Financing and Investment in China s Agricultural and Rural Development

Transcription

1 Financing and Investment in China s Agricultural and Rural Development Professor Yang Qiulin China Agricultural University Bamako, Mali April 27, yangql@cau.edu.cn 1

2 Financing and Investment in China s Agricultural and Rural Development Professor Yang Qiulin, China Agricultural University (CAU) Bamako, Mali April 27, 2010 As a large agricultural and developing country with a long history, China boasts a broad territory with a rural population of 721,350,000 and 121,716,000 ha.s of arable land. The problems related to agriculture, rural areas, and farmers are the most essential and important issues for China s socioeconomic development, and constantly draw high attention from the government and arouse deep concern among various social circles. Over the six decades since the founding of the People s Republic of China, remarkable achievements have been made in its agricultural and rural development. The total output value of agriculture, forestry, animal husbandry and fisheries has increased from 46.1 billion yuan in 1952 to 5,800.2 billion yuan in 2008; the total output of grain has increased from million tons in 1978 to million tons in 2008; the absolutely poverty-stricken rural population has decreased from 250 million in 1978 to million in 2005, and the incidence of poverty has witness a drop from 30.7% to 2.5%. We may account for the above-said progress from different aspects, out of which a key reason is the constant increase of the financial investment made to China s agricultural and rural development. Next, I would like to deliver a presentation on how we finance for the agricultural and rural development in China, as well as the role of financial investment in promoting the development of agriculture and rural areas. Part I: Problems of Financing in China s Agricultural and Rural Development I. Objectives of the reform of investment and financing systems in China Since the implementation of the policy of reform and opening up, China has carried out a series of reforms to its investment system along with the deepening of its economic 2

3 restructuring. The highly centralized investment management mode under the traditional planned economic system has been terminated, while a new situation featuring the diversification of investment bodies, multiple financial sources, diversified investment methods, and market-oriented project building has been preliminarily formed. The Decision of the State Council on Reforming the Investment System issued in July 2004 further advanced the reform of investment system in China. 1. The guiding theory of the reform of investment system in China is: in line with the requirements of improving the socialist market economic system, give full play to the basic role of the market in resource allocation under the State s macro-economic control; establish the dominant position of enterprises in the investment activities; regulate government investment activities; protect the legal rights and interests of investors; create a market environment favorable to the fair and orderly competition of various investment bodies; promote the rational flow and effective allocation of the factors of production; optimize the investment structure; enhance the return of investment; boost the coordinated economic development and overall social progress. 2. The goals of the reform of investment system in China are: reform the government s enterprise investment management system, and secure the enterprise s autonomy in making investment in line with the principle that an investor is the one who shall make the decision, gain the profit and assume the risks ; rationally define the government function in investment, enhance the scientification and democratization level in making investment decisions, and establish the system of accountability for investment decisions; further expand the financing channels, and develop multiple financing methods; cultivate standardized investment service agencies, strengthen the industrial self-regulation, and promote fair competition; improve the macro-investment control system, ameliorate the methods of control, and better the means of regulation; accelerate the legislation process of the investment sector; reinforce the investment supervision, and maintain the order of a standardized investment and construction market. By deepening the reform and opening wider to the outside world, ultimately establish a new investment system characterized by the market-driven investment, enterprise autonomy in decision-making, independent bank loan approval, diversified financing methods, standardized agency services, and effective macro-control. 3

4 3. The reform of financing and investment systems for the agricultural and rural development in China must be consistent with the national reform. Given the characteristics of agricultural development, the State has, by adhering to the guideline of agriculture nurtured by industry, and rural areas supported by urban areas, further adjusted the distribution of the national income in a reasonable manner. More assistance will be provided to the agricultural and rural development through the national finance. The market-oriented reform of the financing sector will be constantly deepened. Improve the quality and standard of rural financing services, actively guide the investment of social resources to agriculture and rural areas, and form an investment and financing system with Chinese characteristics, in accord with the law of market economy, and conducive to China s agricultural and rural development. II. Principles of financing for the agricultural and rural development in China Some frequently encountered difficulties for investment project financiers include the differences in the capital sources and financing modes, as well as the differences in the cost of funds and risk levels. Capital from the same source can often be obtained by different means, and the same financing mode can always be applied to different financing channels. Generally, the financing for agricultural and rural development shall respect the principles as follows: (1) Principle of market liability The overall direction of China s economic restructuring is to establish a sound socialist market economic system in line with the Chinese national conditions. Under such a system, the agents of market activities are clear, with explicitly defined authority, responsibility and interest relations. The financing bodies enjoy the benefits created by financing and assume the underlying risks. Therefore, the financing process for agricultural and rural development shall follow the law of market economy, define the financing liabilities, and thoroughly implement the principle that an investor is the one who shall make the decision, gain the profit and assume the risks. (2) Principle of low cost In the investment projects for rural construction, most of them are characterized by large investments, long project life cycle, and high project cost. However, agriculture is a basic industry of national economy, and due to its public nature, much of its contents requires enormous investment but generates low return, such as ensuring the national food safety. 4

5 Thus, how to lower the cost of financing has become a highly important issue in this regard. Investors may flexibly take advantage of a series of incentive policies for agricultural investment formulated by the state government, financial support to the rural development, as well as social concerns and contributions to the agricultural development, rationally design the project investment and financing structure, and reduce the investment and financing cost as much as possible. On the one hand, improve the design of the project investment structure, strengthen the project s economic intensity, reduce the project risks and lower the debt capital cost; on the other, choose and decide on the financing channel in a scientific and rational manner, and optimize the capital structure and distribution of financing channels in order to lower the project investment and financing cost to the utmost extent. (3) Principle of risk spreading The agricultural and rural development and construction are closely related to the nature and intertwined with the economic reproduction and natural reproduction. There exist economic risks (e.g. market fluctuations), social risks (e.g. policy changes), as well as different natural risks including droughts, floods, diseases and pest plagues. Therefore, all the risk liabilities in investment and financing shall be reasonably and effectively divided between different investors, loan-issuing banks, and other stakeholders in an effort to thoroughly implement the principle of risk spreading and create the smallest resource obligation for the investors. In order to achieve the said goal, we must rationally select the investment and financing methods, and spread the risks through reasonably designing the financing structure. For instance, the investor may have to assume all risks during the construction and trial production periods. However, after the project is finished and put into operation, the risk liabilities of the investor will be limited to a certain scope, while the loan-issuing bank may also have to bear part of the management risks. The sharing of project risks also requires the optimization of the investment structure. The investor may ensure the marketing of part of the project products through the introduction of several shareholders (investors), whereby the market risks will also be rationally spread in a timely manner. (4) Principle of combining long-term and short-term financing The financing activities for agricultural and rural development include both long-term financing for fixed investment (most of the domestic long-term loans are mid- and long-term ones for years, and those in the foreign countries may extend to as long as more than 20 years) and short-term financing for flowing capital within several months to one year. When deciding on whether we shall adopt a long-term or short-term financing strategy, we must take into account such dimensions as the best returns, lowest cost and 5

6 smallest risks. Thus, an investor needs to combine the short-term and long-term financing when designing the project financing structure in a bid to lower the financing cost and avoid the financing risks. (5) Principle of optimizing the financing structure The optimization of the financing structure refers to optimizing the combination and composition of various elements in the circulation of funds. There are several things to do in order to achieve this: with the required capital cost and fund-raising efficiency as the criteria, make every effort to ensure the rational and diversified combination of various elements constituting the financing activities, such as the financing methods, financing channels, type of currency, term of financing, interest rate, and ways of repaying the loan. Fund-raisers must avoid counting on one financing method, one capital source, one type of currency, one interest rate, and capital loaned within the same term. Starting from the actual financial needs of the financiers, and in accordance with the actual situation of the development and construction, fund-raisers shall combine the internal and external financing, domestic and international financing, long-term and short-term financing, as well as direct and indirect financing to enhance the financing efficiency and benefits, reduce the cost, and avoid the risks. III. Channels of financial and their role for China s agricultural and rural development With the continuous deepening of China s investment and financing system reform, the source and channels of China s investment funds have been gradually diversified. As the main body of the market, an enterprise shall assume the main investment and financial responsibilities, and the proportion of market financing has become larger. Although the absolute amount of the national financial investment has increased, the relative proportion has become smaller. The materials of Table 1 have shown that the investment of national financial funds has increased to 795,48 billion yuan in 2008 from 26,98 billion yuan in 1981, increased by 28.5 times; however, its proportion has decreased to 4.3% from 28.1% in Table 1 Source of Investment Funds of Fixed Assets of the Whole Society in China Unit: 100m yuan, % Year Project Funds within Domestic Utilization Self-raised Total the National Loans of Foreign Funds Budget Investment 6

7 1981 Amount (100m yuan) Proportion % Amount (100m yuan) Proportion % Source: China Statistical Yearbook 2009, China Statistics Press, Beijing, 2009 Table 2 Investment of Fixed Assets of the Rural Areas and Whole Society in China Unit: 100m yuan Year Total Investment Investment by Peasant Households Non-peasant Households Total Proportion % % 66% Source: China Investment Yearbook 2008, China WaterPower Press, Beijing, 2009 Under the great environment of the investment and financing system reform in the above-mentioned countries, the said investment and financial principle shall be implemented, and financing channels of China s agricultural and rural development are also diversified, which include various channels involving national finance, financial institutions, business group, social individuals, domestic and international channels, etc. The funds from different channels and source have been applied differently in the agricultural and rural development due to different expectations of the stakeholders. 1. National Financial Channels 7

8 In view of China s actual conditions, the Chinese Government has always been attaching high importance to agricultural and rural development. The Central Government put forward clearly in 2005 that the State shall implement the policy of Industry Nurturing Agriculture and Cities Supporting Rural Areas, and the national finance has remarkably intensified its investment in agricultural and rural development, forming an important financing channel of China s agricultural and rural development. However, the public character of the state finance determines that its investment shall be mainly used for the economic and social fields which concern the national security and market cannot effectively distribute resources. Therefore, the role of the national financial funds has been mainly reflected in the following aspects: (1) reflect the directing function and demonstration of the governmental investment, and promote other investors to develop and invest in agricultural and rural development; (2) used for the construction of the infrastructure and facilities for public welfare in the agricultural and rural development, which mainly include the following aspects: improve the agricultural production conditions, introduction and promotion of agricultural quality varieties and new technologies, construction of social service system and rural market system, farmers basic living conditions and technical training such as water facilities for people and livestock, methane in rural areas, etc. According to incomplete statistics, from 2003 to 2007, the central expenditure on agriculture-rural areas-farmers had reached 1,506 billion yuan, among which the expenditure on agricultural comprehensive development stood at billion yuan in 2007, making the local financial input reach billion yuan, bank loan input worthy of billion yuan, input raised by farmers themselves in rural areas stand at billion yuan and China s comprehensive agricultural development financing reach billion yuan in Domestic Financial Channels Under the guidance of the national policies, the financing situation of China s domestic financial channels to the agricultural and rural development has been improved continuously, preliminarily forming the agricultural and rural financial networks. (1) Agricultural Development Bank of China (ADBC) has implemented the national financial support for agricultural policy, ensure national food security and implement financing mainly in such aspects as procurement and storage of grain and cotton, infrastructure construction in rural areas, rural processing enterprises and agricultural 8

9 science and technology, other specific projects, etc. In 2007, the said loans are billion yuan (53.69%), 41.5 billion yuan (8.1%), 44.6% (8.7%), billion yuan (20.5%) and 46.2 billion yuan (9.01%), respectively. By the end of 2007, the balance amount of each loan is 1,022.4 billion yuan, increased by billion yuan in comparison with that of in 2003, with the average annual growth rate of 12%, playing an obvious backbone role in China s rural finance. (Source: China Agriculture Yearbook 2008) (2) Agricultural Bank of China (ABC) is a large-scale state-owned bank and implements the guiding thought of serving agriculture-rural areas-farmers, and increases the agricultural lending. The amount of agricultural-related loans in 2007 reached billion yuan. By the end of December, 2007, the balance amount of the said loans had reached billion yuan. This large amount of financing funds were mainly used for supporting such aspects as agricultural spring plowing, farmers consumption, agricultural industrial development, rural infrastructure construction, rural urbanization construction, training for farmers, small hydropower stations and enterprises in rural areas, etc., which basically satisfied the loan fund requirements of the construction of agriculture-rural areas-farmers and effectively supported the agricultural and rural development. (Source: China Agriculture Yearbook 2008) (3) Rural Financial Cooperative Institutions (including rural credit cooperatives, rural cooperation banks and rural commercial banks) are China s rural financial cooperative institutions. In 2009, the balance amount of RMB loans of the said institutions stood at 4,700 billion yuan (2009 China Statistical Bulletin), which is an important financial channel of China s agricultural and rural development. The rural credit cooperatives give full play to the role of supporting agricultural production mainly through micro-credit. By the end of 2007, the balance amount of the said cooperatives reached billion yuan, among which the micro-credit of peasant households reached billion yuan. The number of peasant households obtaining loans stood at million, which accounted for 32.6% of the total and effectively resolved the requirements of the funds shortages of farmers in agricultural and rural development. (Source: China Agriculture Yearbook 2008) (4) Rural Financial Mutual Aid Organization is a financial mutual aid organization with farmers as the main body in rural economic system reform, and still at the exploring and developing process. In accordance with the resource data, in 2007, the poverty alleviation management institutions under the leadership of the Chinese Government had carried out the poverty alleviation mutual-help fund pilots in 27 provinces and 274 villages. The said pilots obtained the assistance from the international organizations such as the United Nations Development Porgramme (UNDP), Asian Development Bank (ADB), etc. The 9

10 poverty alleviation fund mutual-aid organizations resolved the fund requirements of the poverty-stricken peasant households through financing, promoting the poverty alleviation in rural areas in China. (See Conclusion from ADB TA 4933-PCR Project of the State Council Leading Group Office of Poverty Alleviation and Development and materials of Multi-dimensional Poverty Seminar) 3. Channels of Business Group and Social Individuals The channels for social business groups and social individuals are the very important channels of China s agricultural and rural development financing. In China s market economic reform, enterprises are the main body of both the market and investment behaviors. In China s rural areas, the township enterprises have witness rapid development. In 2007, the number of township enterprises across China reached million (Bureau of Rural and Township Enterprises of Ministry of Agriculture: 30-Year China s Township Enterprises, China Agriculture Press, 2008). By 2008, the number of the employees in the said enterprises reached million, accounting for 9.34% of the total number of labor force in rural areas; the added value of the enterprises stood at billion yuan, accounting for 71.21% of the total in the rural society and 27.98% of GDP, becoming the strongest pillar supporting rural economic development. During 30-year reform and opening-up from 1978 ton 2007, the funds of the township enterprises used for agricultural and rural development had reached billion yuan, which improved the rural production conditions, increased the agricultural technical equipment, promoted the rural modernization construction, reduced the agricultural natural and market risks, promoted the added value, efficiency, profit of agricultural products and supported the agricultural and rural development. (Source: Overview on Township Enterprise Development for the 60 th Anniversary of the Founding of New China, Sun Xiaofei, August 11, 2009) 4. Foreign Financing Channels (Introducing Foreign Investment) Foreign financing is one of the main contents during China s reform and opening-up, and also an important financing channel of China s agricultural and rural development financing. Up to 2009, China had established the long-term and stable agricultural partnership with more than 140 countries and major international agricultural institutions and financial organizations. The fields introducing foreign investment include more than 10 fields such as agriculture, water conservation, forestry, animal husbandry, fishery, agro-product processing, township enterprises, grain circulation and infrastructure construction, policy adjustment in rural areas, rural financing, rural educational science and technology and promotion, etc. According to the statistics, from 1979 to the end of 2008, the number of China s foreign investors in the field of agriculture reached more than 18,000, with the accumulated investment amount standing at billion yuan. 10

11 ( February 25, 2010). Introducing the foreign investment in rural areas promoted China s agriculture to open wider to the outside world, accelerated the agricultural modernization process and made due contributions to the agricultural and rural development. The following aspects focus on introducing the financing of the international organizations and situation of China s agricultural and rural development. The international organizations are the inter-governmental organizations concertedly set up by many countries, and possessed and managed by the member countries, and are characterized with the nature of financial institutions and also the economic development organizations. The objects obtaining the loans from the international organizations are mainly the developing countries among the member countries, providing preferential loans for the developing countries and also the technical assistance. With relative large amount of loans, preferential conditions, low interest rate, long repayment terms, the said organizations are appropriate for large-scale agricultural and rural development and construction projects. The different international organizations have various natures and loan objects, conditions, etc. The main institutions obtaining the referential loans of China s agricultural and rural development through the international organizations are listed as follows: (1) The World Bank Group The loans provided by the World Bank Group to Chinese agriculture are re-lended uniformly by central Ministry of Finance, and the loans can be classified into two types: soft loan and hard loan. Soft loan is long-term preferential loan of interest-free, which annually charges 0.75% procedure fee against the disbursed part, 0-0.5% commitment fee of the part that takes effect but hasn t been disbursed. The repayment period is 40 years and the leniency period is 10 years. Hard loan belongs to interest-bearing loan, the rate of which varies according to different products, and fixed rate loan and the single currency loan of floating rate vary according to different currencies. For lenders who can repay loans in time can partially exempt from the paid or unpaid balance interest of the loan, and the repayment period is 25 years including leniency period. Since reform and opening-up, 50% of the loans Chinese government obtained from the World Bank are soft loans; with the other half are hard loans. According to the development state of Chinese economy, the World Bank Group has cancelled soft loans to China since 2001; the repayment period of hard loan of the World Bank Group to China has shortened to 17 years. Due to the fact that hard loans still have the advantages of long repayment period and lower interest rate, it is a fairly good financing channel to promote the Chinese agricultural and rural development. From 1981 to 2007, China had financed 279 projects with the loans of the World Bank Group, the financing amount of 11

12 which had been over 41,300 dollars. Among them there had been 71 agricultural projects with financing amount of 10,595 million dollars, accounting for 25.65%. (Website of the World Bank Group: ) (2) United Nations Development Program (UNDP) The organization provides services to developing countries mainly in the form of technical assistance. It mainly assists in various activities prior to investment, such as the survey of resources and its reasonable utilization method, economic development investigation and analysis, formulation of investment plan, feasibility study and assessment of investment projects, technique application study, personnel training and technological education, etc. Since carrying out activities in China from 1979, UNDP has always cooperated closely with the Chinese government and mainly adopted the model of government execution in the investment projects in China. The cooperation covers more than 10 government departments, non-government organizations and private sectors, etc. Till 2007, UNDP has supported 5 master plans of operations and country-specific cooperation frameworks, among which there are about 900 development projects. UNDP has assembled about funding of 800 million dollars. Projects of UNDP are widely distributed throughout China and make contributions to rural sustainable development and China s poverty-reduction career. (3) International Fund for Agricultural Development (IFAD) It is set up according to resolutions of World Food Meeting, the loans of which are preferred to develop food production. The loans consist of special loans, secondary loans and Normal Credit Tranches. According to China s situation and provisions of IFAD, China can enjoy special preferential loans, namely, IFAD charges 1% service fee annually with the repayment period is 50 years and the leniency period is 10 years. Since 1987, IFAD has always provided special preferential loans to China. Till 2007, IFAD has provided 16 preferential loans to China in all (environmental protection poverty reduction projects in Ningxia and Shanxi are not included), loan amount commitment are added up to 300 million SDR, which is equivalent to 400 million dollars. In addition to joint financing of domestic supporting organizations and other institutions, the input is totaled 860 million dollars, and about 6.25 million peasant households and 26 million rural poverty-stricken population from 18 provinces (municipality and autonomous region) and 146 counties (banner, city) benefit directly. 12

13 (4) Food and Agriculture Organization (FAO) The organization extracts a certain proportion from membership fees paid by member states as royalty fund, which is used for providing technical assistance to developing countries, including services such as technology consultation and technical training in order to improve the production of agriculture, forestry, animal husbandry and fishing industry, sales, processing and distribution situation. The amount of assistance is relatively smaller, each of which is less than 250 thousand dollars and equipment investment is less than 50% of project investment. The organization also seeks trust fund on behalf of developing countries and provides technical and capital assistance according to their applications. Since reform and opening-up, China has always kept favorable cooperation relationship with FAO, who has paid close attention and provided supports to the development of Chinese rural reform and agricultural economy. Some of the FAO s performance has played positive role in promoting the development of Chinese rural reform and agricultural economy. For example, from 1993 to 1997, agricultural system research of sustainable development, demonstration and dissemination projects in China's north-western region, Gansu sands comprehensive treatment and sustainable agricultural projects, which cover 11 towns in Minqin County, Wuwei City and Linze County, 77 villages and 17 thousand peasant households. Shanxi oil sunflower production and processing project stabilize local oil plant production, improves small-scale processing in order to improve livelihood of local people and promote the transformation of mountain farming to market economy, etc. (5) World Food Program (WFP) WFP is a UN institution responsible for multi-lateral food aid. From 1979 till now, WFP had carried out 70 free food aid projects in China, the total amount of which is 925 million dollars. Food aid projects are widely disseminated throughout provinces, municipalities and autonomous regions of our country, covering 214 cities and counties, most of which are located in rural poverty-stricken areas of our country; The implementation of projects have played a favorable role in improving productive condition of agriculture and ecological environment in poverty-stricken areas of our country, exploring and utilizing reasonably resources of agriculture, forestry, animal husbandry and fishing industries as well as water conservation, promoting agricultural production, improving level of food self-sufficiency, speeding up disaster recovery, increasing income of local farmers and solving employment, etc., which benefit over 30 million Chinese farmers directly and 13

14 become important financing channel of rural development at the initial period of China s reform. With the development of China s economy, China is no longer in the recipient country list of WFP from January 1, 2006, on the occasion of which China will become a food contributing country from a recipient country. In addition to the above-mentioned international organizations, international organizations such as ADB, UNICEF, and UNIDO are all financing channel of Chinese agricultural and rural development. Since reform and opening-up, Chinese agriculture has set up many agricultural and rural development building projects with the support of foreign capital (including donations) from the above-mentioned institutions. For example, North China Plain Agricultural Project, Heilongjiang Farmland Reclamation Project, Guangdong Rubber Project, Agricultural Research and Education Project, China Seed Project, 8 City Freshwater Fishing Project, China Red Soil Area Development Project, Agriculture Research II Stage Project, Agriculture Education II Stage Project and Poverty Reduction Project in West China (Xinjiang, Gansu), etc. are all large-scale agriculture development projects, which have brought favorable economic and social benefits and promoted sustainable development of Chinese agriculture and rural areas. 5. Self-financing of Peasant Households Relying on investment subject of farmers in rural areas, the input of the Chinese government to agricultural and rural development always attaches importance to national policy of self-reliance and fully motivates farmers enthusiasm of investment and financing. While implementing agricultural and rural development building projects, farmers can match national input by converted capital of voluntary work; farmers can also carry out projects of giving people work in place of relief subsidies to directly input labors; farmers can also devote into rural construction with monetary capital by migrating into cities to work. From data in Figure 2, it can be noticed that the self-financing of peasant households accounts for over 1/3 in financial resources of rural society fixed assets investment, and self-financing of peasant households is the basis of financial for agricultural and rural development. It is absolutely impossible to solve China s agricultural and rural development problems if separated from farmer subjects. The above financing channel of Chinese agricultural and rural development is illustrated as follows (Figure 1 Financing Channels of China s Agricultural and Rural Development): 14

15 Central Government Financing Financing Channels of China s Agricultural and Rural DevelopmentNational Finance Central Government Financing ADBC ABC Domestic Finance Rural Financial Cooperatives Rural Mutual Cooperatives Business Group Leading Enterprises Township Enterprises Others NGOs Domestic Channels FAO Social Donations Self-financing of Farmers WB UNDP International Organizations IFAD Foreign Channels Foreign Governments Foreign Enterprises Others WFP Loans from Foreign Government Donations from Foreign Government NGOs Social Donations Figure 1 Financing Channels of China s Agricultural and Rural Development 15

16 IV. Modes of financing in China s agricultural and rural development Modes of financing for China s agricultural and rural development are also diversified. There are listed companies in agriculture sector directly financed by issuing shares or indirectly financed by financial institutions; financed by direct fiscal subsidies or in terms of agricultural investment projects. The project financing is the main diversified mode that is commonly adopted. The agricultural and rural development in China is financed by international organizations mostly via project financing; Part of the state finance capital investment is by subsidy, but mostly by project financing. All of the national comprehensive developments of agriculture are financed by projects. Project financing is the successful experience learnt by international organizations and proved to be an effective financing mode for agricultural and rural development in China. The main approach of project financing for agricultural and rural development in China includes three-phase project management as follows: 1. Phase I - preliminary preparation. Works completed at this stage consist of: (1) Project proposal. The purpose of investment is identified in accordance with such factors as the market condition, technology, local resource condition and social and economic development planning etc. It must be in correspondence with the requirement of the planning for local social and economic development, the national industry and investment policies and the principles of measures tailored to the local condition. (2) Research on the project feasibility. Analysis is conducted on the scientific feasibility of project in terms of six facets, i.e. marketing, technology, social and ecological conditions, organization and management, financial efficiency, national economic benefits etc. so as to generate the report of research on the investment feasibility. (3) Project evaluation. Expert field trip is organized by investors (national departments or loan banks) to evaluate the project investment feasibility report made by the project unit, make judgment on the report scientific reliability and put forward suggestions on improvement so as to generate the report of project investment evaluation. (4) Project approval and investment (or loan) agreement. This stage marks the success of project financing and the access to the capital in accordance with the agreement to carry out the project. 16

17 (5) Project development design etc. The preparation at this stage makes project implementation build on the scientific and democratic decision-making for the project proceeding smoothly. 2. Phase II - project implementation. Project implementation is conducted strictly in accordance with the requirements of the project evaluation report and development design. In order to ensure the quality of project implemented and the desired goals, the focus throughout the implementation process is to strengthen management: to carry out scientific and effective planning management, funds management, material management, engineering technology management, establish and improve the statistical and accounting systems and conduct rigorous and scientific monitoring, ensuring the projecting proceeding smoothly. 3. Phase III - acceptance of completed project. The completed contents, quantity, quality and effectiveness of the project for acceptance are reviewed in accordance with the objectives proposed by the project investment agreement. Assess the quality of evaluation report, draw on the lessons learnt during the project implementation process and award the certificate of the acceptance of completed project. V. Future modes of financing in China s agricultural and rural development The reform on the investment and financing systems, based upon the objectives aimed at strengthening market orientation and highlighting the main body of enterprises, is conducted in accordance with the reform requirements of market-oriented investment, enterprise autonomic decision-making, diverse financing modes and effective macro control. In this context, the future mode of financing for agricultural and rural development in China shall be a diverse investment and financing system of agriculture featuring farmers as the main body of investment and financing, the state s financial investment as the guidance, financial and credit funds as the back-up, foreign funds, capitals from stock market and idle capital in the society as the supplements. The system is characterized by: 1. Guided by the steadily growing state s funds. The state s financial investment is institutionalized. With the development of national economy, the total investment in agriculture enjoys steady growth and increase in proportion. The subsidy for agriculture is improved and the inputs for agriculture, rural areas and farmers are on the increase. These all bring into full play the role of national funds in guidance. 2. Supported by the improved domestic financial institution network. Integrated rural 17

18 financial network is formed, consisting of the state agriculture policy bank, agriculture commercial bank, rural credit cooperative, inter-related rural non-governmental financial organization and service provided for agriculture, rural areas and farmers. Domestic financial institutions, supported by the national bank for agriculture and rural development, shall constantly expand the agriculture fields to support and vigorously conduct the medium to long term policy-related credit business for the agriculture development and rural infrastructure construction in spite of securing the national food safety and funds for purchasing such major agricultural products as grain and cotton etc. Together with China investment and financing network system for domestic agriculture and rural development composed of the agriculture bank, rural credit cooperatives, rural banks, loan companies in rural areas, rural fund cooperatives, rural micro-credit organizations, agriculture and rural insurance, funds for agricultural industry development etc., they innovate financial products and the mode of service, improve rural credit environment, enhance rural finance monitoring in line with the characteristics of agriculture and rural areas, aiming at bring into full play the role played by the financial institutions at levels in safeguarding the satisfied demand of funds for agriculture and rural development. 3. Centered on rural enterprises and farmers self-raised funds. Growing township enterprises and thousands of farmers are the main body of investment and financing for agriculture and rural development in China, whose self-raised funds are fundamental to the financing for agriculture and rural development. Without this main body, it is impossible in China to tackle the issues of agriculture and rural development. 4. Supplemented by foreign funds and social idle funds. More innovative approaches and modes are explored in the reform to guide funds to invest for agriculture, rural areas and farmers. Make full use of foreign funds and idle funds in the society and fully mobilize the initiative in the investment for agriculture and rural development. These are the fund foundation for the agriculture and rural development in China. Part II Role of Investment in China s Agricultural and Rural Development The agriculture and rural development of any country is connected with such factors as land, labor force, capital, technology, conditions endowed by nature, information etc. and reasonable combination of these factors, in which the capital is a link that bounds other factors together to co-play the role in the development promotion. According to the inspection on the agriculture and rural development in China, the role of investment is manifested in the following aspects. I. Improve the basic agricultural production conditions 18

19 By the end of 2008 in China, there were arable lands million ha.s, population billion in total (China Statistical Yearbook 2009) and ha.s (equivalent to 1.38 mu) arable land per capita, and the natural disaster was serious. In order to ensure the national food safety, endeavors must be made to enhance the capability to combat natural disasters and improve the land productivity so as to ensure the harvest irrespective of drought or flood and stable and high yields. Hence, the primary role of the investment in agriculture and rural development is to improve the basic agricultural production conditions and transform the low-yield lands into the basic farmlands with stable and high yields. The Chinese governments and farmers have committed to work in the said fields with sound achievements. Take the comprehensive development of agriculture for example. The total investment was billion yuan from 1988 to 2007 and the medium low-yield lands transformed were million mu (equivalent to million ha.s), accounting for 28.69% of the national arable land area; the increase in production of grain was million tons, cotton million tons, etc. (China Financial Yearbook 2008) The investment in comprehensive development of agriculture also includes the control on land desertification, reclaiming wasteland suitable for agriculture, grassland (field) construction, small basin control, quality crop and breeding base construction, agro-product processing, etc. (see table 2), which all play significant roles in the improvement on the basic conditions of agriculture production. Table 2 Information on the Comprehensive Development of China s Agriculture Total medium-a Land Reclaimed Grassland Small Quality Increase Increase Year investme nd-low-yi desertificati wasteland constructi basin crop and in in nt eld land s on s suitable on controlle breeding grain cotton (100m transform controlled for (10,000 d bases production production yuan) ed (10,000mu) agriculture mu) (10,000 (10,000 (10,000 (10,000 (10,000 mu) mu) tons) tons) mu) 1988 ~ Source: China Financial Yearbook 2008 II. Improve farmers basic living conditions 19

20 The ultimate goal of the China s agricultural and rural development lies in raising farmers income and improving their livelihood. In this regard, the Chinese Government has made fruitful endeavors and world-acknowledged achievements. Since the initiation of reform and opening-up policy over 30 years ago, the per capita net income of China s rural households has increased from yuan in 1978 to 4,760.6 yuan in 2008; (China Statistical Yearbook 2009) and the basic living conditions of the country s farmers has witnessed comprehensive advancement. According to incomplete statistics, from 2003 to 2007, the central government had invested billion yuan in the Rural Drinking Water Safety Project, solving the water shortage and safety problems facing the rural population totaled million; invested 8 billion yuan to construct biogas facilities for 8.23 million rural households, with its total number reaching over 26.5 million by the end of 2007; invested billion yuan for the rural road construction, constructing and reconstructing 1.3 million-km rural roads; invested 82.9 billion yuan for the construction of rural power grids ( ) and improved the power supply of the rural areas; the per capita floor space of rural residents had increased from 26.5 m 2 in 2002 to 31.63m 2 in 2007 and the per capita living expenditure for of rural residents (after adjusting for inflation) from yuan in 1979 to 3,058.1 yuan in The absolutely poverty-stricken population of China s rural areas had decreased from 28.2 million in 2003 to million in 2007, down by 47.6%. (China Statistical Yearbook 2008) Thus we may conclude that China s investment in agricultural and rural development has exerted a comprehensive and profound influence upon the improvement of the basic living conditions for farmers. III. Push forward the innovations in agricultural technology, and promote the application of advanced agricultural technology to improve agricultural productivity Innovations of agricultural technology determine the future of China s agriculture, only through promoting the application of advanced agricultural technology and continuously improving agricultural productivity could we satisfy the increasing demands for agricultural products. In this respect, China s investment in agricultural and rural 20

21 development has played a great role. Taking the aid-agriculture fund of the Ministry of Agriculture arranged by the state finance for example, billion yuan was invested in 2007, the utilization of which was closely related to the innovation, promotion of application of agricultural technology (see table 3). Table 3 Input of Fiscal Fund for Assisting Agriculture of China s Ministry of Agriculture in 2007 Project Amount (100m Proportion (%) yuan) Total Including: Agricultural Subtotal protection system Thoroughbred system of 9.54 construction Including: crop cultivation and aquaculture Sci-tech demonstration 2.88 system Protection system of flora and fauna Quality safety of 5.93 agricultural produces Information market system 1.12 Resource and ecological protection Socialized service system 5.51 High-quality grain project 16.0 Special fund for Subtotal assisting agricultural Overall grain production 8.35 technology Including: capability Scientific and healthy 2.97 culture High-efficient gardening 1.62 Quality safety of 4.47 agricultural produces Sci-tech training 21.5 Industrialization and systematization upgrade 0.74 Agricultural and ecological protection

22 Modern agricultural 3.47 facilities and equipments Animal disease prevention 1.98 and control Research and construction of policy and legal system Transfer payment subsidy For improved variety, agricultural implements, training, etc Source: compiled in accordance with China Statistical Yearbook 2008 In terms of improving agricultural productivity, China s investment in agricultural and rural development also attaches great importance to the advancement of the equipment level of modern agricultural facilities. In 2007, the tractor-ploughing degree of China s agricultural mechanization amounted to 58.9%, mechanical sowing 34.4% and mechanical harvesting 28.6% (China Statistical Yearbook 2008), relieving the labor intensity of farmers by a great margin. The total power of farm machinery had increased from million KW to million KW in 2008, up by 56% and the agricultural intensification degree had been significantly enhanced. IV. Enhance the quality and employability of rural labor force The determinant of China s agricultural and rural development lies in people, in high-quality rural labor force. Therefore, one of the significant roles of investment in agricultural and rural development is cultivating talents and continuously enhancing the quality and employability of rural labor force, which could be carried out in two aspects; on the one hand, laying emphasis on the rural compulsory education so that rural adolescents can get access to the nine-year compulsory education and maintain an educational level of junior high school; on the other hand, focusing on the training of rural labor force to improve their overall quality. Since 2005, China has generally exempted for rural students during the compulsory education stage the miscellaneous fees and textbook fees, all of which shall be bore by the state finance. The revised Compulsory Education Law of the People's Republic of China entered into force in 2006 and in the end of 2007, the population coverage of the universal compulsory education accounted for 99.3%, and 98.4% for Western China. Financial input guaranteed the rights of rural adolescents to education, preparing a group 22