous years, has focused much of its
attention on the rural economy. Policymakers and
rural experts emphasize that rural reform is a long-
term endeavor, and that the current policy will not
offer immediate relief to farmers. The following
policy pronouncements from Beijing over the past year
indicate that the Central Government, with an eye
towards maintaining rural stability and balancing
regional economic growth, places a great deal of
importance upon the success of the New Socialist
Countryside policy:

--October 2005: The Eleventh Five-Year Plan draft,
adopted by the Fifth Plenary Session of the 16th CPC
Central Committee on October 11, launched the New
Socialist Countryside policy, which has five basic
elements: (1) balancing urban and rural development,
(2) developing modern farming techniques, (3)
comprehensively deepening rural reforms, (4)
developing public services in rural areas, and (5)
increasing farmers' incomes (Ref A).

--November 2005: The Central Economic Work Conference,
convened by the State Council and CPC Central
Committee from November 29 to December 1, reiterated
China's commitment to establishing the New Socialist
Countrysie as one of its goals for 2006 (Ref A).

--Feruary 2006: China's State Council announced on
February 21 that establishing the New Socialist
Countryside would be the Central Governmet's top
policy priority in 2006, unsurprisingly naming solving
rural problems as its key objective for the third

BEIJING 00024338 002 OF 004


consecutive year (Ref B).

--March 2006: During the March session of the
National People's Congress (NPC), the Central
Government announced it would spend an additional RMB
42.2 billion (USD 5 billion) for agriculture, rural
areas, and farmers in 2006. The 14 percent increase
in expenditure prioritized rural infrastructure
projects and subsidies for grain producers and farmers
utilizing agricultural machinery (Ref C and D).

--September 2006: Premier Wen Jiabao declared at a
rural reform conference that China is entering a third
phase of reform that will build on the New Socialist
Countryside and focus on local institution-building
and governance (Ref E).

3. (SBU) Critics suggest that budget support for the
policy remains inadequate. A researcher at the China
Academy of Social Sciences (CASS) who also serves as a
policy advisor to the Central Government said in June
2006 that while Central Government funding for rural
programs is increasing, the allocation as a percentage
share of the total budget remains relatively unchanged,
and the expenditures are insufficient (Ref F). The
advisor noted that the Central Government's budget to
support agriculture, rural areas, and farmers
increased to RMB 339.7 billion (USD 42.5 billion) in
2006 from RMB 293.5 billion (USD 36.7 billion) in 2005,
but he lamented that the Central Government's overall
budget expenditure has been increasing at an average
of 17-18 percent in recent years, and the rural
account should be viewed in that context. He also
noted that 16 or 17 Central Government ministries and
several layers of local government (county, township,
and village) ultimately depend on New Socialist
Countryside expenditures.

Funding Shortages and the Public Finance Crisis
--------------------------------------------- --

4. (SBU) According to provincial and local government
officials, lack of funding and poor coordination
between ministries is detrimental to the provision of
social services. County governments, primarily
responsible for delivering social services such as
education and health care, previously depended on the
agricultural tax for their revenue. Since the
elimination of the agricultural tax, however, county
governments complain that the Central Government
allocates only 30 percent of the resources they need
to provide social services. The Director General of
the Department of Rural Development at the State
Council's Development Research Center (DRC) stated in
June 2006 that recent studies by the DRC reveal that
most county governments are not able to meet the
modest funding levels required to implement the rural
cooperative medical insurance program under the New
Socialist Countryside. (Note: As outlined in Ref D,
the Central Government announced it would spend RMB
4.7 billion (USD 600 million) on rural health during
2006. The Central Government provides a subsidy of
RMB 20 per capita for the program, with an additional
RMB 10 from provincial governments, RMB 6 from
counties, and RMB 4 from townships. End Note.)

5. (SBU) In Northeastern China's Heilongjiang Province,
for example, rural watchers expressed concern that
funding shortages for social programs at the local
level may undermine rural policy initiatives (Ref Q).
Throughout China, officials worry that the burden on
local governments will lead to a public finance crisis,
with local governments tending to compensate for the
funding shortfall by borrowing money from financial
institutions. The Assistant Mayor of Chi Bi City in
Hubei Province said in November 2006 that the public
finance crunch is particularly acute in the rural
areas in his district (Ref G).

Misuse of Limited Resources Undermines Implementation
--------------------------------------------- --------

6. (SBU) Further exacerbating the funding shortage

BEIJING 00024338 003 OF 004


problem is that New Socialist Countryside resources
often are misused by local officials for their own
short-term political gain. Leaders in many localities
have misappropriated funds to build model villages as
"image projects" in an effort to help their promotion
prospects. Model villages -- with a cleaner
environment, running water, renewable energy, and a
more developed appearance -- are not necessarily
misguided projects. Most model villages, however, are
constructed with a local official's political gain in
mind, and media reports as well as our discussions
with officials and researchers over the course of
numerous visits to rural areas suggest that these
projects are not sustainable.

7. (SBU) The Central Government recognizes the model
village problem and does not want local officials to
abuse the New Socialist Countryside slogan for their
own gain. Early in 2006 a Xinhua News Agency report
warned about the dangers of model villages,
characterizing them as a "disturbing phenomena" and
"an opportunity for cadres to vie with each other for
political achievements" (Ref I). Similarly, an
editorial in the China Daily in November 2006
criticized model villages, stating that local
government leaders want to "make political
achievements to boost their chances of promotion" or
"make profit for themselves" (Ref G).

8. (SBU) In Central Gansu Province, Emboffs visited a
model village of 27 housing units that serves as an
example of one project that may promote a local
government official's career but does little to
advance economic development in an extremely poor
region. The units are insufficient to house the
nearly 300 families in the village, waste invaluable
resources of the Provincial Poverty Alleviation Bureau
(RMB 26,000 per house), and strain limited public
finance coffers (Ref I).

Non-Farm Income Best Opportunity for Rural Residents
--------------------------------------------- -------

9. (SBU) Officials and researchers maintain that non-
farm income, derived from part-time work in urban
areas or wage income in the countryside, provides the
best opportunity for farmers to increase their incomes.
At the China Development Forum in March 2006, Liu He,
Vice Minister, State Leading Group on Finance and
Economic Affairs, stated that while implementing the
New Socialist Countryside is an important task for the
Central Government, policymakers must continue to
promote urbanization in order to encourage surplus
laborers to migrate to cities. Liu stated that as
much as 55 percent of rural income (approximately RMB
1700) may be derived from part-time work. (Note:
Provincial government officials routinely state that
non-farm income accounts for 30 to 50 percent of rural
incomes. End Note.)

10. (SBU) China's urbanization drive is attracting
rural residents to cities at a breakneck pace. As a
result, there are no figures to accurately reflect the
size of the rural population. Rural experts agree
that the idea that there are 800 million Chinese
farmers is outdated, and conditions in the countryside
demonstrate that the official migrant population
figure, ranging from 120 million to 200 million
workers, does not reflect the current situation. Our
visits to the countryside in the past year suggest
that most young men have departed to seek work in the
cities, and interviews with farmers suggest that they
are heavily dependant upon remittances from relatives
living in urban areas.

11. (SBU) In addition to providing surplus labor, many
rural areas are attempting to cultivate non-
traditional agricultural products and identify other
opportunities for non-farm income. Meetings with
provincial government officials often focus on the
need to modernize the agricultural sector, including
promoting agro-processing. Visits to the countryside
usually reveal that farmers are growing non-

BEIJING 00024338 004 OF 004


traditional crops such as mushrooms or beans from
which they can earn a higher return. In some areas,
in addition to farming, rural residents are engaged in
the tourism sector to supplement their income (Ref H).

Consumption Lagging in the Countryside
--------------------------------------

12. (SBU) Observers uniformly agree that despite
recent gains, government efforts to boost consumption
in the countryside and achieve more balanced
development are constrained by low incomes and high
precautionary savings in rural areas. The urban-rural
income gap continues to grow, with urban incomes
exceeding three times rural incomes in 2006. Many
economists believe the figure is really closer to six
to one if account is taken of the reduced purchasing
power caused by higher costs for services such as
education, health care, and pensions in rural areas.
Education and health care in particular continue to be
a priority for farmers, and a major reason for
precautionary savings in the countryside is that
farmers save to pay for school fees or for medical
care. To alleviate these concerns, the New Socialist
Countryside policy aims to provide free rural
compulsory education for nine years and implement the
rural cooperative medical insurance system, but
anecdotal evidence to date indicates that the policy
has fallen short.

13. (SBU) In Central China's Hubei Province, for
example, rural incomes remain low and government
policies have failed to boost consumption, according
to Provincial Government officials (Ref G). Hubei's
rural per capita income is below the national average
at RMB 3099 (less than USD 400), and observers in
Wuhan (Hubei's provincial capital) state that a sharp
contrast exists between Wuhan, which is attracting
large international retailers such as Wal-Mart, and
Hubei's countryside, where branded companies are
unwilling to venture due to a low rate of consumption.

RANDT

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