China - Rural Sector Adjustment Project

Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Repofl No. 10329 Report No. 10329-CHA Type: (PCR) DUANE, P. / X31753 / T9 049/ OEDD1 PROJECT COMPLETION REPORT CHINA RURAL SECTOR ADJUSTMENT PROJECT (LOAN 2967-CHA AND CREDIT 1932-CHA) FEBRUARY 14, 1992 Country Department II Agriculture Operations Division East Asia and Pacific Regional Office This document has a restited dstrblon and may be used by redpient only In the perfonnrma of dwk officki duies. Its contets may nt othendse be diclosed wihout Wodd Bank atholuzadon.  CURRENCY EQUIVALENTS Currency Unit = Yuan (Y) $1.00 = Y 5.27 Y 1.00 = $0.19 WEIGHTS AND MEASURES 1.00 jin = 0.50 kg 1.00 kg - 2.00 jin 1.00 mu = 0.067 ha (1/15 ha) 1.00 ha - 15.00 mu ABBREVIATIONS CATIC - China Agribusiness Trust & Investment Corporation EZO - Experimental Zone Office MOA - Ministry of Agriculture .OC - Ministry of Commerce MOF - Ministry of Finance PBC - People's Bank of China ?RS - Household Production Responsibility System RCRD - Research Center for Rural Development RE - Rural Enterprise RRP - Regional Reform Program RSAL - Rural Cector Adjustment Loan and Credit SATIC - State Agribusiness Trust & Investment Corporation SECAL - Sector Adjustment Loan SLA - State Land Administration SOE - State-Owned Enterprise TICS - Township Industrial Corporations TVCE - Township and Village Collective Enterprise TVE - Township and Village Enterprise  FOR OMCIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation February 14, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on China Rural Sector Adiustment Proiect (Loan 2967-CHA and Credit 1932-CHA) Attached, for information, is a copy of a report entitled "Project Completion Report on China - Rural Sector Adjustment Project (Loan 2967-CHA and Credit 1932-CHA)" prepared by the East Asia and Pacific Regional Office. Part II is a summary of a Project Completion Report contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment Ths documont has a restricted distrbution and may be used by *adpients only In the performance of thaei offci du"es. Its contents may not otherwise be disdosed without World Bank authorzation.  WOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT CHINA RURAL SECTOR ADJUSTMENT PROJECT (Loan 2967-CHA and Credit 1932-CHA) Table of Contents Page No. Preface .... . . . . . . . . . . . . . . . . . . . . . . . . . . i Evaluation Summary .... . . . . . . . . . . . . . iii PART 1: REVIEW FROM THE BANK'S PERSPECTIVE . . . . . . . . . . . . I. MIS PARTICULARS .1... . . . . . . . . . . . . . . . . . . II. BACKGROUND .1... . . . . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . Macroeconomic Developments . . . . . . . . . . . . . . . . . 2 III. LOAN OBJECTIVES AND DESCRIPTION . . . . . . . . . . . . . . 5 IV. IMPLEMENTATION PERFORMANCE .10 The Rural Reform Programt National Policies . . . . . . . . 10 Progress With the Reform Experiments . . . . . . . . . . . . 16 Diffusion/Dispersion . . . . . . . . . . . . . . . . . . . . 20 Procurement and Disbursements . . . . . . . . . . . . . . . ?. Monitoring and Coordination .21 V. LESSONS LEARNED .22 General . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Program Components .23 Loan Format .25 Lessons From the Bank's Supervision Effort . . . . . . . . . 26 Role of the Bank .27 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Page No. PART 2: REVIEW FROM THE BORROWER'S PERSPECTIVE . . . . . . . . . . 30 FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . 30 I. A GENERAL REVIEW OF CHINA'S ECONOMIC STRUCTURAL REFORM . . . 31 II. A GENERAL DISCUSSION OF THE CONDITIONS OF CHINA'S RURAL ECONOMIC REFORM .... . . . . . . . . . . . . . . . . . . 35 III. REFORM OF THE GRAIN PURCHASE AND SALES SYSTEM . . . . . . . 42 IV. EXPERIMENT IN LAND SYSTEM BUILDING . . . . . . . . . . . . . 45 V. THE EXPERIMEN. [N RURAL ECONOMIC COOPERATIVES . . . . . . . 55 VI. EXPERIMENTS IN BUILDING UP A TVE SYSTEM . . . . . . . . . . 60 VII. RESTRUCTURING OF THE RURAL FINANCIAL AND INVESTMENT SYSTEMS 66 VIII. EXPERIMENTS IN THE STRUCTURAL REFORMS IN FORESTRY, ANIMAL HUSBANDRY, FISHERIES, STATE FARMS & POVERTY STRICKEN AREAS . 73 IX. STATE AGRIBUSINESS TRUST & INVESTMENT CORPORATION (SATIC) 86 PART 3: STATISTICAL INFORMATION . . . . . . . . . . . . . . . . . . 90 I. BASIC DATA . . . . . . . . . . . . . . . . . . . . . . . . . 90 II. STATUS OF COMPLIANCE WITH LOAN COVENANTS . . . . . . . . . . 93 III. SUMMARY OF PERFORMANCE IN THE RURAL REFORM PROGRAM . . . . . 94 ANNEX: Borrower's Comments .............. .. . 101  PROJECT COMPLETION REPORT CHINA RURAL SECTOR ADJUSTMENT PROJECT (Loan 2967-CHA and Credit 1932-CHA) Preface This project completion report has been prepared for the China Rural Sector Adjustment Loan and Credit (RSAL), which were approved on June 23, 1988 to support the second phase of China's rural reform program. The LoAn Agreement, in the amount of $200 million, and the Development Credit Agreement, for an amount of SDR 72.24 million (equivalent to $100 million at the time of Board Approval) were signed on July 15, 1988. The Loan and the Credit were declared effective on September 19, 1988. The Credit was fully disbursed by October 17, 1988 and the Loan was fully disbursed by September 18, 1989, well in advance of the Closing Date of July 31, 1990. The Government of China submitted a draft PCR in December 1990, which was reviewed with the RSAL implementing agencies in January 1991. The Government's PCR, totaling 163 pages, has been placed on file and a summary is presented in Part II of this report. The full PCR, submitted to the Operations Evaluation Department, was prepared by the former China/Mongolia Department on the basis of findings of the completion mission, the Borrower's PCR, site visits in China and a review of project files. The report was reviewed in China by the office responsible for the RSAL within the State Council's Leading Group for Rural Reform, whose comments are annexed hereto.  - iii - PROJECT COMPLETION REPORT CHINA RURAL SECTOR ADJUSTMENT PROJECT (Loan 2967-CiA and Credit 1932-CHA) Evaluation Summary Objectives i. The RSAL aimed to finance critical foreign exchange expenditures and assist with the implementation of China's second phase program for rural reform. The program was designed to increase rural productivity and promote policy and institutional experimentation in order to deepen reforms in criti- cal segments of the rural economy. The main objectives of the Government's program were to foster agricultural development and specialization: increase efficiency; encourage nonfarm rural enterprises--both industrial and commer- cial, expand rural exports; provide productive off-farm employment opportuni- ties; and improve the range and efficiency of rural financial services. The program also had a fiscal component--to reduce subsidies on urban food con- sumption and agricultural inputs, and improve the buoyancy of agricultural taxation. ii. The Government intended to implement the second-phase program over a period of 5-10 years. The RSAL policy package was designed to support incep- tion of the second phase through actions to be taken in 1988-90, and featured reforms at two levels: laws and regulatory measures to extend reforms that had already been tested successfully at the regional level and were ready for implementation nationwide, and tailored regional reform experiments to devise principles for subsequent national policies. Mainly through support for the Government's regional reform experiments, the RSAL encompassed specific reforms to promote: (a) the liberalization of grain pricing and internal trade; (b) market development and integration; (c) reform of the rural lund management system; (d) support services and the business environment for nonstate rural industries; (e) marketing and service organizations in the less commercialized areas of China's rural economy; (f) state level support for investment in agriculture; and (g) the diversification of rural financial markets and widening of ser- vices.  - iv - Other facets of the Government's program which were encomp.3sed within the RSAL framework included trial reforms of agricultural inputs pricing and the system of agricultural taxation. iii. Dr. s of the second-phase program were already in an advanced state of prepa ition when the Bank was asked to assist, and most of the RSAL conditions were agreed to readily in the course of a six-month preparation effort. The Goverument initially resisted inclusion of a rural financial market component, citing resistance from the People's Bank of China and con- cern that the lead agency may not have sufficient expertise to effectively coordinate implementation. As experimental programs under the Lead Agency's purview were already underway in this policy area, the Government eventually accepted the Bank's position: that inclusion of RFM components within the RSAL framework would facilitate the provis,ion of needed technical assistance through the Fourth Rural Credit Project 'then. under preparatijn) and by Bank supervision missions for the RSAL. Implementation Experience iv. The loan and credit became effective three months after Board approval, and both were closed nine months ahead of schedule. The loan and credit proceeds were used mainly for the importation of fertilizers and other agricultural inputs, and a larger share of the counterpart proceeds were allo- cated to support the regional reform experiments and general rural development programs than was anticipated at appraisal. v. In the second half of 1988, the Government began to implement an economic stabilization program to regain control over China's overheated econ- omy. Under this program to "Rectify the Economic Order," largely administra- tive measures were implemented to restore internal and external balance, and severely curtail the expansion of monetary aggregates. The stabilization program had an adverse impact on the RSAL package. In particular, the nation- wide agricultural pricing reforms noted in the policy letter had to be post- poned (for fear of exacerbating inflation), while enactment of several laws to specify property rights and articulate a business environment for rural indus- tries and commercialized marketing cooperatives was deferred (for fear of weakening administrative controls deemed necessary to facilitate the stabili- zation program). The contraction of finance and credit also had an adverse impact on the experimental reform programs, especially on those designed to test reforms for rural industries and rural financial Intermediation. vi. In the wake of the Tiananmen events of June 1989, a profound reassessment of the Government's approach to economic reform began, which consumed the Chinese leadership for the better part of the period between June 1989 and June 1990. During this period, vision and commitment from the top for the rural reforms seemed to waver, and the second-phase program--both at the national level and in the experimental zones--first slowed in 1989, then stalled. By mid-1990, however the debate had closed in favor of continued reform, and several official decisions led to a restarting of the second-phase program and its RSAL components: first at the experimental level, then in Fall 1990 at the national level with the creation of the first genuinely com- mercial grain exchanges, followed in May 1, 1991 by a major increase in urban ration sales prices for the main foodgrains and edible oils (the first such increase in 25 years).  Lessons Learned vii. Being designed to support the only systematic ongoing attempt (in 1988) by a socialist country to accelerate the transition of its rutal economy from plan to market, the RSAL did not resemble the usual SECAL. There were no firm, tested guidelines available in 1988 (indeed, the jury is still out on the more recent attempts in Central and Eastern Europe), and the Government-- being ever cognizant that China remains a very poor country by international standards, and one still _nly marginally equipped with the institutional infrastructure needed to guide a market-based economy--opted to continue to test new reforms in a more controlled loca. environment before extending tiese nationwide. In view of the strong measures needed during the 1988-90 economic crisis (and its contractionary influence on all segments of the economy), this cautious approach was undoubtedly a wise one. Otherwise, had experimental principles been applied nationwide from the start, and lacking the capability for full regulation by indirect means of money, credit, savings, investment, public finance, foreign accounts and the urban wage bill, a prior and full liberalization of the rural economy could have caused the general economic crisis to spin out of control. As a result of this experience, a better appreciation emerged of the critical relationship in a transforming socialist economy, between the pace of rural liberalization and the state of development of macroeconomic institutions. It is a relationship determined not only by manifestations of political will (or its absence) on the macropolicy side, but also by the basic capability of new economic institutions to perform as intended. viii. Reform Components. During the course of implementing the regional Grain Systems reform programs (RRPs) in 1988 and 1989, it became apparent that grain system reforms are not as risky as was previously supposed in China, both in terms of leading to potential urban unrest or contributing to consumer price inflation. Experience with these RRPs also highlighted the importance of advanced publicity about the program's potential impact and of appropriate training for those involved in its implementation. These lessons were not lost when the Government announced its recent nationwide reforms to grain pricing and marketing arrangements. ix. Lessons from the Land Management System reform are less encouraging. There is a realization that reliance on untested market mechanisms probably cannot quickly produce the overdue consolidation of holdings needed in the labor deficit provinces, where there has been a major outflow of labor from agriculture, which also has vitiated some of the enthusiasm for market-based mechanisms. There is also remains a need for clear objectives in this policy area. The RRPs in the labor-deficit areas, which aimed to foster & rapid consolidation of land through administrative means, were flawed in some respects because of a continuing need to service the state's grain procurement quotas, which led uniformly in these RRPs to an otherwise unwarranted "scaling-up" of farm size in order to foster mechanization, though it was recognized that permanent subsidies may be required to sustain the mechaniza- tion programs. x. The Rural Industrialization and Rural Financial Market reforms were designed to support policy and institutional reforms already well underway at the national level. These also are policy areas that proved particularly vulnerable to the contractionary effects of economic austerity in 1989 and  - vi 1990, and which--because full control over experimental policy-making was never released to the authorities responsible for implementing the RRPs for these reforms--meant that these reform programs never enjoyed full latitude to really test experimental designs. There were also design problems at the experimental level. For example, in the Fuyang, Anhui RRP for rural indus- trial enterprise reform, many discrete components were incorporated into the experimental program, which proved difficult to coordinate and nearly impossi- ble to monitor. For the Guanghan, Sichuan RRP for reform of formal sector intermediaries, the inability of project entities to coordinate closely with the PBC's headquarters and regional offices denied sufficient control over "external" influences that ultimately frustrated the intent of the regional reform. Experimentation with this kind of component perhaps could have been better organized through financial sector channels, and not by the "real sec- tor" experts who were assigned to the State Council's lead agency for the RSAL. xi. Sustainability. The remarkable resurgence of the second-phase pro- gram (and its RSAL supported components) in late 1990 and 1991 suggests that the drive for reform is well-entrenchec in China's rural economy, and thus gives reason for optimism concerning the sustainability of the second-phase program, once it can be tested and fully implemented. xii. Loan Format. The absence of tranching in the RSAL's format did not materially influence the progress of reforms under the RSAL. Indeed, for cultural and other reasons, the use of an untranched loan may have hastened a reacceleration of the second phase program in late 1990. However, the deci- sion to exclude provisions for technical assistance and training from the RSAL's format may have been a mistake. xiii. Lessons From Supervision. The RSAL components were comprehensive, and necessarily so. But because of the broad and geographically dispersed experimental net which had to be cast, the RSAL program proved to be expen- sive and difficult to supervise. As a result, staff reliance on fair and accurate reporting by the Government was perhaps more important in trying to discern progress and difficulties encountered than it might otherwise be with more traditional SECALs. xiv. Such reporting proved fully up to staff expectations and require- ments, however, this approach to supervision may contain its own limitations. The Chinese economy has been described as being cellular in previous Bank reports, and staff may have been slow to appreciate the actual importance being assigned to the cooperative marketing RRPs by China's central authori- ties, as potential vehicles for cutting across administrative and subsectoral boundaries. A more intensive effort may have helped the central coordinating units to head off problems which have developed in these RRPs. Role of the Bank xv. The Bank's involvement in the start-up period of the second phase program contributed substantially to the design of the underlying experiments, and helped to focus the Government's attention on the policy, institutional and financial requisites of the program and attendant risks. During the supervision period, the Bank was instrumental in the Government's decision to preserve central coordination arrangements for the RRPs when it decided, on  - vii - December 25, 1990, to reassign Lead Agency units to other Government agencies. Also, while the RSAL was being implemented, the Bank initiated its "Agricul- tural Transformation" study (Report No. 8652-CHA) which focused on reform in China's grain sector. After the report was discussed with the Chinese Govern- ment, staff received several indications that the report's conclusions and recommendations may have tipped the balance in favor of grain sector reform, including the consumer price increases announced May 1, 1991 and the decision to proceed with the Ministry of Cornmerce'9 wholesale grain market program. xvi. While it is too early to assess the s"' s of the RSAL progranm, current indications dre that the reforms in the .m of agricultural pricing and marketing will be pursued aggressively and completed within the current Plan period. Simnilarly, the rural industrialization components are being rehabilitated, and authorization has been given for broader experimentation in order to promote more flexible forms of company organization and capitaliza- tion. xvii. On balance, the Bank's decision to approve the RSAL appears to have been justified by the progress made in 1988 and the first half of 1989, and the renewed emphasis on rural reform that began in 1990. It is thus the view of staff that a repeater RSAL should be kept in the offing, which could be formalized once the Bank has been fully satisfied that sufficient progress is being made to carry out the remaining unfulfilled 'conditionalities" in the RSAL loan and credit agreements.  PROJECT COMPLETION REPORT CHINA RURAL SECTOR ADJUSTMENT PROJECT (Loan 2967-CHA and Credit 1932-CHA) PART 1: REVIEW FROM THE BANK'S PERSPECTIVE I. MIS PARTICULARS Name of Operation: Rural Sector A3iusfment Loan (RSAL) Loan/Credit No.: Ln. Z967-CHA: Cr. 1932-CHA RVP Unit: ASI Country: People's Republic of China Sector: Agriculture II. BACKGROUND Introduction 2.1 Approved on June 23, 1988, and grounded in the success of rural decollectivization in the first half of the 1980s, the RSAL was designed to help the Government of China to articulate a rural policy framework for the country which would deepen the rural reform program at the national level, and support the implementation, coordination and evaluation of regional reform experiments in several key policy areas (i.e., liberalization of grain market- ing, rural land system reform, the systematization of rural industrial poli- cies, and reform in rural financial markets). It was intended and anticipated th.at the results of this experimentation would be gradually assimilated by other regional and local administrative units in China, and that key features os the more successful experiments would be recast and announced as national policy. 2.2 Given the complexity of the reform program supported by the RSAL, the need by the Government of China in 1988 to adopt strong measures to stabi- lize the economy and bring inflation under control, and a hiatus in implemen- tation which occurred following the Tiananmen events, it is too early to ren- der definitive judgment on the success of the RSAL program. However, the stabilization program has been largely effective, and an intense debate within the senior leadership appears to have been closed in favor of continued rural reform. It also appears in mid-1991 that momentum may have been regained for implementing the essential elements of the RSAL program at the national lev-  - 2 - els, while at the experimental level, authorization and finance were given to move the several experiments into their all-important next stage.l/ Macroeconomic Developments 2.3 China achieved respectable growth rates during the prereform era but the economic gains came at a very high cost in terms of investment, labor and energy input. The principal goal of the reform program, initiated in late 1978, has been to improve on past growth performance, and to do so largely through an increase in efficiency. 2.4 The reform strat?gy that evolved in the 1980s, derived on the basis of need but grounded in pragmatism, policy experimentation, and recognition of regional differences, has had a number of strands of which the following stand out:2/ (a) the enconragement of provincial and local autonomy in economic decision-making, manifested in the 1980s through a systematic devo- lution of fiscal authority, attempts to establish 'two-tiered" bank- ing in the financial sector and the encouragement of nonbank (and nongovernment'al) financial intermediaries, a progressive relaxation of central planning in favor of market mediation in all but the most important sectors, the spread of the household production responsi- bility system (PRS) in agriculture, and promotion of rural indus- trialization--largely beyond the purview of annual plans and state ownership. In the process, 1 ?ers of bureaucratic control have been stripped away; (b) an expansion of consumption opportunities as a matter of policy so as to restore workforce incentives eroded by years of austerity; (c) technological advance--after years of autarky--abetted by the encouragement of foreign trade and foreign capital inflow, progres- sive commercialization, the rising prominence of free markets, and the adoption of commercial norms to guide and judge the performance of all but the most strategic enterprises; and (d) active measures to encourage economic integration in the Chinese economy, at the level of regulation and bureaucratic decision-making as well Rs across regions and sectors. Except for the trade in a few heavy industrial items and bulk commodities from agriculture, the country in the prereform period was divided into a number of 1/ In parallel, several of the experiments have been diffused horizontally to jurisdictions outside of the RSAL program, or have been adopted and applied throughout their jurisdictions by prefectural and provincial governments responsible for the original experiment. 2/ cf. Report No. 7483-CHA, "China% Macroeconomic Stability and Growth Under Decentralized Socialism (FY89 CEM)" for a detailed review of Chinese economic performance and constraints during the 1980s.  - 3 - subeconomies as a result of regional self-sufficiency policies, each more or less independent.3/ By encouraging enterprises in industry and agriculture to forge horizontal links across sectors and regions, Chinese reformers are attempting to break down the severe compartmentalization that was one of the legacies of Mao Zedong's preference for regional and local autarky and the hierarchical struc- ture of supervising ministries. 2.5 Between 1979-88, China averaged a growth rate of more than 10 per- cent per annum, more than doubling per capita income and achieving (between 1980-88) an almost threefold expansion in foreign trade. Agriculture responded immediately to the measures introduced in the late 1970s and pro- vided a pow..rful impetus to growth during the first half of the 1980s.4/ Industrial reforms, placed into effect in 1983/84, gave an equally strong stimulus and during 1985-88 most of the growth impulse came from the vigorous expansion of industry. Because of the changed relative prices for agricul- tural products, the powerful incentives provided in the PRS, and the emergence of dynamic off-farm rural employment opportunities, the rural four-fifths of the populace participated fully in this new prosperity. Unprecedented rates of sustained GDP growth have been matched by a substantial increase in domestic savings that have helped to maintain the resource balance, and except for the period 1985/86, minimized China's reliance on foreign capital to meet the enterprise sector's enormous appetite for investment. 2.6 From the very start of the reform program, it was apparent that decollectivizing a planned economy subject to chronic shortages was beset with risk. When the Chinese began their grand national experiment, strong latent demand pressures from enterprises as well as consumers lay beneath the sur- face. The recent and still imprecise literature on socialist economic transi- tion and approaches to manage the monetary overhang had not been researched and recorded, nor would these topics be addressed for another ten years except in Chinese journals. The then pervasive use of accounting prices in China gave little indication of "true" opportunities to improve efficiency, and a pragmatic approach of experimentation and learning-by-doing was adopted. As we now realize, the dangers of macroeconomic stability are particularly seri- ous if an economy is operated near its maximum potential, a course which the leadership wisely chose to follow in the 1980s given the low per capita incomes in this still very poor economy. And during the first five years of reform, a combination of factors helped keep macroeconomic disequilibria in check. Reforms were concentrated in the rural sector, and food supplies and 3/ This cellular pattern of development involved a considerable sacrifice in efficiency: industrial location was not guided by comparative advantage, scale economies remained unexploited, the push for agricultural self- sufficiency inhibited regional specialization, the financial sector was directed by regional credit plans with little incentive to transfer resources or mobilize deposits across sectoral and regional boundaries, and the potential for China's vast internal market to generate trade and competition was neglected. 4/ cf. Report 8652-CHA: "Managing An Agricultural Transformation," for a review of the sector's performance in the 1980s.  - 4 - rural industrial production expanded at a brisk pace, which increased produc- tivity and welfare, dampened price increases and restrained the inflationary potential inherent in a concurrent remonetization of the economy. Consumption provided the fuel for growth and mostly paid for itself through improved incentives for productivity increases. 2.7 When the focus of reform shifted to state enterprises in the mid- 1980s, the situation changed considerably. Enterprises were given more inde- pendence and the option of participating in free market trading, but they were not systematically subjected to the rigors of market discipline and account- ability. Moreover, the unreformed pricing system for the centrally positioned enterprises in heavy industry, mining, energy and the transportation sectors interfered with socially efficient investment decisions.5/ Second, decentral- ization and fiscal devolution encouraged the provinces to aggressively pursue their own industrial ambitions, which resulted in much duplication, the estab- lishment of regional monopolies and the waste of capital. 2.8 Growth accelerated to over 11 percent per annum between 1984 and 1988, pushing the economy to the limits of its productive capacity. Infla- tionary pressure accrued and by 1987 had broken into the open. The prices of food and other wage goods both increased and began to fluctuate in 1987/88, a phenomenon which China's influential urban population had not encountered since 1949. Urban dwellers earning only partially indexed incomes began agi- tating for higher wages and bonuses. Farmers began to object to the rising cost of manufactured farm inputs. During 1988, enterprise wages increased by more than 25 percent in nominal terms, bonuses at an even faster rate, which introduced a wage push element into the inflationary pressure. The budgetary deficit increased to about 2.5 percent of GDP in 1988 and the retail price index moved upwards in 1987 by 9.2 percent, which accelerated in 1988 to 24.9 percent. 2.9 Though insignificant when compared with the trends in other coun- tries that the world became accustomed to in the 1980s, the Chinese leadership recognized that the economy might be particularly susceptible to destabiliza- tion if deficit financing and the pace of inflation were allowed to acceler- ate, since its macroeconomic control mechanisms remained largely those of central planning: spigots which could be adjusted when required, but which had not yet been transformed into self-regulating mechanisms. It was against this background of partial reforms that matters came to a head in 1988. When, under these overheated conditions, the authorities announced in June 1988, plans for a major price reform to be implemented in 1989, inflation worsened when consumers switched from financial into real assets. Prices that had been rising at annualized rates of 10-15 percent in early 1988 soared to rates approaching 80 percent. Faced with this crisis, a mild consumer panic in August 1988 focused the leadership's attention on the need to adopt strong policies to regain control over China's macroeconomic aggregates. The Govern- ment postponed further price liberalization and, in late 1988, adopted a series of stabilization measures. 2.10 The "Program of Economic Rectification". Of necessity, emphasis was on administrative means to restabilize the economy since the institutional 5/ In 1988, the investment ratio reached almost 39 percent of GDP.  - 5 - framework for indirect regulation had not yet been fully developed. A strict program to regain control over inflation, by curtailing enterprise investment hunger largely through the reimposition of sectoral and regional priorities, by placing constraints on enterprise bonuses and salary increases, through reimposition of annual credit plans in order to control the expansion of mone- tary aggregates and channel credit into perceived priority sectors, by some use of indirect controls--particularly of interest rate policy, by stricter enforcement of price controls on commodities subject to central allocation and measures to contain the growth and fluctuation of prices subject to "guidance" pricing, a recentralization of foreign trade in key commodities and the use of import restrictions on nonessential commodities, and actions to simplify the tax system and increase its buoyancy.6/ 2.11 These measures quickly curtailed inflation, from an annualized rate of 26 percent in December 1988 to less than 1 percent in the first quarter of 1990. They have also checked the growth of labor earnings in the formal sec- tor, and for the time being at least, alleviated cost push pressures. In addition, these steps plus curbs on imports have reversed a growing imbalance in China's foreign trade accounts. Preliminary results for 1990 and the first five months of 1991 suggest that though structural problems remain, glowth has resumed, inflation has been held in check, investment and credit controls have been relaxed, the prices of some public services and basic goods (most recently, the prices of grains) have been increased, the pace of exporting has resumed, import curbs are being dismantled, foreign investment and tourism have picked up considerably, and progress is being made in negotiations between the state and the provinces to simplify tax administration and increase collections. III. LOAN OBJECTIVES AND DESCRIPTION 3.1 It is in this setting of sustained growth at high rates during the 1980s and the overheating of China's economy in 1987/88 that the RSAL was formulated. The loan was the first (and to date, the only) adjustment opera- tion the Bank has financed in China, and it aimed to service critical foreign exchange expenditures and reinforce the most successful part of the reform program, which was--and unquestionably remains--China's rural sector reforms. 3.2 Formulated in late 1987 and early 1988, the RSAL was designed to increase rural productivity and promote policy and institutional experimenta- tion in critical segments of rural economy that had been recognized as needed for promoting productivity and increasing the effectiveness of market regula- tion and fiscal intervention. The main objectives of the RSAL were to foster agricultural development and specialization; increase efficiency; encourage nonfarw. rural enterprises--both industrial and commercial; expand rural exports; provide productive off-farm employment opportunities; reduce agricul- tural and urban food subsidies; improve agricultural tax buoyancy; and improve 6/ The austerity program is reviewed in Report No. 8440-CHA: "China: Between Plan and Market" (FY90 CEM).  -6- the range and efficiency of rural financial services.7/ The program sup- ported by the RSAL aimed to deepen policy reforms in the areas of (a) agricul- tural price liberalization and trade reform, (b) market development and integration, (c) reform of the rural land management system, (d) rural indus- trialization and commercial activities, (2) marketing and seltice *ctivities in the less commercialized areas of China's rural economy, (f) state-level support for investment in agriculture, and (g) rural financial market reforms. The program also had a fiscal component--to reduce subsidies on urban food consumption and improve the buoyancy of agricultural taxation. The policy package featured intended reforms at two levels: legal enactmeats and regula- tory measures to extend reforms that had already been tested successfully at the regional level and were ready for implementation nationwide, and tailored regional reform experiments to devise principles for subsequent national poli- cies. 3.3 The RSAL was a single tranche operation, consisting of a Bank Loan in the amount of $200 million and an IDA Credit of SDR 72.2 million ($100 million equivalent). It was offered in the expectation that repeater loans would fol'aw to deepen the initiatives undertaken in the RSAL and also extend the reform program to new policy areas (e.g., input supply). Scheduled to close on June 30, 1990, two years after Board approval, the proceeds of the 7/ The findings of several Bank economic and sector reports contributed to the design of the RSAL, notably: China-LongTerm Development Issues and Options (1985--Johns Hopkins Press) and Annex 2--"Agriculture to the Year 2000'; Report No. 6445-CHA: "China--Finance and Investment' (1987); Report No. 6589-CHA: "China--Livestock Sector Study' ;1987); Report No. 6680-CHA: "China--External Trade and Capital Reform" (1987) and others whose preparation was well advanced when the RSAL was formu- lated, including: Report No. 7267-CHA: "China--Rural Industry: Overview, Issues and Prospects' (1989); Report No. 7483-CHA: "China--Macroeconomic Stability and Industrial Growth Under Decentralized Socialism" (FY89 CEM); Report No. 7605-CHA: "China--Revenue Mobilization and Tax Policy" (1989); and Report No. 8415-CHA: "China--Financial Sector Review" (1990). Reference was also made to a large number of published studies, journal articles and academic papers that dealt with various aspects of China's rural reforms, a selection of which is referred to in the two supplemen- tary volumes to the RSAL President's Report.  -7- RSAL loan and credit were earmarked for the importation of agricultural inputs and machinery. The counterpart proceeds were allocated, inter alia, to meet the incremental financial requirements of several regional reform programs (RRPs) that were accelerated within the RSAL umbrella, and to develop monitor- ing systems in the RRPs. 3.4 Features of the Program. Program specifics included, in the realm of markets and marketing, actions to (a) reduce local government fees on shipments traversing administrative boundaries and simplifying their adminis- tration, (1)) eliminate local licensing requirements and other "nontariff" barriers to internal trade, and (c) develop marketing infrastructure and Institutions through the promotion of marketing cooperatives and other commer- cial forms in areas not adequately served by existing organizations. To deepen the agricultural pricing reforms of the early 1980s, the Government aimed to (a) further reduce the share of agricultural procurement carried out at fixed Plan prices (which mainly involved grains), (b) transform over a period of two to three years the "two-tiered' pricing system for grains into a system of market determined prices by eliminating the lower administered tier, and (c) raise farm input prices for chemical inputs and energy. While the associated retail and producer subsidies were being reduced, measures to aug- ment agricultural taxation would be introduced.8/ 3.5 With the intention of creating an institutional and legal foundation to reduce the extreme fragmentation of agricultural lands that occurred when the PRS was introduced, the rural land system reforms supported by the RSAL were designed to (a) reinforce the capabilities of China's State Land Adminis- tration (SLA) by upgrading the land recording system and expanding the scope of cadastral survey work in the rural areas, and (b) develop modalities for converting the then imprecise contractual relationship between the land-owning township or village and the farmer into a long-term leasehold relationship in which use-rights are inheritable, transferable and mortgageable.9/ Support for rural industrialization was subsumed in policies to promote increased efficiency in the TVEs and their continued expansion, and in the articulation of industrial policies for nonstate-owned enterprises. Within the RSAL umbrella. these policies encompassed (a) the enunciation at the national level of "companies law" for private firms and collectively owned TVEs, (b) acceler- ated implementation of the "Spark" program, a technical assistance and small industry extension program, to upgrade the capabilities of the small enter- prise sector, and (c) reforms to trade policy, the encouragement of interna- tional joint ventures, and focused support to enhance exporting by TVEs located in China's coastal zones. The TVE component also had a financial sector dimension, designed to expand financial services to the TVEs, introduce 8/ The grain system reforms are discussed further in Working Paper No. 1: "Grain System Reforms," which was prepared by the PCR mission and placed in file. 9/ A detailed review of China's rural land policies is presented in Working Paper No. 2: "Land Management System Reforms," which was prepared by the PCR mission and placed in file.  - 8 - liquidation regulations and increase the mobility of fixed (and financial) assets among the TVEs.10/ 3.6 Several important initiatives to improve the flexibility of rural financial markets were also underway in China. In parallel, plans were fairly advanced to reform the State's rural investment system, also grounded in financial intermediation. Components were thus added to the policy package in these areas which involved both the organized sector and the rapidly growing informal sector, aiming to broaden formal sector intervention through (a) sup- port for the establishment of a centrally positioned but financially autono- mous investment corporation (para. 4.14) to offer participation, syndicate and make loans to agribusiness enterprises and formal and informal agricultural financial intermediaries, and to administer the counterpart proceeds from the RSAL in order to support joinit ventures and meet the "transitional costs" of adjustment in selected experimental program areas, (b) to strengthen and gen- eralize important local developments involving the state-owned banks, which relaxed restrictions on deposit taking, generally broadened t1le range of rural financial services offered by the state-owned banks, and had readied for implementation a framework for an interbank market and a regional clearing center, and (c) in the realm of informal financial services, both a study of regulatory requirements for the burgeoning farmers' "cooperative foundations" (mutual savings and credit associations) and of the informal savings and loan associations that were being organized mainly to service TVEs' financial requirements in China's rural areas. 3.7 Underlying all of these initiatives was a program of legal and regu- latory enactments--both within the RRPs and in some instances at the level of the State--to establish the needed authority for commercial enterprises to evolve under various ownership forms, for voluntary cooperatives to be orga- nized, and for the creation of a framework to regulate their commercial activ- ities, contractual agreements, liabilities and liquidation. 3.8 The RRPs. Although the Government of China indicated in its policy letter Il/ that some important national policy reforms would be implemented in 1988, 1989 and 1990, it was anticipated at appraisal that the bulk of the Government's programs to deepen the rural reforms would be experimented with firstly in the context of the several RRPs supported by the RSAL. Regional experimentation has been the pattern in China for testing major policy reforms in a semi-controlled environment before extending the more successful ones nationwide. These usually are formulated through provincial and local initia- tive, though the more far-reaching experimental reforms receive State Council endorsement, which authorizes the temporary suspension of existing rules, regulations and policies that might otherwise inhibit successful experimenta- tion, permits the State to assume coordination responsibilities, and commits the State to furnish expert advice, technical assistance and "transitional" financing to the responsible local agencies. 10/ An overview of China's rural industrialization policies and the experi- mental reform programs is provided in Working Paper No. 3: "Rural Indus- trialization Component," which was prepared by the PCR mission and placed in file. 11/ Annex 4 of Report No. P-4801-CHA: the Memorandum of the RSAL.  -9- 3.9 At the time of project appraisal, State Council endorsement had been given to 11 RRPs in the realm of rural policy reform. Coordination and tech- nical advice were effectuated through its rural policy arm, known as the "Research Center for Rural Development" (RCRD), and a network of subordinate institutions at the provincial and county levels. Spread throughout the east- ern half of China (where 80 percent of the rural population resides) the RRPs featured experimentation ir. the following areas: (a) grain pricing, marketing and agricultural tax reform [one each in a grain-surplus zone (Xinxiang, Henan) and a grain-deficit zone (Yulin, Guangxi)). These "grain system" RRPs aimed to: (i) liberalize grain procurement and sales pricing, reduce rationed grain allotments, and raise input prices to market levels; (ii) reduce subsidization, eliminate implicit agricultural taxation, and improve the yields of direct agricultural taxation; and (iii) devise feasible arrangements and procedures for managing the transition to more liberalized grain pricing, and for financing the associated costs of adjustment. (b) rural land management system reform [one in a poor labor-surplus area (Meitan, Guizhou) and three in high-income labor-deficit areas (Southern Jiangsu Province; Nanhai, Guangdong and Shunyi County, Beijing)]. In these RRPs, two entirely different approaches are being tested to reduce the extreme fragmentation of agricultural land in China and encourage agricultural investment, through: (i) decentralized means (Meitan, Guizhou), by the establishment of working markets in rural land use rights, improved arrangements for land recording and administration, and the creation of a land bank to offer nmortgages secured in the rights being trans- ferred, and (ii) by largely administrative means (in the high-income, labor- deficit areas) to consolidate farmlands, scale up farm size (in pursuit of perceived "scale economies" in grain production), and promote agricultural mechanization through subsidized credit and local budgetary expenditures. (c) TVE development and reform [two RRPs featuring primarily private ownership (Wenzhou City, Zhejiang and Shangzhi, Heilongjiang) and one tailored mainly to collective ownership: viz. nonstate, owner- ship (Fuyang, Anhui)]. These RRPs were designed to improve the TVEs' business environment and efficiency of operations and capital- ization, through the testing of experimental reforms to: (i) define enterprise property rights and forms of ownership, (ii) establish liquidation procedures, (iii) promote investment in selected subsectors and in industrial infrastructure,  - 10 - (iv) systematize the provision of technical assistance to TVEs, (v) test new ways to capitalize TVEs (e.g., shareholding systems, loans from nonbank intermediaries), (vi) establish labor exchanges, and (vii) curtail unwarranted local government interference and simplify TVE administration and regulation. (d) policy and institution-building support for rural cooperatives [one each for special-purpose marketing cooperatives (Shangzhi, Heilongjiang) and multipurpose cooperatives (Yutian, Hebei)), and (e) policy and institutional suppott for rural financial markets [one each for the formal sector (Guanghan, Sichuan) and the informal sector (Fuyang, Anhui)]. In the formal sector, the Guanghan RRP was designed to: (i) promote competition among the state-owned banks by removing geographical restrictions on deposit taking and subsectoral restrictions on lending, (ii) improve the efficiency and accountability of the state banks through improvements in management, organization, personnel management and training, and financial planning, accounting and control procedures, and (iii) reduce the "overhead" costs of intermediation by establishing interbank markets and clearing houses. The "informal" sector component of the Fuyang, Anhui RRP aimed to create and strengthen savings and loan type associations to mobilize rural deposits and channel these to TVEs. It was understood at appraisal that additional RRPs might be brought under the wing of the State Council as the program was implemented. It was also agreed during loan negotiations that monitoring systems would be set for the RRPs. 3.10 Procurement and Disbursement. The RSAL's procurement arrangements involved use of ICB and international shopping procedures. It was expected that procurement under ICB procedures would amount to $125-150 million. Dis- bursements would be made against a positive list of items to be procured. IV. IMPLEMENTATION PERFORMANCE The Rural Reform Program: National Policies 4.1 In the RSAL Policy Letter (paras. 15-18), the Government of China indicated that "the major objective ...for food price reform is to expand the scope of market pricing." To these ends, the Government undertook at the level of national policy to (a) gradually reduce the volume of procurement of  - 11 - farm products at official prices, increase those producer prices which remain subject to administrative controls and increase the proportion of sales through the ma-ket; and (b) reduce government subsidies on food sales,121 with subsidies in the future to be granted only to low-income groups, employ- ees on fixed incomes, and pensioners. 4.2 Performance has been mixed. The quota production prices for grains and vegetable oils were increased nominally by an average of 18 percent in late 1988. Owing to record harvests in 1989 and 1990, however, the Government was forced to retain the volume of official procurement at the pre-RSAL level of 50 million tons, mainly as a producer price support measure. On the sales side, the Government was forced in late 1988 to again postpone grain price reform until control over inflationary pressures in the economy had been regained.13/ Consumer food subsidies continued to increase. 4.3 By 1990, however, the worst of the inflation had passed, and the Chinese Government began to implement grain marketing and price reform: first by establishing national- and provincial-level wholesale markets for the main grains--to introduce market mediation in this hitherto wholly administered segment of agricultural marketing in China--which initially is intended to operate alongside the state-owned grain distribution system during its forma- tive years while necessary investments are being made, and within 3-5 years, will fully supplant the management of interprovinciai grain transfers except- ing transfers to poor, backwards locales. To provide fiscal leeway for pro- ducer price increases and the ultimate phasing out of administered pricing in the grain sector, the Government announced on April 29, 1991 substantial urban price increases for table grains and animal feedstuffs, ranging from 50 per- cent to more than 200 percent by commodity and grade, equally significant increases in the prices of rationed edible oil supplies--prices which had not been increased since the mid-1960s--and a parallel decrease in urban per capita allotments under China's grain ration program. The Government also announced that high-quality table grains would no longer be distributed 12/ Accounting for at least 30 percent of the State budget, grain distribu- tion and sales subsidies are the main source of agricultural subsidiza- tion in China, unlike the situation in former CMEA economies where sub- stantial producer subsidization also exists. 13/ Though precipitated by a consumer panic in August 1988, this announcement was an inevitable consequence of the China's need in 1988 to curtail investment hunger in the enterprise sector, head off the phenomenon of "enterprise pass-through" of major price increases in wage goods, needed to dampen inflationary expectations using the available tools and levers. (These tools, in 1988, were largely administrative ones except in the rural economy, where market mediated development had already made strong inroads into central planning.)  - 12 - through the ration shops at planned prices, but henceforth would be sold at market prices.14/ 4.4 Reform of the rural land management system has proceeded less dra- matically. In the Policy Letter (paras. 19-22), the Government indicated that "A major element of future reform will be to establish a land system that will strengthen the individual farmer's right to use the land.... (and) encourage the transfer of land use rights to encourage production efficiency." Aiming to implement provisions of China's Constitutional Amendment of April 12, 1988 (which stipulated that "The right of land use can be transferred in accordance with the law'), the Government undertook at the level of national policy to "formulate (by the end of 1988) implementing policies and regulations required to establish markets in land use rights, establish the mortgageability in of land use rights, and guide the resolution of land use disputes." To improve China's land administration system and dampen the pace of land conversion from agricultural to nonagricultural use, the Government indicated that its newly established State Land Administration would 'initiate a national land regis- tration system to be implemented by land administration bureaus at various levels (of civil administration)." Support for these actions would be pro- vided through the formulation by 1990 of decrees and regulations to sanction the SLA's land registration and conversion policies. 4.5 National laws to establish markets in rural land use rights were drafted in 1989, though these remain before the State Council and Standing Committees of the Mlational and Provincial People's Congresses, and the momen- tum for their enactment appears to have dissipated. There is a rationale on the Government's side, though not a convincing one. Lacking any semblance of organized rural land markets in China beyond 15/ the purview of the RSAL experimentation, the Government is fearful of the kinds of speculation that may emerge were formal permissions given for subleasing and the contracting of land use rights among China's farmers. Another dimension involves the assig- nation of land-contract approval authority among the various levels and departments in local government, and thus the right to assess and collect land taxes and fees (referred to in China as the need to "clarify ownership") under the country's decentralized fiscal system. Third, there is justifiable con- cern that sound recording and administrative arrangements have yet to be articulated for agricultural lands by the SLA, whose operations thus far only encompass urban lands and nonagricultural rural lands. As a result of these factors, regional and local land administrators and tribunals possess neither the required package of detailed regulations, land valuation and recording procedures, nor precedents in settling land related disputes which will 14/ These are major reforms. Ration sales (which currently govern more than half of total grain sales in China, and are mainly available to China's urban residents) have been conducted at prices that have not been adjusted upwards for more than two decades. Prior to the increase, these prices amounted to only 20 percent of the equivalent international price levels, and also were considerably below the still paltry levels that have been set for administered producer prices. 15/ Informal, short-term transfers occur, but these are neither regularized nor are they systematic.  - 13 - invariably arise once a more flexible system of voluntary land transfers is adopted. 4.6 On the other hand, the SLA has moved rapidly to bring land conver- sion under control. The above-mentioned regulations were enunciated in 1989, one year ahead of schedule, which established administrative procedures and a schedule of fees for agricultural land conversion. Following an intensive publicity campaign, enforcement of the new land conversion procedures in 1989 and 1990 has slowed considerably the annual decline in cultivated area. 4.7 During the first decade of reform, relaxation of earlier restric- tions on rural industrialization unleashed the initiative of local communities and individuals and raised rural nonstate firms' share of total industrial output from 8.7 percent to 25.7 percent, in the process absorbing up to 70 million additional workers displaced from farming into industrial or service occupations. But the legal framework for the operation of both collective and private firms remained ill-defined, and their access to official support ser- vices (finance, information, training) was restricted, frequently resulting in low technical standards: these dual weaknesses constituted the focus of the relevant RSAL program at the national level. 4.8 Significant progress was achieved in clarifying the legal status of private firms with regulations enacted in June 25, 1988, which abolished an earlier employment ceiling of eight workers, and also authorized creation of limited liability companies with up to 30 shareholders (though with tight restrictions on the transfer of shares). Regulations on rural collective firms, adopted in June 1990, promoted the separation of management from owner- ship through contractual arrangements, but also envisaged a strengthened role for higher levels of government in providing guidance and supervision to such enterprises (they remain, however, outside the state plan). By defining own- ership rights as residing in the local community as a whole, the collective regulations could not offer a solid legal basis for recognizing the multiple ownership claims which frequently exist on a de facto basis. Local experi- ments with more flexible models of joint-stock companies were undertaken within the RRPs, and directives dating from May 1991 authorize such experimen- tation in other regions. There remain, however, anomalies in the tax treat- ment and administrative supervision procedures for firms in different owner- ship categories, and in the absence of a strong overall judicial framework for impartial enforcement of business law the operating climate, especially for private enterprises, still owes much to local discretion. 4.9 Overall progress in promoting exports from rural industries has been impressive: these rose from $1.2 billion in 1985 (4.4 percent of total exports) to $8.0 billion in 1988 (16.9 percent of the total), and continued to grow during the RSAL implementation period to an estimated $13.0 billion in 1990 (24.4 percent of all exports). Much of this growth could be attributed to broader trade reforms which allowed domestic firms to retain part of their receipts in hard currency and, from 1988, to trade foreign exchange in a par- allel market--though November 1988 reforms targeted at the larger rural exporters, mostly concentrated in coastal provinces, sought to ease their access to export credits and imported inputs and technology. Both the private and collective enterprise regulations authorized rural firms to enter into international cooperative ventures. The period also saw continuation of offi- cially sponsored "Spark" programs to diffuse improved technology and staff  - 14 - training to rural firms (though since 1986 much of the responsibility for funding and administration had been decentralized to lower levels of govern- ment). 4.10 More broadly, however, the 18 months from late 1988 to early 1990 witnessed a more difficult national policy climate for rural enterprises. The RSAL program's intention to improve their access to credit through established banking channels came into conflict with a credit squeeze which initially singled out nonstate firms for particularly tight restrictions, and--at its height in late 1989--caused extensive dislocation. Simultaneously, formation of new private lending institutions in rural areas was placed on hold, in part reflecting concerns over potential financial instability: it is not, however, clear that the resulting hiatus has been fully exploited to strengthen the prudential regulatory framework for such lending. In this climate, RSAL's intention to introduce formal bankruptcy regulations for nonstate firms, at least on a trial basis, was not accomplished, though concerns raised by the banking sector, which has to date been allowed limited scope formally to write off bad debts, would likely have made these measures controversial at any time. 4.11 Following the period of most intense austerity, which was accompa- nied by central directives encouraging administrative sanctions against rural firms to curb inefficiency, unfair competition with state firms and pollution, the overall policy climate began to ease markedly from about March 1990. Subsequent official statements have shown a more balanced appreciation of the sector's contribution to the national economy, private entrepreneurs have been publicly assured of a stable policy climate and the full application of the 1988 regulations, growth has resumed (rebounding, in the case of rural collec- tive industries. from stagnation in late 1989 to a 24 percent real incre&3e during 1990), and signs of greater openness to reform experiments (e.g., with shareholding firms) are again beginning to be witnessed. 4.12 There remain, however, several questions of rural industrial and commercial policy that have yet to be addressed in national enactments, in spite of commitments to do so within the RSAL's policy framework. These include the sanction of ownership and enterprise management forms in a broader "companies law' for all forms of nongovernmental enterprise; firm and consis- tent rules to govern entry and egress in the sectors where TVEs have evolved, and enterprise liquidation procedures; rules to govern contracts, liability and contingent obligations; general rules to govern capitalization and enter- prise taxation (including the formulation of consistent, transparent account- ing methodologies); workforce mobilization and employment policies, and--for the larger enterprises--safety net provisions for their staff and employees; and the uniform application of creditworthiness procedures by the state-owned banks and assessment of tax obligations by local bureaus of finance. Though considerable experimentation has taken place under the provisions of the RSAL agreements, all of the above will ultimately be needed to establish a stable business environment for the TVEs. 4.13 The deepening and further liberalization of China's rural financial markets (RFMs) during the RSAL implementation period also had to be curtailed under the recent austerity program. However, the contraction of reform has been more pronounced since 1988 in the formal sector than in informal finan- cial markets. Under the RSAL, commitments to RFM reform were mostly at the  - 15 - expertmental level: national-level commitments were confined to the estab- lishment and initial capitalization of an independent state-owned investment company, which would operate on commercial terms while stimulating technology transfer through investments in marketing and agroprocessing, joint ventures with foreign agribusiness concerns, and the exporting of higher-valued fresh and processed agricultural commodities. The second was a commitment to study and formulate procedures and criteria for regulating financial intermediation in rural China's burgeoning informal sector. 4.14 The charter for the investment corporation, known initially as the China Agribusiness Trust and Investment Corporation (CATIC), later subsumed under the State's Agricultural Investment Corporation and renamed the State Agribusiness Trust and Investment Corporation (SATIC), was approved by the State Council in late 1987 after its charter and business plan were reviewed by the Bank. Following a shaky start, the SATIC has made reasonable progress towards achieving its objectives. As outlined in Part II of this report, the SATIC has managed to broaden its capitalization; fostered the creation of seven SATIC "clones" at the provincial and county levels to replicate SATIC operations and serve as conduits for SATIC loans and participation; provided technical assistance, guidance and financial support for the formation of farmers' cooperative credit societies,16/ a relatively new but rapidly spread- ing development in China's informal financial markets; participated directly in the establishment of more than 50 processing and marketing enterprises employing improved technologies; helped to upgrade a considerably larger num- ber; and became the participating Chinese partner in several joint ventures formed with Thai, American and other international agribusiness companies. The SATIC has also served as the principal channel for routing the RSAL's counterpart proceeds to the experimental program areas, both those within the purview of the operation as well as other experiments endorsed by the state and local governments, onlending in the process the equivalent of $100 mil- lion. It has very rapidly pulled itself together as an effective nonbank financial intermediary and, from all appearances, is being managed effec- tively. 4.15 It was not Government's intention that the RSAL would support major policy reform in rural financial markets. However, in recognition of the rapid and basically unregulated expansion of trust and investment corporations and of nongovernmental financial service institutions that was occurring in rural areas, as well as the deleterious effects which maintenance of geograph- ical and other restrictions have had on rural lending and deposit taking by state banks, the RSAL was offered partially in expectation that the Government would carry out in 1988 the Review of Rural Financial Market Policies referred to in para. 33 of the Policy Letter. This review was to be followed by the preparation of guidelines in 1989 for future reform of China's rural financial system. 4.16 During appraisal of the RSAL, Bank staff understood that the Review would focus on the capital structure, deposit taking, lending and service operations of both forma. and informal rural financial institutions; existing policies, regulation, resource limitations and operating constraints; and 16/ Known in China as "farmers cooperative foundations.' More than 8,000 of these entities have fc.rmed, spontaneously, since 1988.  - 16 - options available to govern future relations within the formal system and between the formal and informal systems to improve the effectiveness, finan- cial integrity and flexibility of institutions active in China's rural finan- cial markets. Special topics for the review included (a) an assessment of government policies towards the financing of rural investments, (b) credit/ lending policies and performance, both global, and specific to the various kinds of financial institutions, (c) deposit mobilization policies and perfor- mance, (d) the structure of passive and active interest rates, and the cost of funds mobilized, and (e) policy and institutional requisites for implementing a system of land banking. 4.17 The need for the Review was evident even before onset of the eco- nomic crisis in late 1988: its findings and recommendations were expected to guide the future evolution of the rural financial system from a highly cen- tralized adjunct of budget management (though one where the informals were proliferating largely without benefit of responsible oversight), to a more indirectly managed system for financial intermediation in rural areas. How- ever, the study could not be initiated. This in part relates to the reluc- tance of the People's Bank of China (PBC) to enunciate regulations for the still comparatively insignificant informal sector before it has been able to issue regulations for the formal segment, but it also relates to the limited expertise available in China for carrying out this kind of study. There is no question that the study is urgently needed. As a remedial measure, the Bank has programmed a study of rural financial markets in the China/Mongolia Department's CESW program for FY92, which would likely be carried out with participation by the PBC, SATIC staff and the Ministry of Agriculture's Exper- imental Programs Office, assisted by the Ministry of Finance and the Agricul- tural Bank of China. Progress With the Reform Experiments 4.18 As with the national reforms, progress with implementing the RRPs was mixed, with some policy areas being more severely affected than others by the austerity program and the post-Tiananmen debate. However, all of the RRPs were subjected to financial and other constraints between late-1988 and early 1990, which generally slowed the pace of implementation. Beginning about mid- 1990, the momentum for reform revived in China, and the RRPs began to imple- ment their postponed but critical next steps. For the grain system reforms, these next steps entail a further increase in urban consumer prices 17/ and further developing the agricultural tax reform to partially offset increased outlays required when the RRP authorities raised local producer prices to near-market levels in 1988 and 1989. For the land system experiments, this involved extending the principles te3ted in the RRPs to neighboring jurisdic- tions. For the TVE programs, this entails firstly the promulgation of rules and regulations to establish legal personality more precisely, to govern merg- ers, bankruptcy or liquidation, to simplify administrative procedures, to strengthen the technology support system, and to foster interregional labor contracting. Lastly, in rural financial markets, this entails the spread of banking system reforms to other jurisdictions within the constraints posed by 17/ Beyond the increases already implemented within the design of the RRP (i.e., in Yulin, Guangxi), else announced in conjunction with the nation- wide increase on May 1, 1991.  - 17 - still stringent administrative regulation of China's financial sector, and the formulation and application of trial rules to bring the informal sector (i.e., farmers' cooperative foundations and the rural savings and loan societies) under responsible financial ovt-rsight. Independent of the dampening effects of austerity, however, some experiments are still in the early stages of implementation, while others.-according to existing designs--are largely fin- ished, but may have design flaws worthy of additional attention. These show up most clearly in the land system, rural industrialization and rural finan- cial market experiments, but also--to a lesser extent--in the grain system RRPs. 4.19 Among the land system experiments, the Meitan, Guizhou market-based reform and a new RRP in Pingdu County, Shandong (which received State Council endorsement subsequent to approval of the RSAL, and was brought within the RSAL framework following the visit of the first supervision mission in Septem- ber 1989) deserve continued high priority. Additional state guidance may be required in Meitan to resolve the confusion surrounding the issue of mortgag- ing land use rights, where China's first rural Land Finance Corporation, set up as part of the experimental design, has yet to offer mortgages secured in land use rights. Rather, it appears to have become another channel for financing TVEs, albeit a needed and useful one. Other reasons put forth by Government include a perceived difficulty of evaluating land use rights in the absence of an operating market, and farmer resistance towards relinquishing lands in the absence of effective social insurance schemes. Previous Bank supervisions have noted that synthetic techniques for evaluating land have long been practiced in Western countries, and this should not present insur- mountable problems. On the other hand, the lack of effective social insurance probably represents a major flaw in the Meitan design, and may typify the kinds of resistance that could be expected were land banking facilities estab- lished in other parts of rural China. But rather than give up otn the land banking features of the Meitan experiment, staff continue to believa that the rural social insurance issue be addressed head-on, by establishing a prototype provident fund for farmers in Meitan County, similar to that available to urban residents, then observe any changes in farmer willingness to alienate their land use rights.18/ 4.20 In Pingdu, a redistribution of land use rights by the auction system has largely been accomplished, and it appears to provide a model for managing an initial consolidation and redistribution of land within the constraints still posed by the system of compulsory grain procurement. But it is still not clear wlhich additional steps are intended (if any) to meld this useful technique with parallel programs to foster investments in land and productiv- ity. These details should be spelled out quickly, including the intended roles of the collective and of farm households in investment and production decision-making. For differing reasons, previous supervision missions have 18/ Though it would involve additional cost, setting up a social insurance component midway through the course of the Meitan experiment would be consistent with the intent of the overall program: to test reforms, and modify the more promising ones as necessary to ensure their viability and replicability. If Meitan County requires additional financial and techni- cal support in this endeavor, the state and provincial governments should be prepared to avail same.  - 18 - recommended that state endorsement for the three remaining land system RRPs in labor-deficit zones be withdrawn. From Shunyi, Beijing, because this "experi- ment" was designed and implemented under very special circumstances, having limited replicability; from the 'three counties" program in Southern Jiangsu, because the experiment is mainly a device to fulfill county grain quotas through collective intervention (and thus has confused objectives and limited use as a pointer for general land system reform in labor-deficit areas); and from Nanhai, Guangdong, because it has proved impossible to implement the RRP in the face of farmer resistance to its more coercive features. 4,21 Among the rural industrialization RRPs, the two main ones were located in Fuyang Prefecture, Anhui Province and Wenzhou City, Zhejiang. The former aimed to improve the policy environment and industrial support services for TVEs largely under collective ownership and serving internal markets. The latter was focused primarily on privately owned TVEs, and contained a strong element of export promotion. After the RSAL had been prepared, a third RRP, located in Zhoucun City, Shandong was given State Council endorsement and brought under the RSAL umbrella. This RRP was designed to experiment with shareholding systems as a means to augment TVE capitalization. 4.22 In addition to being severely affected by the economic austerity program (cf. PCR Working Paper No. 3--on file), the RRPs for TVEs had design and coordination problems as well. These are aptly illustrated by the Fuyang experience. Here the program covered eight counties in a poor, labor-surplus area, each responsible for identifying and designing its own component(s). These totaled 20 at the time of RSAL appraisal. In general, these components aimed to improve the definition of the TVEs' legal status and property rights within China's still fuzzy industrial and commercial codes, improve their access to financial services and technical support services, simplify arrange- ments for industrial regulation and administration (mainly through the intro- duction of "one-stop shopping" and measures to reduce fiscal predation by local government searching for additional sources of revenue), and the promo- tion of surplus-labor exports to TVEs in labor-deficit areas. The Fuyang program also contained sites and services development components, and some industry-specific investment programs. 4.23 Although a program office for the RRP was set up at the prefectural level in Fuyang to guide implementation, coordination was a problem from the very start. The county-level governments which created the larger number of these components in response to local problems, never fully accepted the authority of the program office, and for a period during the height of the economic crisis, it became merely another appendage of prefectural government, having neither sufficient funds, trained staff or 'moral authority" to guide implementation and influence county-level decisions. Worse, this lack of acceptance translated into an inability to lobby effectively with the Anhui Provincial and Fuyang Prefectural Assemblies for passage of framework legisla- tion needed to define legal personalities for the TVEs (perhaps the key ele- ment of the RRP) and establish their rights of ownership and property includ- ing liquidation procedures. As a result, many of the TVE reform components were fragmented and implemented without the benefit of having broader objec- tives which might be generalized for TVEs throughout China.  - 19 - 4.24 The rural financial market RRPs are more diverse, and more difficult to prioritize. These consist of three kinds of endeavor 19/ to (a) decentral- ize the state banks, remove geographical restrictions on their operations, permit greater flexibility in deposit taking and term transformation through lending, improve clearance procedures and establish interbank markets (Guanghan, Sichuan), (b) establish savings and loan type associations to aug- ment TVE financial resources (Fuyang, Anhui), and (c) establish financial service cooperatives (Shangzhi, Heilongjiang; Yutian, Hebei and 17 other sites). The Guanghan RRP, essentially involving the state-owned Agricultural Bank of China, the Industrial and Commercial Bank of China and local branches of the PBC was partially implemented before falling afoul of the national credit plan and guidelines announced in late 1988. Deposit taking, in partic- ular. has been broadened, though the flexibility in lending has diminished and controls ov:r passive and active lending rates have been increased since 1988 thereby severely constraining the ability of the state-owned banks to benefit from this increased flexibility and use it as a base for commercializing a greater share of their lending operations. Similarly, clearing procedures have been streamlined, but the RRP has not been authorized to establish an interbank market(s), which again is inhibiting a full commercialization of their financial intermediation activities. There remain many elements in this experiment that are promising, however, and which could easily be rectified and extended to other regions once the drive for financial sector reform can be fully resumed in China. 4.25 There is no question that the experimental reforms in the informal financial service sector (the multifarious financial service cooperatives and Fuyang's savings and loan associations) have demonstrated the important role these entities can play in mobilizing local funds and tapping into the resid- ual assets of the former communes. However, concerns previously expressed by staff concerning current liquidity, the strength of their resource base, and loan appraisal capabilities have really not been addressed yet by the respon- sible authorities. The recent PCR mission (January 1991) continues to have doubts about the financial viability of some of these institutions, which appear to avail of loopholes in or lax enforcement of existing banking regula- tions to engage in high risk lending. These doubts underscore the need to carry out the review of rural financial markets discussed below. As a stopgap measure, however, there remains a need to commission proper financial audits for each of the informal financial service entities under the RSAL's purview. In some instances, there may not be time to wait for the results of the Review (whose recommendations would be general in any eveiit), since an insolvency of any one of these entities could imperil the successful implementation of real sector comporents in the RRPs with which they are associated. 4.26 In an effort to stimulate grain production and reduce budgetary outlays, the grain system RRPs, in Xinxiang, Henan and Yulin, Guangxi, were established to find financially sustainable and politically viable means to increase producer prices and reduce consumer subsidies. The design of both RRPs entailed production quota elimination, input price increases and the eventual elimination of distribution subsidies (but not of manufacturing sub- sidies) on agricultural inputs, the progressive elimination of urban ration 19/ Actually, four kinds, if the Meitan experiment in land banking is catego- rized as an experiment in rural financial market reform.  - 20 - allotments, consumer price increases and eventual price liberalization, the provision of once-only income supplementation to urban ration recipients, and steps to "demonetize" the large volume of outstanding unused ration coupons. 4.27 Both also contain programs to augment fiscal revenues, though these are different. In Xinxiang, the bulk of the financial burden is borne by the local government, and agricultural tax reform is a key component of the RRP. The Xinxiang experiment aimed from the outset to be financially self- sufficient, i.e., the incremental revenue from increased agricultural taxation and input price increases was expected to cover the incremental expenditure associated with higher farm-gate procurement prices, and later--as urban sales prices were increased--to generate positive total net revenue. In Yulin, the cost of financing the grain distribution and production subsidies is shared between the local and provincial governments. Here, the RRP was designed to increase the buoyancy of more traditional revenue sources to finance the incremental costs of adjustment, though implicit in the experimental design was an expectation that some subsidization might still be required in the post-reform period, albeit at much lower levels than before. 4.28 During 1988-90, grain production and local per capita availability increased in both experimental zones, in part due to higher producer prices. Although located in quite different agroeconomic environments (Xinxiang is in a surplus wheat area, Yulin is in a traditionally deficit rice-producing area), both RRPs encountered similar problems, though these were not problems of design as much as they were problems of execution. However, for largely common reasons, implementation was not as smooth as anticipated, and comrr- plaints by local residents threw into doubt, for a while at least, the politi- cal acceptability of the reform models being tested. In both RRPs, it proved necessary to postpone key aspects of consumer price reform and additional reductions in per capita ration allotments, whiuh immediately led to financial difficulties since grain procurement prices had already been raised. Serious cash flow problems emerged, and in the Xinxiang experiment, the Reform Office had to borrow funds to meet cash obligations. Although input prices had been 'ncreased, fertilizer and diesel oil remained in short supply (a consequence of general economic austerity, although special arrangements had been made when the experiments were formulated to furnish farmers in the reform areas with necessary amounts), which placed further upwards pressure on local market prices and may have curtailed potential production response. 4.29 In Xinxiang, the authorities' temporary loss of enthusiasm for urban price increases was exacerbated by inadequate publicity before implementation began. As a result, local cadres reacted quite strongly, and as grain farmers were the main beneficiaries of the producer price reforms, nongrain farmers (especially local cotton producers) also expressed considerable dissatisfac- tion with the reform. In their attempts to restart the experiments during the second half of 1990, the authorities in both the Xinxiang and Yulin reform areas have specifically addressed the above-noted difficulties, and a much smoother implementation is now expected. Diffusion/Dispersion 4.30 Since the RSAL was formulated, ten additional RRPs have received State Council endorsement, covering additional experimentation with grain pricing and marketing reform, trial operation of a shareholding system for  - 21 - TVEs, experiments in social and commercial forestry, animal production systems in remote mountainous zones, and extension of a modified PRS to lands operated within the jurisdiction of China's State Farms. In addition, systematic efforts have been made to diffuse and replicate the more successful RRPs in other regions, through the medium of conferences, seminars and site visits coordinated by central government units. 4.31 The special effort towards diffusion has been most evident for the experiments in grain pricing and marketing reform. The central government and the Experimental Reform Office of the Ministry of Agriculture (previously of RCRD) have organized several conferences to consolidate the results and les- sons from the existing grain system reform programs. These conferences included: (a) a National Working Conference on Rural Reforms in December 1989; (b) a Symposium on Grain System Reforms in September 1990 in Yulin, Guangxi experimental zone; and (c) a National Grain Conference in November 1990. Another conference on rural reforms is planned in mid-1991. One of the outcomes of these conferences was a consensus among policymakers, intellectui- als, researchers and bureaucrats on the need to introduce comprehensive grain system reforms at the national level, which contributed substantially to the recent (May 1, 1991) pricing and marketing reform. Also, through sponsored visits to the RRPs, three provinces, one provincial-level municipality and jurisdictions in four additional provinces introduced all or part of the Xinxiang (Henan) and Yulin (Guangxi) RRPs even before the recent pricing reforms were announced. Elements of other experiments (i.e., the land system reforms) have been generalized within the provinces where the RRPs are located, but there is no indication as yet that these are being replicated yet beyond provincial boundaries, although, in the case of both the land system reforms and the TVE experiments, national and regional symposia have also been utilized to publicize their features to policymakers from other provinces. Procurement and Disbursements 4.32 When the RSAL was appraised, it was expected that its proceeds would be disbursed over an 18-month period. However, both the Credit and the Loan disbursed at a much faster pace in response to the Government's urgent need for foreign exchange financing in late 1988 and early 1989. As a result, the Credit was declared closed on October 17, 1988 and the Loan account was closed on September 18, 1989. 4.33 The Bank's expectation that upwards of $125 million equivalent of procurement would be made using serial ICB tendering procedures was not fully realized. These procedures were established by visits to China by the Asia Region's Senior Procurement Advisor, and were accepted with some reluctance by the intended procurement agency, the China National Chemicals Import and Export Corporation (SINOCHEM). However, the Government responded to staff pressure when it became apparent that this target would not be fulfilled, and procurement from the remaining $57 million in the Loan account was carried out satisfactorily using ICB procedures. Subsequently, conferences were organized in China to encourage the use of serial international tendering by China's foreign trading corporations for all of the country's bulk procurement.  - 22 - Monitoring and Coordination 4.34 In addition to the fairly extensive monitoring effectuated through China's regular reporting channels, a need was noted during preparation for detailed socioeconomic and financial impact assessments in many of the experi- mental program areas. With assistance from the Social Research Center (SRC) at the Beijing Peoples' University, monitoring systems have been designed for all of the RRPs except the rural financial markets experiment in Guanghan, Sichuan (which is being monitored largely through financial system channels). Some progress has also beer, made to staff-up and equip local offices to carry out the required investigations and analyses, and to institutionalize train- ing. Some surveys have also been completed, however the monitoring system as a whole remains at the formative level. Staff training to date has been very limited and equipment purchases have had to be postponed. While the need for monitoring is keenly appreciated by RCRD/MOA staff responsible for designing the system, there is both a lack of adequate technical knowledge among those responsible for implementing the system, and a clear lack of appreciation of the potential benefits from systematic monitoring by many of the responsible local authorities. 4.35 Excepting a year-long hiatus following the events at Tiananmen, when the directions for future reform were under intensive debate, coordination has generally been smooth, and the involvement of central government officials and technicians has helped local authorities to overcome numerous implementation problems. Semiannual progress reporting has been thorough and frank, excel- lent arrangements were made to receive two Bank supervision missions (Septem- ber 1988 and September 1989) and the PCR mission (January 1991), and the cen- tral agencies responsible for coordination were able to respond quickly to Bank concerns about procurement and some procurement documentation which SINOCHEM, the procuring agency, was initially reluctant to release. V. LESSONS LEARNED General 5.1 By design, the RSAL did not resemble the usual agricultural SECAL. It was formatted to support the only systematic ongoing attempt (in 1988) by a socialist country to devise workable/sustainable principles for policy and institutional reform that could help its rural economy accelerate the transi- tion from plan to market. There were no firm, tested guidelines available in 1988. Second, the RSAL was implemented for a continent-sized nation contain- ing the world's largest population, 80 percent of whom continue to reside in rural areas with incomes that remain low by international comparison. Thus, in addition to unclear guideposts for reform, there is an element of income vulnerability that any responsible government would have to address (and the Chinese Government is extremely concerned with safeguarding the incomes of its population) while trying to implement a wholesale reordering of the economic system. 5.2 It was in recognition of these factors that the Government of China adopted the experimental approach, which in essence is a step-by-step approach to reform, and established its program of state sponsorship for the more pro- mising RRPs. And it was in recognition of the wisdom of this approach that  - 23 - the Bank agreed to provide support for the program through adjustment-type lending. 5.3 The impoitance of vision and commitment for such a far-reaching program was amply underscored during the course of RSAL implementation. Throughout 1988 and into the first half of 1989, the program by and large was proceeding smoothly. Perhaps the most visible indication is the volume of legislation actually passed and the amount of draft legislation that was actu- ally prepared in 1988 and early 1989 along lines set forth in the Policy Letter. Equally significant, the confidence shown at the center was reflected in the experimental zones, where RRP designs were improved along lines sug- gested by the RCRD and Bank missions, necessary permissions to suspend exist- ing rules and regulations were quickly forthcoming, implementation schedules were accelerated, and "project" organizations were strengthened and stream- lined. However, the events of June 1989, and the profound review of China's future development strategy that followed (neither of which could be antici- pated) led to considerable uncertainty about the future of rural experimenta- tion in China and a loss of confidence among key officials at all levels of Government who were responsible for implementing the RSAL. Implementation first slowed then stalled during the second half of 1989. 5.4 By the end of 1989, however, China's senior leadership had endorsed a continuation of the program of rural experimentation. It also decided to relocate the central units responsible for RSAL coordination in agencies where (a) rural policy research could be more easily coordinated with general eco- nomic policy research (thus the RCRD's Development Institute was reestablished within the State Council's Development Research Center as a new Rural Develop- ment Institute) and (b) where the experimental programs could work more closely with existing line agencies responsible for implementing existing national policies (thus the RCRD's Experimental Programs Office was trans- ferred to the Ministry of Agriculture's new Research Center for the Rural Economy). By mid-1990, operating links had been reestablished with the RRPs' program offices and the pace of implementation firstly resumed, then had been accelerated markedly by the end of the year. This progression of events dem- onstrates clearly that attempts to introduce reforms in a transitioning socialist economy such as China's, one not fully equipped with self-regulating economic mechanisms and still dependent on a large measure of administrative guidance, requires firm commitment and clear economic leadership from the very top, at least until such time as markets begin to function and macroeconomic interventions can be managed through a more indirect guidance. Program Components 5.5 The RRPs supported by the RSAL, and even those outside the RSAL, provided a rich experience and many valuable lessons. These lessons could be extremely useful to refine the existing programs and improve the design and implementation of future regional or national reforms. Some of these lessons are summarized below. 5.6 Grain System Reform. During the course of implementing the two grain RRPs, it became apparent that system reforms do not involve as high a risk as was previously supposed in China, both in terms of leading to poten- tial urban unrest or contributing to consumer price inflation. Experience with these RRPs also highlighted the importance of advanced publicity about  - 24 - the program's potential impact and of appropriate training for those involved in its implementation. These lessons were not lost when the Government announced its recent nationwide reforms to grain pricing and marketing arrangements. There are other important lessons: (a) Grain system reforms generally result in unequal distribution of benefits and costs. Some segments of the society gain, others lose, but the fundamental redistribution must and will occur in favor of the rural population at the expense of China's highly subsidized urban consumers. In the interest of necessary public support for the reform program, there is a need to make sure that losses are not too large. If so, some adjustments must be made to compensate such losses. Furthermore, there is a need to protect the most vulnerable urban groups from severe economic and financial loss. (b) Agricultural tax reform--as implemented in Xinxiang--may be applica- ble to other areas in China since the agricultural tax is relatively a stable source of revenue and easy to levy. At present, the yields from direct agricultural taxation are relatively low. However, agricultural taxes cannot be, and should not be, raised without a corresponding increase in quota procurement prices and an elimina- tion of price distortions. (c) When setting up local reform programs, financial shortfalls can be expected until new sources of revenue (e.g., from agricultural tax reform) and decreases in consumer subsidies (from consumer price adjustments) begin to materialize. An effort must therefore be made to raise "transitional" financing from existing local sources. Since these sources are not always reliable, there may be a need for tempotary supplementation through budgetary transfers from higher levels of government. However, the planning data from the Xinxiang, Henan RRP suggest that once the price adjustments and tax reform have been fully implemented, the combined set of reforms will result in substantially positive net revenues, in spite of higher producer prices, owing to the elimination of consumer subsidies and higher tax yields. (d) Ideally, grain system reform for both purchase and sale components should be implemented simultaneously. At the very least (to restrain incremental budgetary outlays), consumer prices should be raised and per capita rations reduced prior to introducing offset- ting adjustments in producer prices and grain production quotas. However, different regions or provinces can follow different vari- ants of the grain system reform depending upon their special circum- stances and local constraints. (e) The experience of the grain system experimental programs implemented thus far has demonstrated that these RRPs are effective and do work. In this context, these programs have: (i) provided guidance for the design and implementation of future reforms; (ii) provided necessary experience and on-the-job training for those who were involved in different aspects of the experiments; and (iii) created an environ- ment which is conducive for major policy reforms at local, provin- cial and national levels in the future.  - 25 - 5.7 Lessons from the Land Management System reform are less encouraging. The Government's future agenda in this area is still being worked out, thus the attention of the RSAL implementing agencies has tended to focus on diffi- culties in particular RRPs. (a) The ideological mandate to reconsider nationwide reform appears still to be lacking in this policy area, a point that is underscored by difficulties which the Government's Land Issues Study Team has encountered over the past three years while attempting to secure approval for expatriate assistance with its Rural Land Issues Study.20/ (b) There also is a realization that reliance on untested market mecha- nisms probably can not produce quickly the overdue consolidation of holdings needed in the labor-deficit provinces, where there has been a major outflow of labor from agriculture, which also has vitiated some of the enthusiasm for market-based mechanisms. (c) There is a need for clear objectives at the experimental program level. The RRPs in the labor-deficit areas which aimed to foster a rapid consolidation of land through administrative means were flawed in some respects because of a continuing need to service the state's grain procurement quotas, which led uniformly in these RRPs to an otherwise unwarranted "scaling-up" of farm size in order to foster mechanization, though it was recognized that permanent subsidies may be required to sustain the mechanization programs. (d) That the market-based experiment was located in Meitan, Guizhou--a poor remote area--probably contributed to the sense that market mechanisms may be inappropriate. While this is an area of consider- able land shortage and there was a strong demand for land, there was little supply of prime land for such a market. It was not, there- fore, the most appropriate area to develop that reform initiative, and points to a weakness in the State Council's near total reliance on "revealed" local initiative as the starting point for identifying (and thus locating) sites for the RRPs. 5.8 Unlike the grain system and land system experimental programs, the Rural Industrialization and Rural Financial Market RRPs were designed to support policy and institutional reforms which already were well underway at the national level. These also are policy areas that proved particularly vulnerable to the contractionary effects of economic austerity in 1989 and 1990, and which--because full control over experimental policy-making was never released to the au..horities responsible for implementing these RRPs-- meant that these reform programs never enjoyed full latitude to really test experimental designs. 5.9 There were other design problems. In the Fuyang, Anhui RRP for TVE reform, a very large number of discrete components were incorporated into the 20/ This study was originally formulated in 1988 as a UNDP project to be executed by the Bank, in order to prepare for a deepening of the land system reforms under the umbrella of a second RSAL.  - 26 - experimental program, which proved difficult to coordinate and nearly impossi- ble to monitor. In retrospect, more selectivity should have been used in choosing components, by focusing only on the essential elements, viz. estab- lishing the legal framework for ownership, capitalization and liquidation; technical assistance to develop the associated "internal management struc- tures"; and perhaps more emphasis on breaking down administrative barriers which would allow Fuyang's TVEs to cast a wider net when securing raw materi- als, other inputs and gaining market access (though some progress was made in this area). On the other hand, the "one-stop shopping" component and Fuyang's labor exchange have proved worthy of replication, and much was learned about how to organize skilled input to assist with technological upgrading, grounded largely in the systematic posting of trained engineers on temporary assignment to work with individual TVEs in Fuyang, that has recently (early 1991) become national policy. 5.__ For the Guanghan, Sichuan RRP for reform of formal sector intermedi- aries, the inability of project entities to coordinate closely with the PBC's headquarters and regional offices denied sufficient control over "external" influences that ultimately frustrated the intent of the experiment. PBC rep- resentatives should have been posted to the Leading Groups for the RSAL at both the national and local levels for these experiments, and an attempt was made to do so while the RSAL was being formulated. But the reluctance of PBC's staff to formally participate, partially in reaction to the inexperience of RCRD staff with principles of banking and rural finance, perhaps should have indicated that experimentation with this kind of component would have been better organized through financial sector channels, and not by "real sector" experts. Loan Format 5.11 Tranching. For a host of reasons,21/ it was decided to rely on the prospect of repeater operations as the vehicle for ensuring conformity with intentions indicated in the Policy Letter.221 As events developed during the RSAL implementation period, it appears that tranching in any form would not have been very useful as means for dissuading nonperformance under Chinese conditions. The validity of this conclusion would seem to have been borne out by the readiness with the RRPs were restarted once the senior lead- ership had again endorsed the rural reform program: actions that were taken in full recognition on the Government's side that the "second tranche" (i.e., a repeater RSAL) will unlikely materialize in the near future. It also is 21/ These include cultural reasons, the comparative insignificance of loan proceeds to China's overall budgetary balance, and recognition that the Chinese side desired as much the guidance and institutional support which the Bank could provide as it did the loan proceeds. 22/ In the aftermath of subsequent events, the absence of tranching may also have headed off a potentially damaging confrontation with the Chinese government over RSAL conditionality. As events developed, the Bank-- through a more low-keyed approach--was able to throw its influence behind those urging that reform be continued, and probably also contributed to the decision to retain strong central guidance for the RRPs after the decision to dissolve the RCRD was taken by the Chinese Government.  - 27 - witnessed by the ercellent and candid PCR which was prepared by the Government for the RSAL (cf. Part II of this report), more than a year after the Govern- ment was informed that a repeater RSAL had been deleted from the Bank opera- tional program for China. 5.12 There was another positive aspect to the chosen format. China's budgeting system at all levels of government is managed very much in accord with "pay-as-you-go" principles. This makes it difficult to approve new expenditures unless revenue earning opportunities or new sources of revenue can be identified, irrespective of the global availability of budgetary resources. Earmarking is thus a common practice. A common characteristic of the RRPs, whether revenue generating or not, is the great uncertainty associ- ated with budgeting since their features are unfamiliar and experimental. As noted below, financial shortfalls dogged the implementation of some of the RRPs throughout the RSAL cycle. Thus within this budgeting system,23/ the rapid disbursement of loan proceeds made it possible for the central authori- ties to quickly acquire and allocate counterpart funds to the RRPs. which facilitated considerably their acceleration at the beginning of the operation, and their resuscitation in 1990 after the leadership's intentions were made clear. 5.13 Design. In an effort towards simplification, it was decided while the RSAL was being prepared, not to incorporate a technical assistance compo- nent within the format of the RSAL. With the benefit of hindsight, this appears to have been a mistake. Technical assistance could have measurably assisted with setting up the monitoring arrangements for the RRPs, and was probably needed to assist both the central-level Experimental Programs Office and offices in the experimental zones to simplify the designs of the RRPs (e.g., for TVEs and for rural financial intermediation) and refine the imple- mentation arrangements. In this connection, the provision of an overseas training component, though rarely associated with SECAL-type lending, may also have been justified. Lessons From the Bank's Supervision Effort 5.14 The RSAL program was comprehensive, and necessarily so. It would be difficult to introduce fundamental reform in a single policy area governing rural economic and income generating activities without correspondingly in-depth reform in supporting policies. But because of the wide experimental net which had to be cast in order to prepare comprehensive, interrelated national-level enactments, the RSAL program proved to be expensive and diffi- cult to supervise. Because of the geographic dispersion of the many RRPs, the supervision effort and site visits by staff were concentrated on a few that were considered key. As a result, staff reliance on fair and accurate report- ing by the Government was perhaps more important in trying to discern progress and weaknesses in the RSAL design than it might otherwise be with the more traditional SECALs. 5.15 Such reporting, in the view of staff, proved fully up to o:r expec- tations and requirements, allowing for professional limitations of the Govern- ment's side. The progress reports and extensive briefings provided to the 23/ The reform of which lay well outside of the RSAL purview.  - 28 - Bank's supervision missions were rarely controverted by findings during the site visits. In retrospect, however, this approach to supervision may contain its own limitations. The Chinese economy has been described as being cellular in previous Bank reports, and staff may have been slow to appreciate the actual importance being assigned to the cooperative marketing reforms by Chlina's central authorities, as potential vehicles for cutting across adminis- trative and subsectoral boundaries in order to improve market integration. The Policy Letter (para. 25) called for the preparation of draft cooperative regulations in 1988: a draft cooperative's law was presented to the National People's Congress in 1989, but not approved. Meanwhile, the cooperative mar- keting RRPs were only visited once during the course of supervision, and a more intensive effort may have helped the central coordinating units to head off problems which have developed in these experiments. Role of the Bank 5.16 The Bank's involvement during the start-up of the second-phase pro- gram contributed substantially to the design of the underlying experiments, and helped to focus the government's attention on the policy, institutional and financial requisites of the program and attendant risks. This was no easy matter. The RSAL was formulated after a decade of success in China, a success that was achieved by allowing ideas for reform to percolate up from perceived local needs. But the second phase program added another element: a conscious and visible effort on the part of the State to withdraw from direct interven- tizn to a more regulatory mode, which required a fundamental transformation not only of economic policy and state intervention, but also a systematic withdrawal of Government and Party operatives from daily decision-making in the rural economy. In effect, it called also for a political transformation in China's rural areas. For the local cadre and influentials, this could have proved difficult to digest, and indeed there was a local reaction against the RSAL program in the Fall of 1989 on into the first half of 1990. 5.17 In the midst of the debate concerning the nature of China's future economic order, the Bank fielded an RSAL supervision mission in September 1989 which stressed the importance of maintaining central support and guidance, and in particular, recommended that properly staffed coordination and supervisory authority for the RRPs be retained within state agencies, having the same brief that the original lead agency for the RSAL--the State Council's Research Center for Rural Development (RCRD)--was given. The State Council eventually accepted this recommendation, and on December 25, 1990, reassigned the RCRD's main units more or less intact to the line and policy advisory units otherwise responsible for rural reform in China. 5.18 Also in the midst of this debate, the Bank initiated Its 'Agricul- tural Transformation" study (Report No. 8652-CHA) which focused on reform in China's grain sector. Drafts of the report were reviewed by responsible offi- cials, and its conclusions were presented at an international seminar held in Beijing, January 1991. Subsequently, staff have received several indications from Chinese Ministers that the conclusions and recommendations of the report may have tipped the balance in favor of grain sector reform, including the consumer price increases announced May 1, and the decision to proceed with the Ministry of Commerce's wholesale grain market program.  - 29 - 5.19 While it is too early to assess the success of the RSAL program, current indications are that the reforms in the realm of agricultural pricing and marketing will be pursued aggressively and completed within the current Plan period. Similarly, the rural industrialization components are being rehabilitated, and authorization has been given for broader experimentation in order to promote more flexible forms of company organization and capitaliza- tion. It is difficult to assess the future prospects of reform in China's rural financial markets since the Government still has not organized itself to carry out and monitor effective experimentation. Meanwhile, progress on the land systems reform must await the outcome of a review recently commissioned by the State Council of the proper balance between farm-level decision-making and collective intervention (i.e., intervention by local units of civil admin- istration). 5.20 On balance, the Bank's decision to approve the RSAL has been justi- fied by the progress made in 1988 and the first half of 1989, and the renewed emphasis on rural reform that began midway through 1990. The presence and support of the Bank clearly influenced the leadership's decision to continue to promote rural reform. It is thus the view of staff that a repeater RSAL should be kept in the offing, which could be formalized once the Bank has been fully satisfied that sufficient progress is being made to carry out the remaining unfulfilled "conditionalities" in the RSAL loan and credit agree- ments.  - 30 - PART 2: REVIEW FROM THE BORROWER'S PERSPECTIVE 1 Foreword i. This report is written according to agreement reached between the Chinese government and the Wlorld Bank on the China rural sector adjustment loan. ii. The experimental areas for China's rural reform were established in 1987, as an important component of the overall strategy of deepening rural reform in China. As a summary report, (i) this article is trying to record, on the basis of two early reports entitled '1988: The Experimental Areas for China's Rural Reform" and "The Report on Work in the First Six Months of 1989 in the Experimental Areas for China's Rural Reform," and in a comprehensive and systematic way, the realities of the experiments carried out in China's rural reform; (ii) apart from giving some general descriptions on the reali- ties of the experiments carried out, it also contains in-depth analyses on and theoretical summary of the development process, correlative factors and the future trends of these experiments. iii. The report is made up of ten sections. Section I briefly describes a series of institutional changes and economic growth caused by the restruc- turing of China's economic system since 1987 and introduces major fields of interest involved and measures to be taken in the near future in the restructuring of China's economic system. Section II looks back on the course of China's rural reform; analyses, on account of the recent rural economic developments and related policy adjustment, the major issues involved and difficulties existing in China's rural reform; and describes the developments from 1987 to 1990 in the experimental areas for China's rural reform. Sections III-IX introduce the implementation of seven sets of experiments carried out in the experimental areas. These sections also contain analyses on the problems encountered so far, as well as plans for the future development of these experiments. Section X is an introduction to the executive organ for the China rural sector adjustment loans, namely SAIC Agribusiness Trust and Investment Corporation. iv. This report is mainly based on the abundant materials collected in the already-established experimental areas for China's rural reform. It was jointly prepared by the working staff of the Office for the Management of the Experimental Areas for China's Rural Reform of the Ministry of Agriculture and the Department of Rural Affairs of the Development Research Center of the State Council. The SAIC Agribusiness Trust and Investment Corporation has also previded significant support for its completion. 1/ Summary of Borrower's PCR, submitted in December 1990 by the Office under the State Council's Leading Group for the China-Rural Sector Adjustment Loan. The original PCR (totaling 163 pages) has been placed on file.  - 31 - I. A GENERAL REVIEW OF CHINA'S ECONOMIC STRUCTURAL REFORM A Brief Review of China's Economic Structural Reform 1.1 The year 1990 is the twelfth year of China's economic structural reform. The past 11 years witnessed a remarkable growth in China's economy. During the 11 years from 1979 to 1989, the average annual growth rate of the gross industrial output value (at comparable prices, the same below) is 12.4 percent; of the gross output value of agriculture, 5.9 percent; of GNP, 9.1 percent; national income, 8.7 percent; of the fixed assets investment, 12.8 percent; of state revenue, 9.1 percent; of total volume of domestic retail sales, 8.9 percent; and of total volume of imports and exports, 16.6 percent. The production of a number of major products also maintained a high growth rate. The average annual growth rates of grain, cotton, oil- bearing crops and meat are 2.7 percent, 5.2 percent, 8.6 percent, and 9.5 per- cent respectively, and the average annual growth rates of raw coal, electri- city, crude oil and steel are 4.8 percent, 7.7 percent, 2.6 percent, and 6.1 percent respectively. Meanwhile, the consumption level of the urban and rural population increased at an annual average of 6.1 percent. Experiencing continuous growth in the 11 years, China's economic power as a whole was nota- bly strengthened and the living standards of the people were also raised noticeably. 1.2 The 1980s opened up new prospects for the socialist modernization drive anc witnessed the most remarkable economic development of all the 40 years after the founding of the People's Republic of China. The major reason accounting for the fact is that the government has firmly implemented the fundamental policy of institutional reform and opening to the outside world in economic construction. 1.3 The objective of China's economic structural reform is to establish a new economic system and operating mechanisms that suit the need of develop- ment of a planned commodity economy and in which the planned economy is well coordinated with market adjustment. To this end, it is necessary to carry out comprehensive reform in the highly centralized economic system that was estab- lished and developed from the mid-1950s. So far, the reform has undergone three major stages: (a) The starting stage from the end of 1978 to October 1984: the reform of this stage focused on the rural areas. The rural economic reform found a breakthrough point for the whole economic structural reform and revealed the great achievements of the reform, and thus aroused the enthusiasm and won the support of the whole society. (b) The stage of full-scale implementation from October 1984 to Septem- ber 1988: the focus of this stage was on urban areas. The urban reform showed both the necessity of the continuous deepening of reform and the complex and gradual nature of comprehensive economic structural reform. (c) The adjustment stage from September 1988 to the present: the focus of this period is on the necessary readjustment and improvement of the reform measures already implemented to ensure the stability of  - 32 - the operation of the national economy and create a more favorable environment and conditions for deepening of the reforms. 1.4 The reforms in the past 11 years have brought about a series of major institutional changes in the economic structure of both the rural and urban areas. 1.5 The major institutional changes in the rural areas are as follows: (a) The highly centralized people's commune system, characterized by the integration of government administration and economic management, has been abolished. (b) On the basis of ptublic ownership playing the major role, various economic entities have developed. (c) The system of state monopoly for purchase and the system of state purchase quotas that were practiced for nearly 30 years have been replaced by a system of contracted quotas for purchase, leading to a notable increase in the proportion of farm products that enter the free market and a marked expansion of the role played by the market in the adjustment of agricultural production. (d) The policy that tended to restrain the development of nonagricul- tural sectors in rural areas has changed, promoting a fuller exploi- tation of other resources and giving farmers better opportunities of investment, emoloyment and income. 1.6 In urban areas the reforms brought about the following institutional changes: (a) The reform has remarkably increased the autonomy of the enterprises in their business and production planning, raw materials procure- ment, product marketing, fund allocation and distribution of wages and bonuses, personnel system and internal management structure. (b) The reform of the price and circulation system to establish and improve the socialist market system: the government now is only responsible for the prices of major products that have significant influence on the national economy and people's livelihood, while other products are prices by the market. The basic target of the reform of the circulation system is to establish gradually a new type of commodity circulation system with multiple economic sectors, diversified operation patterns, different circulation channels and reduced number of links in the circulation process on the condition that state commerce will continue to be the main channel. (c) The reform of the macroeconomic control system is to fulfill the task of progressively transforming the highly centralized direct control system of the economy which mainly relies on administrative means into an indirect control system in which the central govern- ment and local governments exercise control of the economy at dif- ferent levels, government planning and the market play a joint role,  - 33 - and economic means, legal means and necessary administrative means are comprehensively used. (d) Further opening of the Chinese economy. The Relationship between Rectifying the Economy and Deepening the Reform 1.7 The economic stru'otural reforms of the past ten years or so have brought about great changes in the pattern and process of China's economy. The developments in the following two areas are especially remarkable: first, the scope and proportion of the economy which is regulated by the market has been expanded; second, the interested parties are diversified. Obviously, the two changes are favorable for vitalizing the economy. However, compared with them, another two areas have lagged behind in the process of reform. One is institutional development concerning the defining of property rights; and the other is the pricing mechanisms, especially those involving the essential productive elements and certain important commodities. It is not dificlult to see that the elements that change quickly are the driving force which vital- izes the micro-economy, and the elements that change gradually constitute actually the policy environment that will guide the direction of this vital- ity. The vitality of the participants in economic activities can now be brought into full play, but owing to the obscured demarcation of property rights and distorted price signals, their vitality may become misguided, lead- ing to an irrational distribution of resources. The economic development in recent years has proved this. Basic industries and their infrastructure failed to get the rscessary resources and their capacity is rapidly declining in contrast to the fast expansion of the processing industries. The stagna- tion of agricultural output frcm 1985 through to 1988 further proved the fact. 1.8 Since the adoption of the policy of improving and rectifying the economy in the autumn of 1988, the central government has taken some stern measures to tighten government expenditure and credit. In 1989, though the target of curbing inflation had not been completely realized, the momentum of rapid rise of price indices was brought under control. What is more impor- tant, the excessive scale of capital construction, industrial growth rate and social consumption growth were to a great extent brought under control. In 1990, on the basis of the initial success in the improvement and rectification of the economy, the central government took a series of adjustment measures to alleviate new contradictions and counter the problem of the weak market while adhering to the policy of tightening of government expenditure and credit. These measures include: (i) moderately loosening control over the money sup- ply to increase working capital of producing enterprises and procurement funds of commercial enterprises; (ii) moderately adjusting the interest rates of both deposits and loans; and (iii) moderately increasing investment. Through these measures, the policy of improving and rectifying the economy achieved marked successes in 1990, which are reflected in the following three aspects: (a) Inflation was curbed effectively. In the period from January to September 1990, the general social retail price index rose by 3 per- cent compared with that of the same period of the previous year. Although some price adjustment measures were taken to adjust the supply and demand relationship of commodities in the fourth quarter, the general social retail price index of the whole year i- sxpected to rise by 7 percent compared with that of the previous yfzr.  - 34 - (b) The growth rate of industry began to pick up. In 1989, industrial output value was 8.3 percent more than that of the previous year, but from the second half of the year, industrial production slumped down for a certain period. Since April 1990, industrial production has been picking up. By October, the gross output value of industry has increased by 4.1 percent compared with the same period of last year, and the growth rate of the annual gross output value of indus- try is expected to be as much as 6 percent, which means that the target for the gross output value of industry set in the beginning of the year will be hit. (c) The grain production of the country in 1989 was an all-time high, and in 1990, it will not only surpass the production of the previous year by a large margin, but also surpass the target of 412.5 million tons set at the beginning of the year. Apart from the good harvest of grain, output income of major farm products such as cotton and oil-bearing seeds, which have been in a depressed state, are expected to rise remarkably this year. 1.9 The changes in the three above-mentioned aspects of economic growth show that the improving and rectifying efforts of the recent two years have achieved great results. However, it is necessary to point out that deeply rooted contradictions in the economic life in China are far from being solved, and it was these contradictions that caused the present serious market slump and imbalance 3.t revenue and expenditure. The two years' improving and recti- fying efforts have also helped people understand that strengthening properly the administrativk adjustment means is quite effective in the solution of such superficial economic contradictions as disequilibrium between aggregate supply and aggregate demand, but they are not so effective and powerful in the solu- tion of deep-lying problems such as those in industrial structure and economic efficiency. Therefore, with the national economy being gradually stabilized, more powerful reform measures should be taken to deepen the economic struc- tural reform in spite of the fact that the objectives of the policy of improv- ing and rectifying the economy have not been completely realized. This has become a perception shared by all.  - 35 - II. A GENERAL DISCUSSION OF THE CONDITIONS OF CHINA'S RURAL ECONOMIC REFORM Rural Reform: Review and Outlook 2.1 The 12 years of the structural reform of the rural economy has brought about wide-ranging and deep-going changes in the organization of its microstructure as well as the operational mechanism of its business activi- ties. Substantial progress has been made in the following fields, forming what is recognized as the fundamental framework of the new system of rural economy: (i) a basic system of farm management has been assured in which the household contracted system with remuneration linked to output forms the cor- nerstone; (.!i) the commodity rate of farm produce and the portion entering the market for exchange is gradually growing and the market of elements of produc- tion is maturing; (iii) the structure of the unitary system of ownership of means of production is broken up, and development is seen in a mix of many different economic sectors and forms; (iv) rural economy has changed from a closed economy to an open one and is developing into an economy characterized by comprehensive management of many different sectors and departments; (v) government control and regulation of the rural economy is being improved, with economic and legal means of prices, taxation, interest rates, and con- tracts being given a greater role. Reform has enabled the rural economy to grow by leaps and bounds and attain new heights. In the 11 years between 1978 and 1989, gross social product in the country's rural areas increased three- fold, with an average annual growth of 13.5 percent; gross agricultural prod- uct increased by 88.3 percent, averaging a growth of 5.9 percent per year, being 3.2 percentiles higher than the rate averaged for the 26 years previous to the reform. The growth rate of all major agricultural produce surpassed all historical periods. Total grain production increased by 33.7 percent, cotton by 74.8 percent, oil crops by 148 percent, and meat by 172 percent. The annual growth rate of the gross product of village and township enter- prises averaged 30 percent over the 11 years. The share of nonagricultural product in the gross social product in rural areas rose from 30.5 percent to 54.9 percent. Average per capita income of farmers rose from Y 133.6 to Y 601.5, that is, a 350 percent increase in 11 years. The average annual increase is Y 42.5, as against the 28-year average of Y 3.2 per annum before the reform. These figures and facts argue eloquently for the success of China's rural reform and the correctness of the general orientation of the policies carried out by the government during the period. The policies have won the enthusiastic support of the farmers. There is no reason and no possi- bility for them to change. 2.2 However, the path of rural reform has not been smooth, and its actual progress in the 12 years has been marked with turnabouts and pitfalls. The success of the reform to contract responsibility to individual households brought great joy, while frustrations and failures dismayed the general pub- lic. Tne reversals in agricultural growth after 1985 and the emergence of inflation around 1988, together with problems left unsolved by the rural reforms, indicate that the complexity and protracted nature of rural reform far surpass our first estimates. It is therefore necessary, perhaps, to describe objectively how certain vicissitudes in the course of rural reform had come about, so that the basic contradictions and difficulties confronting  - 36 - rural reform today could be discerned and what possible actions to solve them may be deliberated. 2.3 Three major stages have been traversed in rural reform up to the present moment: (a) The breakthrough stage (1978-84)s The reform went on rather smoothly during this period. The household contracted responsibil- ity system with remuneration linked to output spread from a few areas to encompass all the provinces and municipalities, and from being regarded as a contingency measure to solve problems of food and clothing, the system won recognition within a few years as the basic system of operations to be upheld in the rural areas for a long period of time. (b) The stage of comprehensive exploration (1985-88): Around 1985, the government adopted a series of important decisions concerning fur- ther reforming the system of the state monopoly of purchase and marketing of agricultural product and the rural industrial composi- tion and structure. Grain purchase was put under a double-tier system of purchase by contract and purchase on the market. Aside from cotton and three other commodities, restraints on the prices of all other produce were taken off, and supply and demand was regu- lated by the market. Farmers were encouraged to start and operate village and township enterprises of different ownership patterns, and to develop nonagricultural industries of all kinds. Reforms in this stage promoted the division of labor and specialization in the countryside and vastly expanded the traditional channels of commo- dity flow and rate of exchange. (c) The stage of readjustment (from autumn 1988 to the present): In order to achieve the aims of curbing inflation, readjusting the industrial structure and composition and reversing the downward trend of economic results, which had all become serious, the govern- ment published in August 1988 the work guidelines entitled "Improv- ing the Economic Environment and Rectifying Economic Order." A series of major policy measures were adopted in the course of improvement and rectification, such as tightening of finances and money, cutting down the scope of capital construction, restraining the processing industry, including township and village enterprises, from overfast growth containing the expansion of consumer funds, and concentrating financial power and enhancing the powers of central government in control and adjustment. 2.4 The direct cause of the setbacks in rural reform between 1985 and 1988 lies in the fact that agricultural growth was stagnated in a mire of difficulties. The average annual product of the crop-planting part of agri- culture was only 0.9 percent, far lower than the 6.8 percent figure of the years between 1978-84. The was insufficient to support the changes in the industrial composition and structure in the countryside and the high-speed growth of the national economy. On the other hand, the most important direct cause of the difficulties in the agricultural domain was inadequate input. The gross capital accumulation in China's rural areas rose from Y 43 billion in 1978 to around Y 200 billion in 1987, including the fund sources of govern-  - 37 - ment finance, credit and loan institutions, the collectives and the individual farm households. However, the share used in agricultural investment fell sharply from 64 percent of the total to 19 percent. Though the absolute sum showed some increase, yet it barely kept the same actual level if price fac- tors are taken into account. Compared with the growth of 77 percent of agri- cultural gross product in the same period, it is obvious that this stagnation meant gaps in investment and relying on past-invested facilities without replenishing or renovating them, and of failing to make new input in capital construction and other long-term projects that should have been made. 2.5 We looked back on what has happened to the rural reform since 1985 and arrived at the following valuable conclusions: firstly, the general ori- entation of reform has been correct. Proceeding from in-depth reforms in the internal and external policy and systemic environment of the rural areas, a change-over from the unitary planned mechanism to a combination of the regula- tive forces of both the planned and the market mechanismns will be completed. This is the inevitable demand of the growth of the rural and national economy. This is also the basic way to solve the fundamental problems outlined above. Second, we have been expected too much of the in-depth rural reforms and un- derestimating the actual difficulties facing us. This has resulted from the limitations of our knowledge and the negative side-effects of the unexpected successes in the initial stages of the reform. Third, in the overall program for reform, design and planning were lacking for intermediate measures. Such measures to solve the concrete problems cropping up during the intermediate stages are necessary owing to the fact that replacing the old system by the new is not completed overnight. Careful planning is needed to minimize the negative impact of the coexistence of two differing systems. Fourth, through- out the process of implementing the reform, we must under no circumstances and at no time relax our efforts at controlling and managing the actual process of economic growth. Before the market mechanism can fully assume its role and after administrative management has begun to soften up, it is imperative to maintain macroeconomic control and regulation powers in order to avoid a state of management vacuum. 2.6 By 1988, serious inflation had led to confusion in the nation's economic and social life, and the tasks of stabilizing the economy and restor- ing normal economic order have been pushed unavoidably to the fore. The task of top priority was to regain a balance between the quantitative in,dicators of the national economy and to readjust the irrational economic composition. 2.7 There is no contradiction between the goals of the rectification and improvement campaign and those of the intensification reform. In building up the economic organizations at the grassroots level in the countryside, we have tried to perfect the double-tier management system and develop a socialized service system, which have strengthened the work in providing farming house- holds with services before, during and after crop-raising and other productive activities. In the field of circulation, the regulation for monopoly opera- tions in agricultural means of production have been updated and improved, resulting in the prohibition and suppression of such acts as obstructing cir- culation, setting up unapproved taxing stations, and dividing the market by administrative means; the control over business administration and taxation organs have been tightened in law-enforcement organs, leading to a complete reversal of the state of confusion prevailing in the field of circulation. In the reform of the system of grain purchase and sale, the State Council issued  - 38 - such important decisions as the decision to set up the wholesale wheat market at Zhengzhou and the decision to establish the system of specialized state grain reserves. It is predicted that with the increase in effective grain supply, a turnaround in the agricultural economy and an optimization of the industrial composition and structure in the rural areas, further progress will be steadily made in rural reform in the future. 2.8 Indeed, the rectification and improvement steps adopted so far have not succeeded in completely solving the underlying contradictions that obstruct the growth of the rural economy. Rural reform is more market- oriented than the traditional system, and aims at setting up a new system of socialist conunodity economy. This orientation of the reform is determined by the inherent demands of economic growth, and will not change with temporary policy adjustments. We propose to do the following: (a) Further deepen the reform in the grain purchase and sale setup. The time is ripe for pushing through the reform as a favorable situation has evolved in grain sale and purchases in the near future is to stabilize purchase and restrict sales, while prices will be raised and quotas for purchases and sales will be allocated and contracted for. Efforts will be made to limit parity-price grain sales to such categories as rations for the population and military personnel and grain assigned for disaster relief. In grain rations, a new system of only subsidizing low-income groups will be adopted. (b) Build up a land system. The present collective ownership system of land in the rural areas is more advantageous both politically and economically than either private ownership or ownership by the state. The most important task of the day is to prevent further diminution in the scale of land management. We should continue to experiment with the "two-tier" and "three-tier" system of land use and introduce the competition mechanism by putting up right-to-use responsibility-contract land for bidding, so that land-use effi- ciency can be raised. Second, under unified i.ianagement by the col- lective, a rational system for the transfer of land-use rights must be firmly established. Third, the present system of contractual use of land must be perfected, chiefly through open and standardized contracted land-use fees. Still another measure is to clearly define and expand the rights of the collective to sell, lease out, mortgage and convert into stock shares the land under its title, and to set down clear-cut rules and regulations for such transactions. (c) Further invigorate the growth of farmers' specialized cooperatives. In building up institutions of a cooperative nature, emphasis must be laid on providing individual farm households with before-, dur- ing-, and after-production services, defining the rights-and-obliga- tions relationship within the institution, setting up a healthy accounting system, a sound administrative system and democratic operating procedures, and protecting the existing property and po- litical rights of the households. The legal status of all types of cooperative economic institutions must also be clearly defined and given legal protection.  - 39 - (d) Persist in building up a village and township enterprise system with clearly defined property rights as its essential content. The sys- tem may be established on a joint-stock basis, so that principals at all levels within and outside the enterprise will share benefits in proportion to their responsibility for risks. The intercommunity flow of production elements and reorganization of village and town- ship enterprises should be encouraged. (e) Open up the system of circulation of agricultural products. With the exception of cotton and tobacco, which are under monopolized purchase by the state, grain, oil crops, and other crops, after fulfillment of government quotas, will be placed in open business operations through a multiple of channels. (f) Reform the rural financial system. The state should effect control and regulation of the flow of social capital funds through such means as setting up a system of agricultural funds, issuing long- term bonds, instituting securities exchanges and making proper use of interest discounts. The farmers' cooperative fund-raising soci- eties, which have seen rapid growth in recent years, must be encour- aged to develop further along healthy lines, and modern credit-and- loan relationships must be helped to flourish. An Outline of Reform in Rural Reform Experimental Zones 2.9 China's rural reform experimental zones were established according to the spirit of Document (1987) 5 promulgated by the Central Committee of the Communist Party of China. As reform spread to all aspects of the existing urban and rural regimes, and regional differences and gaps in regional devel- opment levels grew, it became more difficult to coordinate the pace of reform from the center, and available means and information became seriously inade- qtuate. One of the keys to the success of reform was whether a way could be found, under changing circumstances, to spread thin the risks and difficulties and adjust the strategy of reform to suit the situation. This was the back- drop against which rural reform experimental zones were fitted into the over- all rural reform strategy. 2.10 Starting in early 1987, the number of experimental zones grew year by year, until to date 22 such zones have been established in 17 provinces, municipalities and autonomous regions, all approved by and registered with the State Council. These include the soon-to-be approved Huaihua Mountainous Area Comprehensive Development Experimental Zone in Hunan Province and the Compre- hensive Agricultural Development Experimenital Zone of Hainan Province. The 22 zones have a total population of 60 million. The basic task of the experimen- tal zones is to blaze a trail for intensifying and deepening rural reform throughout the country. The experiments of the zones already set up cover rouglhly all ptoblems of major importance to the intensification of rural re- form and together form a more or less complete program of experiments. Seven series are discerned: (i) reform of the grain purchase and sale system; (ii) land system building; (iii) grassroots cooperative economic institutions building; (iv) village and township enterprise system building; (v) reform of the rural financial system; (vi) systemic reform of the forestry, livestock breeding, and fishery industries, state farms, and impoverished regions; and  - 40 - (vii) building of the organizational system of comprehensive agricultural development. 2.11 Reform in experimental zones differs from that in other regions in that specialized leading organs, an organizational setup, and a whole series of relatively thorough and strict operational procedures have been provided. Governments at the provincial level are trusted with the leadership of experi- mental zones. A leading group is formed headed by the responsible person of the province for rural work and joined by responsible persons of departments concerned, and a secondary-level leading group with a standing work team is formed in the prefecture or county. After restructuring of the governmental offices concerned, the Office for Rural Reform Experimental Zones under the Ministry of Agriculture is entrusted by the State Council with the task of leading and coordinating the work of all the experimental zones in the coun- try. Work on an experimental zone follows in general the following procedural steps: (i) preparatory investigation and study and identification of the subject of the experiment; (ii) selection of site and training of personnel; (iii) implementation of plan of experiment; (iv) follow-up investigation, analysis and monitoring of the experimental process; and (v) summing-up of experiences and shift-over into regular operation. 2.12 It is nearly four years since the first experimental zones were started. As a whole, work has progressed from start-up and deployment to a stage of steady development. Since 1989, the experimental zones have been confronted with a new situation. The changes in the macro-environment have strengthened the restraints on experiments in reform. Further intensification of work in the experimental zones needs to be given a proper direction. In view of this, the Sixth National Conference of the Work of Rural Reform Exper- imental Zones convened in December 1989 determined that work in 1990 should continue to implement the guideline of "consolidation, intensification, improvement, and adoption of necessary complementary measures." The zones were required to strengthen their leadership and aim at perfecting their work over the long term. They were urged to further display the spirit of explora- tion and innovation and strive for bigger and better results in the work of the experimental zones. The zones have since drawn up work plans for 1990 in accordance with the decision. 2.13 Unfavorable conditions have increased since the beginning of this year, and different experimental zones have felt to varying degrees the impact of the rectification drive and the economic retrenchment, and have shown uneven progress; however, taken as a whole, definite results have been gained and progress has been made in the work of the experimental zones. These results are summarized in Sections III-VIII of this report. 2.14 In step with work on experimentation, the experimental zones have organized training programs, theoretical symposiums, meetings to exchange experiences and study projects on specialized topics. The theoretical and practical standards of the personnel have improved. Monitoring and supervi- sion of the work of the experimental zones have been strengthened. 2.15 Some major problems in the work of the experimental zones: (a) Since the initiation of the rectification and improvement drive, conditions have changed as regards some of the measures inconsistent  - 41 - with given policies formerly approved for the experimental zones, indirectly impacting on the regular process of the experiments and triggering new problems in coordination. (b) The poor quality of the personnel and their work have resulted in incompetent and belated review work on the vast amount of experi- ences and data accumulated by the experimental zones over nearly four years. The lagging behind of summing up, analysis and evalua- tion has become a drag on the intensification and extension of the experiments. (c) For lack of properly defined standards of evaluation, and wanting in expertise and means, the supervision and monitoring of the results of the experiments have not been satisfactory and need to be im- proved. (d) Some newly-founded experimental zones are not supported by necessary funding. (e) Leadership and guidance need to be strengthened and it is necessary to employ administrative means and set up specialized channels to attract experts of all types to the work in the experimental zones. 2.16 The experimental zones have played an important role in the rural reform in the past four years. We shall here mention some major aspects: (i) standards of leadership in rural reform have been improved. The trail- blazing work of the experimental zones have produced a great amount of thought-provoking data and practical experience, contributing to more system- atic and less one-sided understanding of rural reform. On this basis, policy- making can be improved through verification of results. Policies will become more concrete and standardized. Many of the successful experiments have been introduced province-wide elsewhere in the country through widespread extension work; some have been implemented on a national scale; (ii) the zones have acted as a "reserve bank" for theory, policies and personnel. On the one hand, the experimental zones have been the vanguard of the main body of troops, but on the other they are the reserves in the refoiam battle order. These reserves will come into full play in the days to come when rural reform is again given the green light; (iii) the experimental zones have promoted the economic development of the provinces and counties of which they are part, and through these palpable results they have rallied the confidence of people in reform and given great support to the process of all-around reform. 2.17 It should be pointed out that the World Bank's first-stage loan for adjustment in the rural sector has been granted on the strength of the estab- lishment of rural reform experimental zones, and its experts have made many field investigation tours of the zones. These have played an instrumental role in promoting work on rural reform experiments and on the reform and development process of China's rural areas as a whole. We highly value this excellent relationship in cooperation and expect that it will endure.  - 42 - III. REFORM OF THE GRAIN PURCHASE AND SALES SYSTEM Background and Problems 3.1 The grain purchase and sales system China has been practicing since 1985 is a "double-track" system which means that part of the grain purchase and sales is put under the direct control of the government by administrative means of a certain mandatory nature in order to maintain a stable supply while the rest if carried out, independent of the government control, among the producer, the conswner and the distributor. The latter is commodity exchange in its true sense, regulated by market mechanisms. The basic ingredients of the "double-track" system are: (i) the coexistence of the compulsory low- price purchase of grains from farmers and their low-priced sale to consumers by the government on the one hand and the market transaction in general on the other; and (ii) the coexistence of governmental and nongovernmental agencies in charge of grain circulation. 3.2 Over the recent years, a certain measure of agreement has been reached on the necessity of the reform of the existing purchase and sales system. But, as to how to effect the reform, there have remained several difficult problems and concerns, for example: (i) what is the role model for the system that suits China's specific conditions? (ii) how to keep the change in the distributional pattern of national income in conformity with the bal- ance of revenue and expenditure of the Government, while raising the grain purchasing prices to bring about fair exchange with farmers? (iii) will the rise in grain price touch off a general price hike? (iv) what if market prices continue to climb after "covert subsidization is turned into overt subsidiza- tion"? and etc. 3.3 In this context, the State Council approved in 1988 the establish- ment of experimental zones for the reform of the grain purchase and sales system in Xinxiang, Henan Province, and Yulin, Guangxi Zhuang Autonomous Region. The purpose was to gain experiences and improve theories through practice in regional reforms with a view to providing guidance and giving impetus to the future national endeavor at the reform. Evaluation of the Reform Experiment 3.4 It has been over two years since the reform began in Xinxiang, Henan Province and Yulin, Guangxi Zhuang Autonomous Region. During this period, there appeared a nationwide violent fluctuation in grain supply and demand and market prices. Considerable changes happened in the overall economic environ- ment. Since the beginning of the reform, it has been smooth-going and moving forward steadily. It has withstood fairly tigorous tests and has at least yielded such positive results as follows: (a) To a certain extent, it has ameliorated the situation where the difference between State-set and market prices are exceedingly great, thereby bringing the grain growers increased income. (b) It has proved to be conducive to relieving difficulties with pur- chase. Contract fixed-quota purchase has proceeded smoothly and improved with each passing year.  dl - 43 - (c) Agricultural production in general and grain production in particu- lar has registered a steady growth. Analysis shows that the steep rise in output is directly due to the great expectations which the soaring market prices across China towards the end of 1988 excited the farmers. It is also due to the increase in farmers' income which made it possible for them to increase inputs. 3.5 The reforming of the sales system has effectively changed the dis- torted grain consumption behavior which occurred under the low-price ration system. This has helped to reduce waste. Furthermore, as covert subsidiza- tion is turned into overt subsidization, the grain consun4rs' saving is no longer unused fixed quotas only but real money in their hands. 3.6 The adjustment and raising of agricultural taxes and the increase of grain prices are linked to each other so that the prices and taxes are sepa- rated. This represents a positive step and a new thinking. It may take effect in two aspects: first, by shifting from "low price and light tax' to "high price and heavy tax," it will be possible to guide production with real product prices and urge rational utilization of resources with real resource prices. Second, part of the revenue increase may, in the course of adjust- ment, be turned over to grain growers. 3.7 The grain reform has brought about a change in the situation where the public finance was bearing an increasingly heavy burden of subsidization. It has also readjusted the interest distribution among the State, the consumer and the producer. (a) In the past, grain price adjustment was mostly a one-way undertak- inig, with purchasing prices changed only. The result was that only the government's behavior was restrained. This has directly caused an excessively heavy burden on public finance. The reforms in the experimental zones have made a breakthrough in terms of adjustment. In all these zones, whether in Yulin or Xinxiang, there has been carried out a policy, in varying degrees, of simultaneous adjustment of both purchasing and selling prices, substitution of overt subsi- dization, separation of subsidies from prices and cost-sharing at various levels. This policy is aimed at seeking a balanced budget on their own while pushing forward with the reform. (b) The cost-sharing arrangement has involved both enterprises and farm- ers in bearing the consequences of the rise in grain pzoduction cost and has readjusted the distribution of national income and trans- ferred part of the income to farmers: (i) as far as the State is concerned, it no longer bears alone all the cost entailed from one- way price adjustment; (ii) for enterprises, the principle of having agriculture help industry has been turned into that of having indus- try help agriculture; (iii) with regard to consumers, adjustment of prices for part of the grain has affected their interests in a cer- tain degree. But what is of far-reaching signifieance is the fact that it has offered the individual businesses the opportunity to bring their purchasing power into play. Moreover, it has helped to get rid of egalitarianism and the tendency of exclusive stress on material benefits manifested in the existing distribution system; (iv) as for the producers, the reform has led to increase in their  - 44 _ income and, therefore, spurred their enthusiasm for grain produc- tion. 3.8 Through the reform of the price subsidy system, a new principle of subsidization has been instituted and the efficiency of subsidization has thus been improved. Plan for the Next Stage of Wfork 3.9 This year, the drive for improving the economic environment and rectifying the economic order has entered its second year. In this context, how to seize opportunities and create conditions to deepen the reform in an active and steady manner is an issue of crucial importance. But, the trouble is that all the experimental zones are faced with one common difficulty in their reforms, namely, a sluggish market arising from the improvement and rectification drive. The economic results of the enterprises in a number of trades have drastically deteriorated. Despite some improvement in recent tnonths, the situation remains quite grave. Enterprises and workers are still hardly able to endure any significant price increase. This will become an obstacle to the reform of the sales system. 3.10 The plan of the Xinxiang Experimental Zone for the next stage of work: (a) Continue to raise the contract grain purchasing prices next year. If the State is not planning a price increase in the near future, Xinxiang will further advance the wheat price from Y 66 to Y 70 per 100 kg. (b) Further push forward with the reforming of the sales system if con- ditions are ripe. Judging from the current conditions, it is not practical to shift all the increased burdens of subsidization onto the enterprises. It is, therefore, desirable at present to take the "turning-without-moving-forwerd" approach to the change "from covert subsidization to overt subsidization." That is to say, the increased income from the selling price rise will all be used to subsidize urban residents. The increased cost can be borne by enterprises in the future when their conditions improve. This approach cannot help to cut down the burden of subsidization on the finance offices and readjust the income distribution between the urban and rural areas. But the "covert-to-overt" switch will cer- tainly have the effect of encouraging people to save grain. 3.11 The tentative ideas Yulin has with regard to its recent work in the reform: (a) Further cut sales on ration at State-set prices. (b) Increase appropriately the quality-based purchase-selling differ- ence. The present difference at the 13 percent only is very irra- tional. From now on, the selling price for top-grade rice may be raised in the light of the average price difference in the market. This can both satisfy the consumers' different needs and reduce the subsidies provided by the State finance departments.  - 45 - (c) Simplify the procedure of subsidization. The grain price subsidies will be appraised and decided according to the family support coef- ficient and included in the total sum of pay for cadres, staff and workers as part of labor reproduction cost. (d) Promote complementary reforms within the grain purchase and sales section and enhance the vigor of grain-related enterprises. (e) Stimulate further development of grain markets and enhance the gov- ernment's power of adjustment and control. At present, it is neces- sary to increasR efforts at the development of relevant regulations governing the existing grain markets and a supporting system, and speed up the construction of new markets. At the same time, the government should guarantee the effectiveness of its adjustment and control by providing more effective guidance in price, information, circulation channels and other fields. IV. EXPERIMENT IN LAND SYSTEM BUILDING Background and Problems 4.1 The problem of the agricultural land system has always been at the core of the formulation of China's rural policies, because adequate solution of this problem provides the basic guarantee for agricultural growth. 4.2 The emergence of the household contractual responsibility system, which was spontaneously initiated by farmers in 1979, represented a dramatic change in the original policies and system. Its contribution to the extraor- dinary growth of China's agriculture from 1979 to 1984 has already gained utniversal recognition. However, the stagnation and fluctuation of China's agricultural production (particularly in terms of the major categories of agricultural produce) once again led to a debate over the efficiency of this systeam. 4.3 The household contractual responsibility system adopts a contract structure in which "the farmers are allowed to retain for their own disposal all the grain left over after handing over set quotas to the state and the collective." This not only guarantees the state and the collective the right to a proper share in agricultural returns, but also guarantees the farmers, as producers, the right to use the land and enjoy the returns therefrom. 4.4 However, the household contractual responsibility system is not the answer to all problems found in China's agricultural growth. Putting aside all the other institutional arrangements affecting farmers' conduct, the sys- tem itself is bound by a series of constraints, suffering from a constant increase in its operation costs and a decrease of itr incentive effectiveness. Guiding Ideas for the Experiments and Program Design 4.5 A variety of land system provisions have appeared in different types of rural areas in China, and five rural reform experimental zones, namely, Meitan County of Guizhou Province, Pingdu County of Shandong Province, Wuxi  - 46 - Municipality, Changshu County and Wuxian County of Jiangsu Province, Nanhai County of Guangdong Province and Shunyi County of Beijing Municipality, have already come to different sets of guiding ideas for the solution of their problems arising out of the increase in the operating costs of the household contractual responsibility system and according to their respective character- istics. Major Experiment Items and Progress in the Meitan Experimental Zone 4.6 The Meitan experimental zone is a typical traditional rural area in China. More than 90 percent of its population are engaged in agricultural activities, with a per capita farmland of 0.09 ha. Agricultural land is of absolute importance to the farmers in Meitan County. Hence, experiment in this area should focus on clarifying the principles of the collective owner- ship of land and their functions, perfecting the farmers' land use rights and stalilizing, through more effective system provisions, the farmers' prospects of investment in land, so as to provide an institutional basis for the long- term growtlh in agricultural production. 4.7 With respect to the ownership of land, it was made clear that vil- lages are the basic unit entitled to the ownership of land. Village adminis- trative offices were set up as authorities to contract land to the farmer households. 4.8 With regard to the right to the use of land, regulations were made in the following two aspects: (i) "no redistribution of land will be effected in case of an increase in the number of persons of the farmer households,' a new system provision through which the following four aspects of advantages are aimed at: (a) to spare the cost originally entailed by the constant read- justment of land distribution under the contractual responsibility system; (b) to protect the farmland from fragmentation by constant readjustment of land distribution; (c) to provide institutional guarantees for the farmers to make reliable plans for the use of land and returns therefrom; and (d) to control the rural population growth and to promote the nonagricultural trans- fer of the people engaged in agricultural activities; (ii) the contracting households are allowed to effect a nongratuitous transfer of land use right. 4.9 The Experiment on the Land Property Rights System. (1) The concept of the collective ownership of land has been clarified. This mainly includes a clear explanation of the principle of land ownership and its implications, imposition of land contractual fees, and strengthening the management over land resources. (2) A new stipulation has been introduced affirming that no readjustment of land will be made within the contractual period (20 years) upon increases or decreases in population, thereby severing the linkage between population and redistribution of land, and solving once for all the problem of the constant redistribution of land necessitated by population changes. (3) The expansion of the land use rights, the right to inherit and dispose of land (including the rights to transfer, subcontract and mortgage land), has been effected. Besides, the certificate for the use of land is introduced as providing the unified legal norm and institutional form for the exercise of this particular right. The above-mentioned experiments started in 1988. On the basis of the results achieved from these experiments, two legal documents were formulated in 1989, namely, "Tentative Rules of Meitan County on the Management of Rural Collective Land Operations' and "Basic Regulations  - 47 - of Meitan County on the Collection, Use and Management of Rural Land Contrac- tual Fees." In 1990, the "Basic Rules of Meitan County on the Management of Rural Collective Land" was adopted as the basic document in the county's land legislation. This is a legal document of great and profound significance. 4.10 The Experiment in the Establishment of a Land Credit System. A land finance corporation was set up in Meitan County in 1988, the main task of which was to provide, against a mortgage on land and other properties, invest- ment credits for the development, transfer and improvement of agricultural land, as well as other medium- and long-term agricultural investment credits. A set of regulations on financial management and on mortgage and credit guar- asitees were formulated, and some medium-term agricultural development credits were provided. 4.11 The Development of Nonfarmland Resources. To promote the develop- ment of nonfarmland resources through the improvement of the land system is another important aspect to the experiment carried out in the Meitan experi- mental zone. Three basic principles have been formulated in this regard, namely, an uneven distribution based on competitive bidding; the practice of contractual or rental operation, with a regular period of 20 years and a maxi- mum period of 50 years; development and operation oa a moderate economic scale. Altogether, 7,467 mu were developed from the winter of 1988 to the spring of 1989, and 4,400 mu from the winter of 1989 to the spring of 1990. 4.12 Rural Political Power Organ-Building at the Grassroots Level. The experiments carried out in this respect mainly aim at providing a sound orga- nizational basis, as well as an adequate contingent of reliable cadres, for the imlprovement of the land system. The major measure adopted has been the establishment of village administrative offices as a subordinate organ with authority delegated by the township government, exercising some general func- tions of administrative management. Meanwhile, the village neighborhood com- mittees formerly instituted at the administrative village level have been lowered to the natural village level, and the original village neighborhood groups were dissolved. 4.13 The Reform of the Grain Purchase and Sale System. The central idea of this reform is to ensure, on the one hand, the full payment of agricultural tax (paid in kind according to the State-set prices), or in other words the fulfillment of the state compulsory purchase of grain, and on the other hand, to reduce the state grain purchases quota by 58 percent, so as to alleviate the burden imposed on the farmers by the state in the form of grain price taxes. At the same time, the amount of grain sold at subsidized and therefore low prices in cities, towns and villages is to be minimized. 4.14 In the experiment zone of Pingdu County of Shandong Province, per capita farmland is calculated at 2.2 mu. Although there has been rapid devel- opment over the past few years in nonagricultural sectors, farmland still re- mains the most significant source of income for the majority of farmers. Therefore, the main idea of the experiment is to introduce the "two-tier" land system, namely, a system which divides the farmland into "rations land", which is evenly distributed among community members, and "responsibility land", which is contracted through bidding.  - 48 - Major Experiment Items and Progress in Pingdu Experimental Zone 4.15 In the experimental zone of Pingdu County of Shandong Province, per capita farmland is calculated at 2.2 mu. Although there has been rapid devel- opment over the past few years in nonagricultural sectors, farmland still remains the most significant source of income for the majority of farmers. Therefore, the main idea of the experiment is to introduce the "two-tier" land system, namely, a system which divides the farmland into "rations land,' which is evenly distributed among community members, and "responsibility land," which is contracted through bidding. 4.16 Land Improvement. Land is the most essential prerequisite for the realization of moderate-scale operation of land. Some remarkable achievements have been made in Pingdu County over the past few years in the construction of agricultural infrastructures, namely, the upgrading of land quality, road construction, and the construction of water conservancy facilities in particu- lar. 4.17 The Practice of the "Two-Tier System" of Land. The central idea of such a system is to divide the farmland in rations land, which is evenly dis- tributed among farmer households according to the number of family members, and responsibility land, which is contracted through bidding. The rations land is only liable for agricultural tax, while the responsibility land, apart from the agricultural tax, is also subject to the state grain purchase quotas and land contracting fees. The contract period is five years, and the con- tract can be renewed on a priority basis. At the same time, 3 percent of the land has been put aside in reserve, in case some adjustment in land distribu- tion is needed because of demographic changes. The experiment in Pingdu County on the "two-tier system" was started in 1984, popularized in 1988, and completed in 1989. So far, moderate-scale operation has been basically achieved on the responsibility land. 4.18 Land System Building. The main purpose of the experiments carried out in this regard is to develop a complete system of strict land management. These include the system for the protection of land resources, the system for land assessment (including the grading of land, rewards for upgrading the land and punishment for its degradation), and the system of land archives. This experiment started in 1989. In 1990, more attention was given to its control and implementation. So far, 1,402 villages have effected rewards for upgrad- ing land and punishments for its degradation, involving more than 80 percent of all the villages in the county. 4.19 The Rural Accumulation System. The accumulation of funds in the rural areas comes from such funds as the collective accumulation, labor accum- ulation, households accumulation and farmer household housing construction reserve funds. The township or village Cooperative Foundation is the govern- ing body responsible for the management of the accumulated funds. These funds are mainly used in the development of agricultural infrastructures (including land development, the construction of water conservancy works, road and power stations), in the purchase of agricultural machinery and in the popularization of agricultural techniques. 4.20 The Agricultural Service System. The main idea of the effort to develop an agricultural service system is to establish, both at the township  - 49 - level and at the village level, a series of service organizations in the field of agriculture techniques, agricultural machinery, water conservancy, animal husbandry, the purchase and sale of agricultural produce, and the supply of goods for agricultural production. The experiment in this regard started in 1989 and was popularized in 1990. So far, 45 comprehensive agricultural ser- vice centers and 468 agriculture service stations have been set up at the township level, involving a working staff of 4,739 people. At the village level, a variety of agricultural service teams and service shops engaged in the purchase and sale of agricultural goods have been set up. Malor Experiment Items and Progress Achieved in the Experimental Zones of Wuxi, Changshu and Wuxian in south Jiangsu Province 4.21 Compared with other agricultural areas in China, the experiment zone of Wuxi, Changshu and Wuxian in southern Jiangsu Province can be regarded as the most developed rural area in China, experiencing in recent years a very rapid expansion of its TVEs. An overwhelming majority of its original agri- cultural labor force has already moved into nonagricultural sectors, resulting in a drastic reduction of the importance of agroland economy to both the farm- ers and the local government. On the one hand, this has greatly increased the opportunity cost of agricultural input in this region; on the other hand, the extremely low comparative advantage of agriculture, together with an unchanged state purchase quota, has seriously affected the farmers' enthusiasm in agri- cultural activities. Therefore, in face of these constraints, the southern Jiangsu experiment zones are trying to realize the modernization of agricul- ture through the concentration of land at the village level, an increase in machinery input and the establishment of a socialized agricultural service system. 4.22 During the experiment, a gradual process of discreetly spreading the trial measures from a few chosen spots to the whole zone is advocated, and the choices made by the village organizations, as principals of scale operation, are fully respected. A series of studies have been conducted on the prerequi- site for the experiment, setting of targets for scale returns, various options for machinery composition and perfection of fully-developed infrastructures, so as to provide a basis, in both theory and practice, for the optimal compo- sition of production elements, establishment of principals of scale operation and fostering of proper contractual relationships between farmers engaged in scale operations on the one hand and the village organizations on the other. 4.23 The Moderate-Scale Operation of Land. The experiment carried out in this regard mainly focuses on two aspects: (i) to promote a steady and grad- ual development of the moderate-scale operation of land in a number of model towns and villages; and (ii) to promote the moderate-scale operation in the remote areas and on barren land. For this purpose, the following measures were adopted in the southern Jiangsu experimental zones: (iii) practice the "two-tier system"; and (iv) minimize the area of rations land and maximize the area of responsibility land, so as to gradually realize the moderate-scale operations. Major Experiment Items and Progress Achieved in the Nanhai Experimental Zone 4.24 Moderate-Scale Operation. Experiment in the moderate-scale opera- tion of grain fields started in Nanhai County in 1987, but was confined to  - 50 - mainly five pilot villages. Due to certain obstacles encountered between 1989 and 1990, the experiment has now been moved onto the nongrain fields. This mainly refers to the large-scale central contractual development of slopes and hills and water surfaces. 4.25 Land System Building. In 1989, a general program was formulated for the experiments in land system building, the central theme of which was to reaffirm the collective ownership of land, prop up the farmer households' right to the use of land and apply strictly all stipulations concerning the right to land management. In 1990, measures concerning the contracted opera- tion of farmland through bidding and the imposition of land contractual fees were put into operation. 4.26 Improving the Agricultural Service System. A variety of measures have been taken to improve the services provided by the collective in mecha- nized farming, irrigation and drainage works, plant protection, raising of rice seedlings, supply of agricultural goods, etc. In this way, by providing diversified services to the farmer households engaged in scattered operations, a measure of economy of scale could be achieved outside the limits of land operation itself. Work in this respect has been going on quite smoothly from 1988 to 1990. 4.27 The Establishment of Agricultural Development Funds. The "Regula- tions on the Establishment of Agricultural Development Funds" was promulgated and put into effect in 1989. Altogether Y 69,980,000 was raised in the same year for the establishment of the funds. At the same time, a system of con- tribution by labor by the farmer households was introduced, by which Y 14,500,000 worth of labor was contributed to the funds. The experiment has been continued in 1990. 4.28 Experiments in Agricultural Mechanization. Nanhai County enjoys a relatively high level of agricultural mechanization, having realized mechani- zation in a number of basic technical procedures such as farming, irrigation and drainage, threshing, and processing. However, with regard to some key technical procedures such as transplanting, harvesting, plant protection and grain drying, mechanization is still at a very low level. Experiments were started in 1988 on mechanized operation in these key technical procedures, and a target was set for the mechanization of the entire process of grain produc- tion. Experiments in this field have been carried on in 1989 and 1990. 4.29 Rural Political Power Organ Building at the Grassroots Level. The experiment in this regard started in 1989. Its main idea is to dissolve the original villagers' committees at the administrative village level and rees- tablish them at the natural village level. Meanwhile, the original villagers' groups at the natural village level were dismantled. At the administrative village level, administrative zone offices (corresponding to village adminis- trative offices) were set up as the subordinate organs delegated to act for the township government (corresponding to "xiang" or township governments). In 1990, attention was given mainl: to its institutional organizational devel- opment.  - 51 - Major Experiment Items and Progress Achieved in the Shunyi County Experimental Zone 4.30 Unlike In the above-mentioned experiment zones, the experiment car- ried out in Shunyi County of Beijing Municipality follows a different pattern in that the county government takes the initiative in organizing its imple- mentation, and that by means of administrative intervention, large collective farms have been set up in order to realize the rapid and large-scaled concen- tration of land. The experiment contains the following aspects: (1) to iden- tify the ways of land concentration, namely, to take back and pool together land which was originally contracted to (a) those presently working in TVEs; contracting workers working away from the community with long-term fixed income; and individual households engaged in industrial and commercial activities; (b) people who have lost their ability to work on land; (c) specialized houReholds that have long been engaged in stock-breeding or poultry farming, forestry and in the production of cash crops; (2) to adequately solve the problems left over from the concentration of land, such as the employment of those who have lost their land, providing them with rations, etc.; (3) to set up collective farmns o- different kinds on the con- centrated land; (4) to enhance agricultural investment, promote mechanized agriculture, and to further consolidate the material and technical basis for the collective farms. 4.31 Altogether, 613 collective farms and 594 tean,s were set up in 1987. In 1989, they were further merged and combined into 193 collective farms, which were all set up across village boundaries. Then in the same year, after some reorganization and adjustment, they were again split into 497 collective farms. Except for one farm that straddled village boundaries, all the other farms were set up with the village as their basic units. Of all the 497 col- lective farms, only 116 have adopted centralized ways of management, account- ing and distribution, while the other 381 were turned into coordinated farms where farming was carried out in a centralized way, contracts were signed according to labor force and accounting was settled on a household basis. They accounted for 76.7 percent of all the farms, operating 83.3 percent of all the land of the county, and forming the mainstay of the collective farms. 4.32 The following work has been done for the improvement and consolida- tion of the collective farms: (i) With regard to the 116 substantive collec- tive farms, emphasis is on further improvement of the internal farm work con- tract system. Measures taken in this regard (a) contracting the land to teams or individual farmers and paying remuneration according to output; (b) strengthening labor management, contracting processes of farm work, and setting up management quotas; (c) applying a strict system of rewarding over- fulfillment of production quota and punishing shortfalls in output; (d) estab- lishing inside the farms strict cost accounting and fiscal systems. (ii) With regard to the 381 cooperative farms, emphasis is on the realization of cen- tralized coordination and services. In terms of farming plans, irrigation, mechanized farming, technical measures and grain distribution. (iii) In the first six months of 1989, the macroeconomic policy of improving the economic  - 52 - environment and rectifying the economic order adopted by the central govern- ment had confronted some township enterprises with the questions of reorganiz- ing their business or to change their products. A Brief Analysis of the Major Experiments 4.33 Government Intervention Constitutes the Main Driving Force in the Experiments on Institutional Developmetnt. The experiments in land system building and moderate-scale operation of land all include some basic institu- tional changes, during the process of which government intervention is strongly felt. Owing to the different characteristics of government interven- tion involved, these institutional changes are divided into two types, namely, compulsory institutional changes, as in the case of the Meitan, Pingdu and Shunyi experimental zones, and induced institutional changes, as in the case of the southern Jiangsu and Nanhai experimental zones. 4.34 Compulsory institutional changes have the following characteristics: (i) Definite targets are set up. The target setup for the Meitan experimental zone is to establish a definite and complete land system, including arrange- ments for its ownership, transfer and management. That for the Pingdu experi- mental zone is to realize moderate-scale operation on the 'responsibility land" and establish a system of strict land management. In the case of the Shunyi experimental zone, t.he aim is to set up collective farms. (ii) The changes are pushed through by compulsory means. Government intervention, which is coercive in nature, has always been the driving force in starting up and continuously pushing forward these compulsory institutional changes. The implementation of experiments in Meitan, Pingdu and Shunyi on the building of a land system and moderate-scale operation has, since the very outset, been directly enforced by the County governments concerned. (iii) Different means of enforcement are adopted. The means adopted by the Meitan experimental zone in its intervention is to introduce, in a centralized way, a series of insti- tutional norms and the rules for their functioning, for instance, the institu- tional norms concerning land property rights, land market, land mortgage and land credit; and the institutional forms taken by these norms as well as the procedures for their functioning. These are tantamount to land legislation. In the Pingdu and Shunyi experimental zones, government intervention is car- ried out through the formulation of an overall program, which is then put into compulsory implementation. For instance, the program for the implementation of the 'two-tier system' of land formulated in Pingdu County and the program for the establishment of collective farms formulated in Shunyi County were all put into practice in a coercive way. Such coercive intervention is very effective in the establishment of basic land system norms and their finction- ing rules, rapid reorganization of the pattern of small-scale opera*on of evenly distributed land, realization of moderate-scale operation of land, and establislhment of collective farms. 4.35 The induced institutional changes in the southern Jiangsu experimen- tal zones and Nanhai County, however, have some different characteristics: (i) A series of complicated targets are set up. In the case of the three zones in southern Jiangsu Province, two targets were set up, namely, moderate- scale operation of land and agricultural modernization, including the moderni- zation of agricultural techniques, organization and management. The targets set for the Nanhai experimental zone were, firstly, moderate-scale operation of grain fields, and the, of nongrain fields, which also contained a number of  - 53 - technical and organizational implications. (ii) A prolonged process is expected. Although organizational reconstruction can be completed rapidly, technical development, however, takes time and a prolonged process can be expected. This requires continuous intervention on the part of the govern- ment, in the form of continuous policy guidance as well as efforts at organi- zation and coordination. With regard to such institutional changes having a large number of organizational, technical and management implications, govern- ment intervention of an inducing nature is found to be very effective. 4.36 An Institutional Cycle has been Initially Formed, Connecting the Land System, Ways of Management and Organizational System. The implementation of the experiments has resulted in a number of achievements in institutional and organizational development. With regard to the land system, a complete set of arrangements have been made, including those for land property rights, credit, transfer and management; in land operation, various forms of moderate- scale operation have been developed; in the organizational system, village and community cooperative organizations, political power organs (village adminis- trative offices), villagers' autonomous organizations and agricultural service organizations have been formed. The institutional system, organizational system and ways of operation have, both in logic and in their functioning, formed a kind of institutional cycle. In Meitan County where the economy was relatively backward and agricultural technical development was still at a low level, small-scale household operation constitutes the dominating pattern of agricultural operation. Therefore, experiments on the development of land system carried out here are only designed for such a pattern of household operation. Village administrative offices were set up in accordance with the experiments in land system and the household operation pattern, and together, they formed a harmonious institutional cycle. In the Pingdu experimental zone where the level of economic and technical development was relatively high, collective economy and household operation were given equal importance in the economic activities. The strict provisions for land management and moderate- scale operation of land and the fully developed systems of village and commu- nity organs and of agricultural services have also formed a harmonious insti- tutional cycle. In Shunyi County where economic and technical development are at a high level and TVEs are highly developed, collective operation has played a dominating part in the economic activities. An integrating institutional cycle has also been formed between the collective farms and the village and community organs. The formation and functioning of these institutional cycles prove that significant progress has been made in the work of these experimen- tal zones, and some substantive institutional and organizational results have been achieved. 4.37 Significant Results have been Achieved in Dealing with the Compli- cated Relationship between Population and Land Resources. After three years of continuous exploration in the experimental zones, important headway has been made and significant results have already been achieved in alleviating and solving the problems deriving from the tense relationship between popula- tion and land resources. 4.38 With the new institutional structure established in the Meitan experimental zone, the follewing progress has been made in this respect: (i) Wlile the basic pattern of even distribution of land and household opera- tion is affirmed, the natural linkage between population changes and redistri- bution of land has been severed by the adoption of the policy of no redistri-  - 54 - bution of land to suit population changes within 20 years. In this way, land movement has been freed from the original constraints of population change and thereby turned into an independent process of resource reorganization. (ii) Regarding the development of nonfarmland resources, a policy of uneven distribIution was adopted from the very outset, by which the development of the nonfarmland resources was contracted through open bidding, thereby breaking its inherent linkage with population and fornming finally an independent pro- cess of resource distributioni, flow and reorganization. At the same time, a new field of employmetnt was created for the increased population. (iii) With the establishment of the new institutional structure, the subsequent movement and reorgarnization of land (including the already developed nonfarmland) are carried out by way of transfers in the land market, and thus totally freed from population and its changes. 4.39 In the Pingdu experimental zone, however, this problem was solved by the formnulation of a unified series of policies, with the collective as the intermediary unit. (i) Land is divided into two parts, namely, "rations land" (including a small amount of land in reserve) and "responsibility land." The rations land is evenly distributed according to the population and will be constantly redistributed according to population changes. With regard to the "responsibjility land," however, the linkage between its distribution and popu- lation was broken from the very outset by introducing a means of uneven dis- tribution, with the operation of land contracted through open bidding. There- fore, the linkage between population and the distribution of land resources has been confined to a relatively linmited scope, affecting only the rations land. (ii) Any changes in the distribution of land (including subcontracting) after the responsibility land has been contracted should be carried out with the village or community organs as intermediaries and by way of open bidding and contracting the land to the most qualified people. This, again, will have no linkage with population changes. (iii) The surplus population will be employed, on a selective basis, in areas of nonland operations, so as to alle- viate the employment pressure exerted on land distribution by the changes in population. 4.40 The Shunyi experimental zone, however, adopted a number of more drastic measures, by which the relationship between population and land was completely broken. The linkage between land distribution and population was denied, and land distribution and its changes were all freed from population and its changes. Land was put under the planning and operation by the collec- tive farms. The distribution of land and the changes in it were turned into a process of resource distribution and composition. Grain and other agricul- tural products were supplied to the rural population according to the central- ized plan drawn up by the village and community organs. Excessive rural popu- lation would then be employed by the village and community organs in a cen- tralized manner in areas of nonland operations. Problems Encountered and Some Basic Ideas for their Solution 4.41 After three years of experiment, a number of important items still fall short of the original target, and at the same time, many problems and difficulties have been encountered in the experiment, which is now enduring great pressure.  - 55 - 4.42 The experiment items which have yet to realize their expected tar- gets include mainly the experiments on the land transfer system in Meitan County and the moderate-scale operation on grain fields in Nanhai County. The major obstacles faced by Meitan County in its experiment on the land transfer system are mainly the following: (i) On the one hand, farmnland resources are too scarce for them to enter into the transfer market. (ii) Conditions are not ripe for the introduction of land mortgage loans, therefore this has not been put into large-scale practice. Only a very limited amount of land has been put under the land credit system. (iii) In the initial program design, the possible constraints and difficulties in the experiment on the land trans- fer system were underestimated, and therefore some impossible targets were set. In the case of the experiment on moderate-scale operation on grain fields carried out in Nanhai County, the main obstacle comes from the state grain purchase system. The state grain purchasing quota set for Nanhai County is 600 jin per mu of grain fields, accountinig for more than 40 percent. of the output. With a considerable amount of grain retained for consumption by the farmers, only a very limited amount of grain can be brought to the market. Therefore, the burden incurred by grain field operation is too heavy, and the farmers do not have such interest in expanding the operation scale of the grain fields. There was underestimated during the original program design and therefore unpractical targets were decided upon. 4.43 The main problems and difficulties encountered by the Meitan experi- mental zone: (i) The resource basis for the experiment on the land system is extremely weak. This is caused by the scarcity of farmland resources and by the constraints of a limited development scale of nonfarmland resources. (ii) The experiment on the development of the land system has met with great pressure coming from population changes and demand for jobs. Future develop- ment of the experiment is difficult, therefore is very hard to push forward. The same is true for the experiment carried out in the Pingdu experimental zone on moderate-scale operation. Besides, concerning the experiments on the land management, agricultural service and agricultural accumulative system, great efforts will have to be made in their implementation, supervision and improvement. In the southern Jiangsu experimental zone where the experiments on the moderate-scale operation and agricultural modernization are to be fur- ther pushed forward, there is a need for increased inputs of human, material and financial resources, and therefore they are also facing great pressures. In all the experimental zones of Meitan, Pingdu, southern Jiangsu, Nanhai and Shunyi, further development of the experiments on land system and mtoderate- scale operation has met with great pressures and many difficulties. There- fore, it is necessary for the government to improve its organizational, man- agement and coordinating abilities in the experiment, and its abilities to mobilize the needed resources. V. THE EXPERIMENT IN RURAL ECONOMIC COOPERATIVES 5.1 The rural economic cooperatives at the grassroots level are devel- oped to reach two objectives. One objective is to organize more than 200 million farmer households of decentralized management to cope with market risks and cooperate in areas of production and management suitable for scale economy so as to alleviate market fluctuations resulting from centralized demanld and scattered supply of agricultural products. The other one is to  - 56 - bring into play the management function of government organs at the grassroots level so that such fundamental work as family planning, social security, edu- cation and health are taken care of and state purchase of part of the agricul- tural products at low prices is ensured. Therefore, the cooperatives designed in the projects should not be idealized ones organized along Rochdale princi- ples. The actual rural situation in China must be taken into account. The rural cooperatives should have Chinese characteristics implementing the policy of combiniing centralized and decentralized management on two levels. Principles for Cooperative Building and the Main Elements of the Experiment 5.2 The experiment in cooperative building is designed and carried out according to the following basic principles. (a) The independent property status of farm households and rural enter- prises as principals in rural economy should be guaranteed. (b) Cooperatives should be regarded as the separate basic stratum of grassroots management principals and restructured accordingly. (c) A key link in the development of cooperatives is to set up an accum- ulation and a distribution system clearly defined with relevant internal property rights and duties. The structure of the coopera- tives, either communal or specialized, should correspond to their internal property rights and duties relationships. (d) Cooperatives are only set tip in those spheres of production and management which are suited to the economy of scale such as finance, purchase and sale, hydraulic power, crop protection, farm machinery, and farming technology. (e) One person, one vote remains the basis of the whole decision-making mechanism. It is the basic guarantee for democracy inside the coop- eratives, and supervision by the public. However, in traditional rural communities, community leaders and decisions on public affairs are produced after a screening and balancing process by farmers who are closely bound by blood and geographical relationships according to ethical standards and clan or faction interests. By this pro- cess, organizational and supervisory expenses are saved. Therefore, the system of one person, one vote and democratic management should be implemented step by step. 5.3 Main elements in the experiments In Shangzhi city, Heilongjiang; Yut'an county, Hebei; Liquan county, Shaanxi: (a) The project for Shangzhi, Heilongjiang province includes four parts: the farmers' specialized societies, cooperative fund-raising socie- ties, specialized development companies at the municipal level and training centers for specialized societies. The focus of the proj- ect is to organize specialized production societies in fully "liber- alized" areas and set up development companies to strengthen the societies' ability to engage in dialogue as a group and develop their economic strength.  - 57 - (b) The f-cus of the projects in Yutian county and Liquan county is on the deveiopment of community cooperatives at the xiang and village levels. Different names have been given to the cooperatives at these two levels. As principals enjoying the property rights of the collectively-owned land in the community, the cooperatives inherit the assets of the original collective economy, and reclarify their property and distribution relationship with farm households and rural enterprises. On the one hand, cooperatives, on behalf of the government, provide planning of and control over agricultural pro- duction (food production in particular) through allocation of the means of production at the official parity prices. On the other hand, they provide the farmers with various service items concerning their production and management. 5.4 The development and improvement of the cooperatives constitute the basis for building the whole socialized agricultural service system. This system consists of three componentss (a) Self-serv:.Lce through the cooperatives. In the process of their organization, the cooperatives should develop their service items and set up service systems. (b) Nongratuitous service concerning finance, sales and supply, crop protection, farm machinery and farm water conservancy facilities provided by relevant enterprises and institutions. (c) Service concerning information, technology, training and policy guidance provided by such gevernment organs as those in charge of agricultural administration, industrial and commercial management and animal husbandry. Implementation and Monitoring 5.5 Organization Building of the Cooperatives. The specialized economic cooperatives in Shangzhi, Heilongjiang, were essentially set up according to the Rochdale principles. They are called farmers' specialized associations. These associations cover such areas of relatively highly specialized produc, tion and management as forestry, fruit-tree planting, animal husbandry, bee- keeping, vegetable-raising, mining and timber processing. Boards of direc- tors, supervising committees and other executives were all directly elected at the general assembly of the cooperative members. More then 50 percent of the cooperatives at the village level have formulated rules and regulations and worked out rules for membership. Out of 346 villages in the municipality, 200 have set up specialized production associations, and 189 have developed spe- cialized production villages. Since 1989, specialized associations involved in grain production have been developing very quickly. By 1990, 484 grain producers' associations have been set up at the village level or below with 3,296 mutual-help groups under them involving 47,800 households. 5.6 The rural specialized cooperatives in Shangzhi county have developed to the municipal level. By the end of 1989, six federations of farmers' spe- cialized associations and trade associations at the municipal level were set up involving such areas as fruit and ginseng, raising cow-breeding, timber  - 58 - processing, sand and stone, abrasives, and cooperative fund-raising societies. These associations have the same structure as those at the grassroots level. 5.7 In the experimental zone of Yutian, Hebei Province, community coop- eratives were set up from above. By the end of 1989, in all the villages and townships of Yutian, cooperatives had been set up at the village and township levels with the participation of all the adult farmers. In November 1990, a community cooperative at the county level was set up in Yutian. 5.8 In Liquan county, Shaanxi Province, cooperatives at regional and village levels were first set up on a trial basis in selected areas and then extended to the whole county. In the period of three years, 780 cadres were sent to villages and regions in four batches to help in the establishment of the cooperative organizations and the preparation of rules and regulations. By the end of 1989, community cooperatives had been set up in 12 out of the 20 xiang and townships, and 410 out of the 432 villages. 5.9 The System Concerning Property Rights. In the initial stage of the development of grassroots cooperatives in the three experimental zones, either communal or specialized, efforts were made to identify property rights and duties of relevant parties and to set up a property systems. The stocks sys- tem was applied in the specialized cooperatives in Shangzhi and Liquan. The proportion of dividend to stock was under restriction. The surplus was dis- tributed in proportion to the amount of business carried on by farmers with the cooperatives. 5.10 In the community cooperatives at the village level in Yutian and Liquan, the property of the collective was first of all checked up and the accounts made public. Thz property of the collective in the period of the people's conmunues now belonged to the cooperatives. The relationship between the cooperatives and the farmers in terms of land, production facilities, and debt assets and liabilities was identified. On this basis, an accumulation system was set up and the contracting system for different industries and trade further improved. Retention was collected from farmers involved in all areas, agriculture, forestry, animal husbandry, sideline production, fishery, industry, commerce, construction, transportation and service. With contracted land size and contracting fees checked up and regularized, the number of work days for labor accumulation stipulated (15 to 30 days for each farm worker per year) and debts recovered for the establishment of a cooperative fund, funds were collected and accumulated to increase the economic strength of the coop- eratives. 5.11 Land System. In the three experimental zones, land contracts were checked up and adjustment made in the size of the contracted land and the amount of retention after the cooperatives were set up. In Shangzhi, it was made clear that in the 15 years after the land contracts were adjusted and signed, contracted acreage would remain unchanged despite possible growth or reduction of population and the consequewmt change of labor force. Funds for public welfare and management fees were merged into funds for overall manage- ment which in turn were collected according to the number of people in each household. Funds for acctumulation were collected in the form of land con- tracting fees according to the size and quality of land concerned. In Yutian county, 674 villages have adjusted the size of contracted land. The average number of plots contracted to each household dropped from 10.8 to 3.9. Cer-  - 59 - tificates were issues to all contractors by regional management stations. At the same time, it was made clear that with the chanige of population in the future, adjustment in the size of land will only be made in the books. Farm- ers wltose land size is reduced in the books should pay a certain amount of extra money (and sell an extra amount of grain to the state). In Liquan, the focus of the management of the land contracting system is to highlight the right of the cooperatives to own, possess, use and manage land and punish those who do not use land properly. Farmers have the right to use land only under unified planniing and management, and upon effective fulfillment of the contracts. Cooperatives can make adjustments in the use of land for large- area specialized production to gain scale benefits. 5.12 Service System. Services are developed in all kinds of cooperatives and a system is being set up. In Yutian, plans of services develepment have been prepared for 41 township cooperatives and 750 village ones by 1990. One hundred twenty thousand farmers have signed service contracts with the cooper- atives. Two hundred seventy-two service organizations with 720 staff members have been set up by township cooperatives and 2,186 organiizations with 4,640 staff members by village cooperatives. In Liquan, there are already 22 serv- ice organs at the county level, 99 at the township level, 852 at the village level, and 4,040 rural demonstration households. In Shangzhi, 230 village specialized cooperatives, 97 percent of all the cooperatives, provide their members with such services as information, technology, capital, and purchase and sales, 77 stations for specialized services have been set up at the town- ship level. Eight specialized development companies and six specialized pro- duction associations at the municipal level have developed sound service capa- cities. Design of Monitoring 5.13 Since these projects are comparable, a generally similar effect index system was used in all the monitoring plans to reflect the demand for iifferent organizational structures by farmers at different levels of economic development, the difference or the change in the behavior of the cooperatives and in the evaluation of the cooperatives. Standardized questionnaires were produced and separate sample tests conducted with the PPS method among all farming population in the three zones. Specialized investigative organs were invited for monitoring and analysis to ensure the accuracy of the data evalua- tion and the objectiveness of the assessment. Analysis of Monitoring 5.14 The indices from the experimental zones are reported to higher autlhorities. Accordinig to the implementation indices and environment indices reported by the three experimental zone offizes, the cooperatives have set up sound organizations and systems, developed their economic strength, expanded service items, and effectively protected the interests of the farmers, thereby meeting the set targets. 5.15 In Shangzhi, the associations have been greatly strengthened in their ability to have dialogue as a group. They have already engaged iP direct negotiations with the provincial governments on matters concerning farmers' interests. They play a dominant role in the development of protec- tive purchase prices, in ensuring reinvestment of part of the processing  - 60 - income, and in the negotiations with enterprises. Many activists have emerged in farmers' cooperatives. In Yutian, the economic strength of the coopera- tives at the village and townslhip levels developed continuously. In 1989, 480 village enterprises were set up, an increase of 79 over the previous year. The cooperatives developed the rural economy by solving problems which indi- vidual farm households cannot cope with. In 1989, the total grain output of the county reached 327,363 tons, averaging 372 kg per mu, an increase of 3.8 percent and 3 percent respectively over 1988. The average per capita income increased to Y 630, 5.4 percent more than the previous year. The cooperatives promoted the growth of the rural economy in Liquan county by improving the conditions for rural production and management. In 1989, grain output reached 413,300,000 jitl, the highest record in the county. Average per capita net income for the farmers reached Y 509, 11.4 percent more than in 1988. VI. EXPERIMENTS IN BUILDING UP A TVE SYSTEM Background and Problems 6.1 Since 1978, China's township and village enterprises (TVEs) have been developing at an unusually high speed, resulting in a rapid expansion of nonagricultural output value and total volume of assets in the countryside. The fast growth of TVEs is connected with the expansion of greater market leverage in the wake of the decade-long reform and with the policies by the government to encourage the farmers to boost their income and improve their livelihood. The significance of the development of TVEs has been widely con- firmed and appreciated. However, it has to be noted that in the course of this development, some contradictions and problems have also gradually piled up, which will probably stunt future growth. These problems are partly due to the fact that the market-oriented TVEs are in contlict and friction with the outmoded system, while the government suffers from a lack of experience as to how to manage the nonstate economy and how to provide it with a fertile policy and legal environment for its rapid growth. Ideas and Programs for the Experiments 6.2 The purpose of building up a system of TVEs is to define the pro- perty rights of enterprise and standardize the transaction rules of and policy environment in line with the basic norms of a modern comnodity economy. In a certain sense, this is also the issue to be addressed by the urban and state- run enterprises in their reform efforts. Although it is universally acknow- ledged that TVEs are more dynamic because they suffer less interference by the state planning. Yet, it should not be overlooked that in the prevailing unique corporate hierarchy in China, it is those less-controlled enterprises that are usually having the most shaky foundation in terms of organization and system. Therefore, when the primary stage of drastic and explosive develop- ment of TVEs is passed, there is a greater urgency and need for having a sound foundation in respect of organization and system for the next stage of TVE development. 6.3 On the basis of the ideas stated above, we selected Fuyang, Wenzhou and Zhoucun of Shandong province as three experimental zones. They represent three different types of the local development models of TVEs. Among them,  - 61 - Wenzhou is well known for the raplid development of private enterprises in recent years. It represents a type of TVE development in the commercially developed coastal areas (such as Guangdong and Fujian). Zhoucun (under the city of Zibuo, Shandong) represent the type of TVE development in suburban areas where farmers enjoy the employment opportunities created by the urban economy, and also the relatively sound foundation of collective economy, while Fuyang is typically a traditionally agricultural region. It is far from cities, and its economic structure is characterized by the salient features of a pre-in(dustrial society. The mode of TVE development here is broadly repre- sentative of China's vast central and western regions. 6.4 In light of the actual conditions of these three regions, different and specific programs were formulated and implemented. In Wenzhou, emphasis was placed on the provision of legal protection and norms for the development of private enterprises. In the first stage of the experiment, certain local administrative laws and regulations were promulgated at all levels. In Zhoucun, the experiment centered around the system-building within the enter- prises. Prior attention was paid to the summarization of experiences from the practice of installing a shareholding system, and then the extension of the successful experiences to other types of TVEs, while in Fuyang zone, the experiment was characterized by the combination of system-building efforts both inside and outside the enterprise. Twenty experimental projects in two Ihatches were carried out successfully, covering almost all the areas of TVE developmenit. Progress in the Work of the Experimental Zones (a) Zhoucun 6.5 When Zhoucun was designated as an experimental zone for rural reform upon the approval by the State Council in February 1988, it decided on the experiments in six areas: (i) clearly defining the ownership of assets, rationally determining share ownership, establishing an assets management system; (ii) publicizing the model rules for different types of stockholding cooperative enterprises (hereaftr,r referred to as SHCEs); (iii) setting up a system for the distribution of accumulated profits and determining the method of claiming dividends by shares in SHCEs; (iv) bettering the management of these enterprises, standardizing the management of such enterprises by admin- istrations at xiang and village levels; (v) exploring an assets-handling pro- cedure of and a compensatory approach in case of loss and bankruptcy; and (vi) setting up stock exchanges, and devising methods of stock management. 6.6 In practicing the SHCE system, three steps were taken: (i) intro- ducing the elements of the SHCE system such as risk mortgage, inspection and auditing of assets, and corporate merger into the parental body of the con- tractual responsibility system, to create necessary conditions for a smooth transition; (ii) through the v-rification of capital and assets, establishing a regime of separate accounts to determine the share ownership and the legal representative of the property owners. On this basis, moving further to share subscription and share expansion and developing different types of SHCEs; and (iii) summing (tp experiences, making rules and regulations, and extending the standardized SHCE system in an all-round way.  - 62 - 6.7 In Zhoucun, after two years of efforts, the work progressed from field study to formulation of programs, from extensive mobilization to desig- nation of experiment subjects, from physical operation to monitoring, analysis and theoretical research, from small scale to full scale, the experiments were also extended from TVEs to other businesses such as rural department stores, forestry and fruit and breeding industries. 6.8 Upon entering the 1990s, the work in Zhoucun Zone includes mainly: (i) Summing up successful experiences in order to give incentives to those models. Experiences about SHCEs from nine different models at differelnt levels were summed up and extended through the seminars on the spot, to fur- ther the experiments in the whole zone. (ii) Giving more effective leadership to the experiments and exchanges of experiences. The zone committee reshuf- fled and fortified the leading group (from the original 5 to the current 14 members). The same was donie at lower levels and the brochure about the "exchange of work experiences in the experimental zone" was compiled and dis- tributed to make the leaders at different levels more knowledgeable and better equipped. (iii) Speeding up the formulation of rules and regulations in the zone. Three draft proposals--"the detailed regulations about the SHCE system for TVEs in Zhoucun zone," 'provisional regulations on assets evaluation and conversion into shares for SHCEs in Zhoucun zone," and "proposals for the regulatory income tax on dividends and bonuses of SHCEs in Zhoucun zone' are under full consideration and discussion. (iv) Setting up a monitoring system to exercise overall supervision over these new enterprises. Early this year, Zhoucun people, in cooperation with the Center for Statistical Analysis at the People's University, spent 42 days studying samples, as a result, over 20,000 data were collected and analyzed. An analytical report on the findings of monitoring was written. The findings show: (a) the SHCEs in Zhoucun are held by the local government. The value of stocks of these SHCEs in 1989 totaled Y 13,045, 4.2 percent of which were state shares, xiang- and village-held collective shares, corporate shares and institutional legal person shares, another 5.8 percent were employee shares and private shares; (b) the rate of corporate saving is high. By theoretical analyses of 51 samples, we know that 83.4 percent of the retained profits were used for expansion of production, and 16.6 percent were for expenditures like welfare funds and rewards of the employees; (c) only a small percentage of profits was for dividends; the eco- nomic performance of these enterprises were apparently better than the aver- age. Statistically, the per capita output value and per capita profit- and tax-generating rate of these SHCEs were higher than the average by 43 percent and 63.6 percent respectively. (b) Fuyang 6.9 Since its inception in March 1987, the Fuyang Experimental Zone roughly went through three stages. 6.10 The Beginning Stage (March-June 1987). The main tas s in this stage were the inves.'gation and study, the designing of the programs for experi- ments, and the establishment of a system for the work in the zone. On the basis of the study, the first set of ideas for the experimental zone was advanced. At the end of June, the finalized program was put forward. 6.11 The All-Round Unfolding Stage (August 1987-End of 1988). The work in this stage included: (i) launching a publicity campaign in the whole zone.  - 63 - Through radio, TV, press and all kinds of meetings, the objectives, signifi- cance and steps of the experimental zone were propagated to seek the common understanding and support from the people of all walks of life in Fuyang; (ii) establishing the system necessary for managing the relevant offices and lprojects; (iii) starting successively with 20 projects (see the annual report of 1988 for details). 6.12 Sunmmarization, Consolidation and Improvement Stage (1989). The fundamental tasks in this stage were: summing up the suctessful experiences of the experiments, consolidating the existing experimental projects, making important breakthroughs and improving the pilot projects that were widely applicable. the efforts were concentrated on the design of the companion proj- ects to upgrade the overall level of work in the Fuyang zone. Specifically, the work involved: (1) The examination, appraisal and summarization of the eight mature projects, namely, the rectification of market and checkpoints, joint office work, the models of corporate system-building, the models for the organization of enterprises and trade associations, the grant of the right to wholesale to the private drug stores, the guide to the establishment of TVEs, and the labor export of Linquan. (2) Continuing the execution of the unfin- ished projects, strengthening their management and making additional inputs, and with the improvement of monitoring system, following closely the develop- ment iu the execution of the projects and making timely correction of the deviations. (3) Marshalling resources to the key projects in order to make breakthroughs. This mainly refers to the drafting and enactment of the "Law of Nongovernmental Enterprises." The preliminary preparation of this project included the extensive field study about the enterprises, departments and communities. The drafting of this law and supplementary documents, the dis- cussions on them and on their implementation, the consultations among the departments concerned and the solicitation of views and ideas, the formation of the work teams and the necessary promotional efforts were all completed. But due to the changing external conditions, the actual operation of this project was suspended for the time being. 6.13 Starting from the second half of 1989, the work in Fuyang progressed to the stage of readjustment, harmonization and further improvement. The fundamental tasks were: readjust the priorities of the projects in the zone, focus efforts on the key projects like the industrial parks and financial service units, design a comprehensive system. The work included: (1) A conscientious examination of the progress in the execution of the projects. (2) Strengthening the guidance to and standardized management of the projects like the industrial parks, financial service units. Affected undesirably by the changing national economic priorities, the new enterprises in five indus- trial parks were doubly pressured by the shortage of funds and poor sales of their products. The approaches and responses by the zone authorities were: (i) the classification and study of the 89 enterprises already in the areas were made, making use of the World Bank funds in support of the key projects which have a beneficial effect on the development of the parks. A total of Y 4 million was invested to assist the projects whose output value was over Y 5 million; (ii) restructuring the product nmix, acquire or auction those poorly-managed enterprises; (iii) promoting the construction of infrastructure and the implementation of preferential policies in the parks; (iv) finiarncing the industrial parks through the nongovernmental financial service units. (3) SHCE trials. The work was done on tthe basis of the expetiences about tHe rules of eight model enterprises. Through three years of trials and errors  - 64 - and comparisons, experiences were garnered in Fuyang which were: with the necessary preconditions, SHCE was the best model for the development of TVEs, especially of the established enterprises on a considerable scale. Now the trials were finished, the model would be applied in a planned and gradual manner. (4) The pil(t projects in Chudian Xiang, Wuoyang county, about the "system of responsibility and private plots." The experiment U-.s conducted in the suburban areas of the towns where TVEs were higlhly developed, it was about the centralized ust of land after the rural labor force was absorbed by TVEs and the correspond ng provision of social services. Therefore, it could be construed as a matching up and interaction of work of TVE and land-system building. (5) Experiment of the integrated development of agriculture, indus- try and commerce. The local agricultural resources were tapped mainly by means of the combination of companies, peasants' associations and farm house- holds. (c) Wenzhou 6.14 Since its inception in 1987, the Wenzhou zone saw the work done in the following two ways, first, formulation and promulgation of local adminis- trative laws and regulations form the top down, leading those private and partnership enterprises under the signboard of the 'collective" into the SHCEs. Second, the experiments, from the ground Up, to clarify property rights through the evaluation and quantification of capital and assets, a clear definition of property ownership was arrived at. 6.15 But most of SHCEs in Wenzhou, in implementing the "provisional regu- lations of SHCEs," only paid attention to those parts about institutional setup. In 1987 and 1988, SHCEs only achieved quantitative growth. No sub- stantive improvements were made in the structure of property rights, manage- ment and distribution systems inside the enterprises. 6.16 On the basis of the achievements of previous stages, several follow- up actions were taken in Wenzhou zone in the first half of 1990: (1) Promoting the standardization of SHCEs in a planned and gradual manner. In the first half of this year, leading groups were formed one bly one in coun- ties. The issue of standardization was placed on the agenda of the local governments. On June 2, a working session was convened in the city of Wenzhou on how to promote the development of stockholding cooperative economy. After the meeting, 20 articles of supplementary regulations on the policy of stan- dardizing SHCEs were adopted and circulated. These articles dealt with: (a) a clear definition of the collective nature of these enterprises; (b) the distribution of post-tax profits: 30 percent of these profits should be used for the expansion of production. They should be registered in the name of shareholders as additional assets for the purpose of calculating dividends. The divicdends and bonuses should be less than 25 percent of the profits; 15 percent of them should be put aside as the accumulated funds; 10 percent of them are used for welfare and rewards of the employees; (c) encouraging the development of new products of SHCEs and the acquisition of sunset enterprises by the sunrise counterparts tlhrough the preferential tax policy; (d) improving the financial management of SHCEs, formalizing the accounts and bills of the enterprises; (e) clearly stipulating that share ownership can be inherited, presented, marketed and transferred, but the withdrawal of shares is impossi- ble. (2) Seminars were held on the legal issues of SHCEs, in-depth discus- sions and extensive propagation were carried out on the management of enter-  - 65 - prises under the law and on the norms of behavior for the law enforcement agencies. (3) A monitoring team with the people from the municipal Statisti- cal Bureau as its backbone was set up, the plans and programs for training the monitoring professionals were made. (4) Establishing the primary institutions for the circulation of stocks. After the careful preparations during the first half of 1990, a consultancy service on the transference of share owner- ship in Wenzhou, composed of five SHCEs, was set up upon the approval of municipal governments. Its main functions are: (i) providing consultancy, liaison and agency services on the share ownership transfer of SHCEs; (ii) responsible for the assets evaluation of the enterprises undergoing transformation to the shareholding system, to prevent frauds and shifting of risks: (iii) strengthening the supervision over the listed enterprises to avoid the midway exodus of financial resources by some managers; (iv) regu- larly publicizing the performance of enterprises and changes in the share index. 6.17 At present, there are 23,000 SHCEs in Wenzhou, of which 15,000 are industrial enterprises with a gross industrial output of Y 2.3 billion, over 65 percent of the municipal total. In the coastal counties of Cangnan, Ouhai, Ruian, Leqing, the output value and tax of the SHCEs constitute over 80 per- cent of the total from the TVEs. So these enterprises have become the pillars supporting rural economic development. General Principles 6.18 Choosing the Focal Point of Work. The TVE system-building covers many aspects. The responses and approaches by the different enterprises to these aspects are different. There are two kinds of situation--one is that the enterprises can benefit from the endeavor, for example, the establishment of organizational structure that will promote the external economy of scale is highly agreeable to the enterprises; the other is that the enterprises will not directly benefit from the system-building effects which, nevertheless, have an overall significance, e.g., those concerning the standardization of operations. Enterprises will have greater difficulties accepting those efforts. Worse still, in real economic life, those who standardize will lose. So there should be priorities in the system-building. Considerations should be given to the different demands by different enterprises. It has been borne out by the experiences that not all TVEs take a positive attitude toward stan- dardization. Generally speaking, the established enterprises (in terms of scale), in the face of growingly complicated exchanges, and relationships of credit and interests, will not only gain nothing, but also incur heavy losses if they respond by nonstandardized behavior or by ignoring the legal con- straints. In this respect, the emphasis of TVE system-building should be put on the established enterprises, only then can we achieve more with less ef- fort.  - 66 - VII. RESTRUCTURING OF THE RURAL FINANCIAL AND INVESTMENT SYSTEMS Implementation 7.1 In Guanghan city-level Integrated Experimental Zone for Rural Finan- cial and Investment Restructuring, the enterprise reform of the county-level branches of state-run financial organizations and insurance companies was conducted in the following ways in order to improve the coordinated measures of reform under the new management system and to raise the vitality of the financial enterprises: (a) To improve and perfect savings, finance and credit management and enterprise property management and distribution system, as well as the indicators evaluation system for the better execution of the branchi companies' economic plans. (i) The enterprise internal responsibility system went into effect in 1989. The indicator itenis were adjusted in 1990 to better correspond to the rights and obligations of each tier of con- tractors. (ii) The indicators for the staff efficiency wage system were repeatedly improved, linking the staff work efficiency more directly to personal income. (iii) Improvement and perfection of the relevant accounting system concerning profit retention, business development and invest- ment restraints made it possible for county-level branches to maintain development vitality while effectively controlling the rise of operation and wage costs. (b) The asset liability ratio management scheme practiced since 1989 by the county-level branches of the Bank of Commerce in their credit operations further expanded the branch banks' operation autonomy. (c) An appraisal on the Bad Debt Reserve System practiced by county- level branches of the Bank of Agriculture since 1988 was made and submitted to the head office of the Bank of Agriculture and the Ministry of Finance. The Bank of Agriculture began to implement this system in all its branches around the nation in 1989. On this basis, the Ministry of Finance made some revisions in the detailed regulations and promulgated them in 1990. Now all the banks in China have adopted this Bank Bad Debt Reserve System--an achievement of the Guanghan experimental program. (d) The Credit Safety System has been promoted in an effort to improve the banks' credit asset safety. (i) In 1989, the Bank of Agriculture completed its comprehensive clearance of credit assets since 1979, and reestablished a credit file and appraisal indicators for each client.  - 67 - (ii) The banks are gradually increasing their ratio of secured loans and mortgage loans in the credits and encouraging the debtor enterprises and secured enterprises to buy insurance policies on their own in order to inmprove their creditworthiness. 7.2 The nonbank financial organizations in the Guanghan Experimental Zone focused mainly on strengthening stability and safety of enterprise opera- tion and assets and improving the internal management system. (a) Improving the cash capital system and approval of the rate of increase for cash capital according to deposit and lending growth. (b) Defining shareholders' rights and interests according to the equity pJinciple and improving the share management system. The Datong Financial Service Unit and the Urban Credit Cooperatives revised their new rules twice in 1989/90 in accordance with the recommenda- tion of the 1988 World Bank Program Inspection and Evaluation Groups so as to change the situation of the shareholders' rights exceeding their obligations. (c) The Urban Credit Cooperatives and the Datong Financial Service Unit adupted the asset liability ratio management system in 1989. (d) After a comprehensive investigation made by the provincial branch of the People's Bank, the Guanghan Trust and Investment Corporation adjusted in 1989 its operation orientation and improved its finan- cing and credit management. (e) The Rural Credit Cooperatives and their municipality-wide Associa- tion improved the city- (county-) controlled Bills Settlement regu- lations and the financing management regulations within the system. 7.3 A self-disciplined Financial Coordination Group consisting of presi- dents ot city branches of the People's Bank and other specialized banks was formed under the leadership of the vice-mayor of Guanghan municipality in order to facilitate the development of a citywide Bills Exchange Center into a County Settlement Center (Settle Bank). The Group holds consultations once a week, arbitrates settlement disputes, and promulgates Bills Exchange Regula- tions. Other nonbank financial institutions settle their bills through the specialized banks, with whom they establish an agency relationship. 7.4 The process of enterprise reform of the specialized banks and Insur- ance companies and the business expansion of nonbank financial institutions was slowed down, while the improvement of financial enterprises' auditing and effective regulatory activities undertaken by the city branch of the People's Bank was speeded up. (a) Financial auditing and management were strengthened over the spe- cialized banks whose autonomous decision-making power in operations had been increased; asset liability ratio management was adopted with respect to other credit institutions. (b) Capital Call Market regulations were improved, clear distinction between short-term market and other markets was effectively drawn,  - 68 - the erroneous tendency of issuing loans from the short-term call capital was under control. (c) Regulations were made for financing in the capital market which clearly provide that the enterprises must finance by issuing bonds or equities, disclose their amount, term, rights and purposes, and that financing cannot be started until examined and approved by the People's Bank. (d) The establilshment of a Guanghan Securities Trading Agency was approved, securities agency business was approved for the special- ized banks, and the detailed regulations for securitiee trading were formulated. 7.5 More obvious financial growth and reform was manifested in the establishment and institutional development of the grassroots organizations of the Farmers Cooperative Foundation (FCF). After the two township level FCFs were in operation in 1989, FCFs were established in all of the 2". townships and another two village-level FCFs were established on a trial b:Asis. In 1990, the village-level FCF management system was further improved. The farm- ers have newly established 40 village-level FCFs, and by the end of this year, the preparatory work for city- (county-) level Associations of FCFs will be completed. 7.6 The growth of the rural insurance sector and its system restructur- Ing foctised on the development of the multiple agencies for state-run insur- ance companies and development of insurance products. 7.7 The development of securities business mainly focused on the estab- lishiment of Guanghan Securities Agency of Sichuan Province (entrusted to Guanghan Investment and Trust Corporation). At the same time, financial orga- nizations were allowed to start operations as securities agents and Guanghan Securities Agency was encouraged to broaden its securities trading business and develop toward trading on its own. 7.8 State-owned financial organizations, including insurance companies and postal savings agencies as well as Rural Credit Cooperatives have begun to train staff members on a planned basis at regular universities, vocational middle schools and other training courses in banking business and skills. Nonstate financial institutions have offered the staff banking business and skills training courses in which experts from Beijing, Chengdu, Mianyang and other cities as well as senior staff members from Guanghan specialized banks are invited by the System Restructuring Office of Guanghan Experimental Zone to give short-term topical lectures. 7.9 Having improved its enterprise management regulations in 1989, Meitan Land Finance Company was put into normal economic operation in 1990. As to its operation performance, please refer to the chapter on 'Land Reform System" in this report and the Financial Statement for the Credit Transfer Project by China Investment and Trust Corporation for Agricultural Development to the Experimental Zone. 7.10 The project implementation of the 11 Financial Service Units set up according to TVE's production structure in Fuyan Prefecture was described in  - 69 - the 1989 Progress Report submitted to the World Bank. No major reform mea- sures have been taken in 1990. As to the performance of the operation, please refer to the chapter on "TVE System Restructuring" in the current report. 7.11 The implementation performance of FCF projects was quite different in the different experimental zones of Shangzhi Municipality, Yutian County, Pingdu County and Yulin City. (a) The Shangzhi FCF has completed a comprehensive system of village- level FCFs and city-level Associations, formulated over ten sets of important regulations and rtules. At the same time, as a financial intermediary of this Experimental Zone transferring the World Bank's policy loans, it has been put into normal economic operations since 1989. The reform measures mainly involve adjustments in the regula- tions' specific rules, development of new forms of loans and credit instrtuments and development of agent business for state-run insur- ance compatnies in farm insurance. (b) The FCF in the Yutian County Experimental Zone will continue to prepare and set up township- and village-level FCFs while reforming the organizational structure of county Associations of the already- established FCFs, and improve and perfect their management regula- tions. At the same tine, it will start agency business for state- run insurance companies in farm insurance. (c) The FCFs in Pingdu and Yulin Experimental Zones will mainly continue to prepare and set up the village FCFs and township and village Associations, and establish and improve relevant regulations. (d) A village-level FCF was set up in 1989 in Shunyi Experimental Zone. In 1990, efforts will be made to continue preparing and setting up the village-level FCFs. 7.12 Two Fishermen's Cooperative Foundations and one Fishermen's Insur- ance Association were set up in 1990 in Huanghua Experimental Zone for Fishery System Restructuring. Three Fishermen's Cooperative Foundations were also set up in 1990 in Shanwei Experimental Zone for Fishery System Restructuring. For further information, please refer to the section of "Integrated Fishery Reform" in this report. Current Problems and Brief Analysis 7.13 The following problems occur in the Guanghan Experimental Zones (a) The mandatory commercial loans imposed on the Bank of Agriculture to purchasing farm produce (grain, oil crops and pigs) has become a loan adversely affecting the bank's annual credit scheme, profit- earning capacity and economic growth. This is because: (i) though the proportion of commercial loans to overall loan gross has been on the decline, the absolute amount is still on an annual increase;  - 70 - (ii) similar mandatory loans scale imposed on other specialized banks have decreased in items and size due to the increase weight of market adjustment in economic operations and the restructuring in the state-owned industrial and commercial enterprise; no mandatory loans were imposed on nonbank finan- cial institutions as they grew in number and increased their deposit and loan business; and (iii) the budgetary restraint was strengthened after the enterprise reform of the Bank of Agriculture, and a more direct link between staff income and Bank's profit earnings has been estab- lished. (b) The various kinds of mandatory loan schemes and goods-purchase imposed by the government in the annual economic development plans lack corresponding budgetary, taxation and accounting support, thereby bringing about negative impact on the asset safety, profit- earning capacity, staff income and economic growth of the special- ized banks. And that leaves unspecified the financial relationships between the specialized banks' branches and their corresponding head offices, and those between head offices of the specialized banks and their owner--the Ministry of Finance--without a forceful budgetary restraint. The best example of this is the rapid development of branch networks without considering the cost returns and the sharp rise in the cost of savings. There is still a shortage of forceful restraint on the reloan relationship of the Central Bank (People's Bank) with the specialized banks, as relations of the Central Bank still retain quite some characteristics of the early system of equal alpportioning without taking account of need or performance. And an inherent motivation to improve self-innovation, cost control restraints, profit-earning capacity and economic growth is still absent from the county branches of the specialized banks. (c) As the man(atory loan scheme imposed by the government has negative impacts upon the specialized banks' profit-earning capacity and growth, the specialized banks find it hard to automatically follow the mandatory investment direction outlined in the loan schemes. (d) The Bank of Agriculture, in order to finance the low-cost capital to execute the govermnent-imposed mandatory loan scheme to purchla'e farm produce, controlled by administrative means the deposit and credit operations of the rural credit cooperatives under the protec- tion of the existing financial structure and made them deposit 12 percent and more of their deposit accounts with the Bank of Agri- culture at low interest. This has reduced the profit-earning capa- city and growth of the rural credit cooperatives. This is why the economic relations between the Bank of Agriculture and the rural credit cooperatives have failed to be rationalized for many years. (e) Though no direct mandatory loan scheme was imposed on the nonbank financial institutions, the regulation and control of the People's Bank over their scope of business and the reserve fund requirements (actually a savings fund) left them little credit capital to operate upon. The reserve fund and transferred deposit in the People's Bank  - 71 - were made to serve as the reloan capital of the People's Bank to the sp)ecialized banks which is an indirect way of financing the low-cost capital for the specialized banks to implement the mandatory loan schemes. (f) The public settlement organization has yet to be established. The difficulty in developing a public settlement organization lies in the fact that the county branches of the specialized banks have long operated under respective interbank settlement networks and have paid settlement funds. The establishment of a county-level settle- ment institution would require additional settlement fund, which will further reduce the profit-earning assets. What is more, the existing citywide Bills Exchange has basically met the bills settle- ment needs of the specialized banks. But the nonstate financial institutions are prevented by the government from joining the set- tlement operation. (g) The increased credit control schemes by the People's Bank over the specialized banks, and by the specialized banks over their branches has limited the credit autonomy of the branch banks. This is par- ticularly true of the Bank of Agriculture. With its business opera- tion mainly in the country, the Bank of Agriculture's major activi- ties are undertaken by its county branches. The increased limita- tions of operation autonomy of the county branches have reduced the economic efficiency of the whole Bank of Agriculture system. (h) The efficiency of finan&ing by the financial market was reduced because of the rib,. control of deposits and credit, low basic interest rates, control of floating interest rates and the inability of financial enterprises from Issuing loans with floating interest rates according to risk. (i) The framework for a county-level rural financial system is yet to be clarified. Further investigation is to be made and discussion to be started as to which category of financial institutions should be brought under the government development strategy for basic rural financial institutions. 7.14 Though the problems are manifested in the Guanghan Experimental Zone, the causes for these problems lie outside the framework of financial and investment restructuring at the county level. The basic causes are: (a) Central Government annual financial budget deficits and final accounts deficits were not fully balanced by fiscal measures, but mainly by the traditional method of overdraft, thus applying heavy pressure of mandatory loan schemes on the specialized banks. In order to ensure the low-cost capital financing for its development plan, the Central Government strictly limits the establishment and development of local state-run financial institutions and nonstate financial institutions. (b) The lopsided price system in the national economy manifested in the low price for farm produce suppressed the earnings in agricultural operation while raising the returns in nonagricultural production  - 72 - activities, leading to the inclination of the agricultural financial institutions to engage in nonagricultural credit operations. (c) In order to ensure the implementation of the government economic development plan, a strict credit planning and managing scheme was practiced by the People's Bank over the specialized banks, and by the specialized banks over their branches. The more the financial institutions seek profits and economic growth, the more rigorous the credit planning and managing scheme to control them. The rigid credit planning scheme is in great disharmony with the multiple economic principals taking shape in the process of economic restruc- turing and the combination of planned economiiy with regulation by the market. (d) The "iron-rice bowl" (no responsibility for losses) of medium- and small-scale state-run industrial and commercial enterprises, coupled with overstaffing and lack of a new social unemployment and retire- ment system, obviates the basic legal prerequisites for improvement and perfection of the credit system. 7.15 The solution of the aBove-mentioned problems is an important task facing China's economic restructuring and requires a gradual process of reform and development. However, this does not mean that certain isolated vanguard reform measures cannot be put into operation in rural financial and investment restructuring. Therefore, to solve the problems mentioned above, minor and tentative measures of organizational innovation and system restructuring can be taken in preparation for broader item-by-item or comprehensive rural finan- cial and investment system restructuring. Valuable experimental projects should be instituted for the sake of accumulating theoretical, program and operational experience. Experimental Projects Envisaged for the Next Phase 7.16 The Guanghan Experimental Zone is still the major experimental proj- ect for rural f'nancing and investment restructuring. Further experimental projects are mainly the necessary coordination and perfection of the first- phase restructuring. Tentative schemes havc been drawn up in the following respects: (a) The establishment of the county-level pulblic settlement institution. The organization will be self-disciplined, and adopt a fixed member- ship structure. It will be put under the existing settlement orga- nization of the People's Bank Guanghan Branch. A Settlement Fund will be established to collect fees on the basis of settlement amount. (b) Higher-level Cooperatives Associations will he established at meet- ings of lower-level Cooperatives. Basic regulations for organiza- tion and financing activities will he based on the Shangzhi Farmers Cooperative Foundation (detailed description given in the 1989 Prog- ress Report). (c) Improvement and perfection of an accounting system governing the property ownership and management and economic transactions between  - 73 - the Ruiral Credit Cooperatives and the Bank of Agriculture in prepa- ration for entering a stage of operation on an agency basis. (d) Improvement of the auditing regulations and measures of the People's Bank over all the financial institutions and its regulatory function over the financial sector, so that the People's Bank may strengthen its auditing and creditworthiness, evaluation roles, and settlement- managing capacity. (e) Establishment of a bjasic regulatory system over rural insurance markets, settlement of the small-scale single-item insurance activi- ties operated under government intervention, and establishment of a village insurance agency system consisting mainly of Farmers Cooper- ative Foundations and Rural Credit Cooperatives. (f) Design of new projects for setting up a capital market, training intermediate-level staff as well as introducing the floating inter- est rate system. 7.17 The Farmers Cooperative Foundations Experimental project in other experimental zones will all be based on the Shangzhi and Guanghan experiments and improvements will be focused on the development of institutional system and perfection of the regulatory system. New experimental projects of this kind will be statted in a numiber of other zones. 7.18 With regard to the 11 TVE Financial Service Units in Fuyan Prefec- ture, further efforts should be made to perfect the administrative regulations of the People's Bank over their auditing and management, improve auditing and management skills, and adopt more stricter asset-ratio liability management measures and shareholders' internal loan regulations. VIII. EXPERIMENTS IN STRUCTURAL REFORMS IN FORESTRY, ANIMAL HUSBANDRY, FISHERIES, STATE FARMS AND POVERTY-STRICKEN AREAS 8.1 In addition to the above-mentio.ed experimental reform6 centering around the most fundamental economic relations and structural links in rural areas, since 1987 pilot zones for reforms in forestry, animal husbandry, fish- ery, state-owned farms and poverty-stricken areas have.been established one after another in the overall setup of experiment zones in rural China. Experiments in Forestry Reform a. Experiments and Progress 8.2 According to the national blueprint for rural experimental reforms, two experimental zones for the reform of both collective and state-owned for- est areas were set up in Sanmning City, Fujian Province and Weihe Forestry Bureau, Helongjiang Province, respectively around 1988. The basic objective of the experiment was to explore ways and means of setting up economic systems and organizations in state-owned and collectively-owned forest areas, thus laying the structural ground for the long-term development of forestry. To  - 74 - this end, the two experimental zones worked out their own programs for experi- mental reform in the light of their respective local conditions. 8.3 The Sanming Experimental Zone set up experimental projects to meet the need for an economic structure and mode of development of the collective- ly-owned forests in the wake of the policy adjustments in rural China. The experiments include the following: (i) reforming the managerial structure of the collectively-owned forests; (ii) institution of a mountain-and-forest property rights system; (iii) establishment of operational organizations in collectively-owned forest industries; (iv) establishment of a forest cultiva- tion system; (v) reforming the investment structure of the forest industry; (vi) setting up a management regime of forest resources; and (vii) building forestry-related processing and exporting bases. 8.4 Guided by the principle of "defining organizational functions, tran- sforming the operational mechanism and improving the external environment, the Weihe Experimental Zone drew up an experimental plan which can be broken down into the following: (i) building organizations for the management of state- owned forest resources and the administration of the forest areas; (ii) reforming the operational mechanisms of state-owned enterprises; (iii) instituting a system governing the payable transfer of forest resources and building a forest market; (iv) developing agriculture and multiple forms of other industries as addiLional financial support for the forestry industry; and (v) carrying out price reform of the timber that comes under unified state control. 8.5 So far, varying degrees of progress has been made in the experiment of the two zones. Between November 1988 and June 1990, the Sannming Experimental Zone completcd 15 experimental projects three of which have been extensively introduced through the city, 9 are further tried out in parts of the city while the remaining 3 are going through feasibility studies for application. (a) Sanming City. Experiments in the establishment of village board of forest shareholders. In 1984, the zone adopted the reform measure of "dividing shares but not mountains, and setting up cooperative ventures with a pool of shares.' It changed the previous collec- tively-owned forest farm into a joint venture with the villagers as the shareholders under the village forest board. In the experiment, the system covers the following provisions: (i) The ownership of the mountains/hills shall be held by the vil- lage council on behalf of the collective while the ownership of the forests is owned by the board of shareholders on behalf of the villagers, who jointly hold the shares. (ii) The shares are broken down into hilly land shares, general shares and investment shares, representing respectively the hilly land shares held by the village council on behalf of the village as a whole, the redistribution of forest assets created by the villagers through labor since the establishiment of rural cooperatives in the early 1950s and the various forms of investment in the forests by individual villagers.  - 75 - (iii) The board of shareholders is clearly defined as an economic body independent of the village council and responsible for its own profits and losses. As an industry-specific organizatienr under the board of shareholders, the forest farm shall be con- tracted out for management. (iv) Efforts should he made to consolidate the systems governing the distribution of assets, earnings and labor inside the board of shareholders. (b) Establishment of a timber market system. To optimize the disposi- tion of resources, the city opened a forest market under the condo- minium of the Municipal Forestry Committee and the Bureau of Indus- trial and Commercial Administrr.tion. Meanwhile, it promulgated Interim Measures for the Administration of the Sanming Lumber Mar- ket, which permits the circulation and transfer of lumber resources through auction, lease and many other means. (c) Progress in the construction of a fast-growing and high-yielding e'ommercial forest base for demonstration, the setting up of a net- work for the propagation of scientific and technological findings in forestry, the institution of a resources and forest administration system and the establishment of an experiment and monitoring regime. In 1980-90, the city planted 622,00 acres of forests of which 124,000 acres were fast-growing and high-yielding ones; forestry science and technology propagation centers were set up at the munic- ipal and county levels; 91 percent of the townships and 93.4 percent of the villages set up forestry development stations/groups. 8.6 At its first phase of experiments, the Weihe Experimental Zone laid emphasis on changing the operational structure of its state-owned forestry bureau and developing various industries. (a), Reform cf the operational mechanism-s of enterprises. The Weihe Forestry Bureau introduced bureau-wide a contracted responsibility system known as "three quotas and three linkages," i.e., under the contract, quotas are set for the amount of felling to be done, the acreage of reafforestation and tending of saplings, the growth rate of earnings from other business activities, the amount of revenue to be surrendered, the related infrastructure and technological trans- formation, the protection of forests and the prevention of fire; the producers' interests are linked to the increase of decline of lumber resources, the managerial level in the enterprise concerned and the economic returns for other business activities. (b) Experiment in the establishment of an intrabureau bank. The basic idea for the experiment was to set up inside the Forestry Bureau a fund-raising institution which was to apply the mechanism of inter- est rate regulation by simulating the state professional banks' function of credit extension and means of settlement. The internal bank uas to serve as a financial resettlermient institution for the whole bureau. Meanwhile, the enterprises' accounts in the state banks were withdrawn. The preliminary results of the experiment point to better utilization of the funds available in the Bureau.  - 76 - In 1988, Y 7,920,000 of funds were raised altogether and Y 4,820,000 of loans were extended to the Bureau's subsidiary enterprises. (c) Experiment in developing a diversified economy. The fall in lumber reserves in the state-owned forests forced the state-owned Forestry Bureau into operational difficulties. To free itself from this predicament, the Bureau conducted an experiment in diversifying its economic activities by reclaiming mountains and wasteland and devel- oping farming is support of the forest industry. ,ne running of the Zone's Jiugongli Diversification Farm was contracted to the Bureau's staff, who planted 627 acres of trees, dug 180,000 e2 of fish ponds and reclaimed 200 acres of hilly land for agricultural pursuits in 1979, with a total output value of Y 220,000 and a per capita ainual income of Y 1,800. On the basis of the experiment, the Weihe Experimental Zone formulated Regulations on Land Develop- ment Contracting. At the moment, the first-phase experiment projects in this area are under review and assessment. b. Analysis and Plan 8.7 The major problem facing the Sanming Experimental Zone is how to put the introduced projects on a firm and standardized footing. The institution of the forest shareholding cooperative system has a direct bearing on the foundation on which rests the economic structure of collectively-owned for- ests. In the trial establishment of the forest board of shareholders, the protection of the basic rights and fundamental interests of the shareholders, including the transfer of shareholding power, the inheritance of general shares in lieu of remuneration for labor and the structural constraints inter- nal to the board of shareholders, remains a subject for further studies. The relationship between the forest board of shareholders and the village council also needs clear definition through legal procedures with a view to ensuring the legitimacy and independence of the board. On its part, the Weihe Experi- mental Zone is mainly confronted with two problems. First of all, the wor- sened environment in which the enterprises operate has made it difficult to puwh ahead with the experimental reform of the enterprise operational mecha- nism. Secondly, as the Forestry Bureau is subordinated to its superior admin- istrative departments and involved in ties with the local cormmunity and the society at large, the conditions are not yet ripe for attempting a direct, comprehensive restructuring of the state-owned forests. 8.8 At its next stage of experiment, the Sanming Experimental Zone will give priority to standardizing and spreading the projects that have been introduced while coming up with a number of supportive experimental projects. The Weihe Experimental Zone has worked out the 1991-93 experiment plan in a bid to push forward the experiments in reforming forest management, developing a diversified economy, readjusting the industrial setup and reclaiming barren mountains/hiills and swamps. Experiments in Animal Husbandry Reform c. Experiments and Progress 8.9 Tlle basic line of thinking guiding the reform in the Xianghuang Banner Experimental Zone was to promote the growth of the local economy with  - 77 - definition of the pastureland property rights system as the core and through reform of thte business management, circulation and service structures existing in the pastoral areas. The priority for the first phase of the experiment was to perfect and effectively implement the pastureland contracted management responsibility system as well as establish and improve the pastureland admin- istrative regime. The main components are as follows: (i) clearly define the village-based collective ownership of grasslands and grazing grounds, augment the pasture use right of the herding households and institute a complete pas- tureland contracted management system which links responsibilities, rights and interests in an integrated setup; (ii) introduce a system for the transfer of pasture use right and a system: for the preservation, utilization and develop- ment of grazing grounds; (iii) intensify efforts to build organizations at the grass-roots level in order to promote the development of a double-tier opera- tional system and build structures supportive of the grassland management regime . 8.10 Over the past two years, progress has been made in the Experimental Zone in the following areas: (a) Contracting of the pasture use right. While the pastures remain under the collective ownership of the administrative village, all 1.1 million acres of pastures of the whole Banner have been con- tracted to the herdsmen for their use. A multiform contract system has been introduced, with 70 percent of the pastures divided on a per capita basis and 30 percent on a household basis. (b) Instituting a system for the payable use of pastures. Pastures are graded to form the basis for levying charges for pasture use, with 60 percent of the earnings going to the development of the village's pastures. Pastures are transferable with payments which may be 50-100 percent higher than the village's levy of pasture use fees. This is an incentive to the free flow and pasture operation of scale. (c) Establishing two pasture systems to introduce the mechanism of com- petitive management. The subsistence pastures, earmarked for the herdsmen's basic daily needs, are equally distributed on a per cap- ita basis while responsibility pastures, used for developing commod- ity production, are contracted out to the contracting households in light of their production conditions and operational ability. (d) Delineating the boundaries of pastures and establishing a registry and files system. A comprehensive assessment of the boundaries between the townships in the Banner was carried out, with a pasture boundary map drawn up for each and every village. Meanwhile, pas- ture files have been established for all the contracting producers, covering the acreage of pasture under contract, the grade of the pasture, its grass/hay production, load of animals, the use fee due and the short-term development targets. This has not only provided historical docunments at.d the legal basis for the future settlement of pasture disputes, but also laid the ground for supervision, exam- ination, evaluation, granting of awards and imposition of fines by the higher authorities.  - 78 - (e) Improving the system of determining the head of livestock on the availability of grass by assessing the pasture load of herds. Assessed by taking into account both pasture size and grass/hay productivity, the targets for livestock carriage are applied to every household. In encouraging herdsmen to increase the production of grass/hay and livestock, a pasture's livestock load is the main production target. The owner of the pasture will interfere if the assessed load is exceeded. This experiment has helped increase the protection and rational disposition of grazing resources. 8.11 Xianghttang Banner's first phase of reform has three results: (i) the establishment of the pasture contracted use system is conducive to a fundamental change of the traditional conception that pastureland has no cost, thus reversing the traditional operational methid of emphasizing livestock to the neglect of pasture and leaving livestock raising to the will of God; (ii) it is conducive to the formation of a new pasture input mechanism for increasing sources of revenue and attracting herdsmen input; (iii) It is con- ducive to reinforced scientific management of pastureland, greater efforts to manage pasturelanid according to law, restoration and improvement of the eco- system and attainment of a balance between livestock and grass so that both can be increased simultaneously. Experiments in Fishery Reform d. Experiments and Progress 8.12 May 1989 witnessed the formal establishment of two Comprehensive Fishery Economic Restructuring Experimental Zones in the nation's constella- tion of experiment zones for rural reform. One is located at the coastal city of Huanghua, Hebei Province, North China; the other is at urban Shanwei, Guangdong Province on China's southern coast. In view of the primary condi- tions in the fishery management regime and the structural obstacles facing the development of the fishing industry, the experiments in fishery reform were designed to establish microeconomic entities and systems for the production and free flow of aquatic products against the backdlrop of market readjust- ments. 8.13 Accor(ling to this line of thinking, the experimental reforms at both Huanghtia and Shanwei were carried out in microeconomic organizations, invest- ment si-ructure, market system and fishery development. The specific pilot projects are as follows: (a) Development and improvenment of fishermen's associations. (i) Fishermen's associations have been established on a voluntary basis, grouping such specialized cooperdtives as deep-sea fish- ing, in-shore pisciculture and processing of aquatic produc- tionl. (ii) Economic subsidiaries have been founded under the fishermen's associations with funds coming from the members in the form of shares. Their priority is to purclhase or li4re the village's collectively-owned supportive facilities for fishery produc- tion.  - 79 - (iii) Fishery production support and a system for mutual aid in sal- vages at sea have been put in place. (b) Establishment of fishery shareholding cooperative syndicates. (i) Industry-specific syndicates. Fishery companies have been formed under a shares system and with the fishing boat as the basic unit of production. (ii) Integrated complexes of related trades. Under a shares system, enterprises involved in such production links as marine fish- ing, in-shore pisciculture, processing, refrigeration and mar- keting are brought together. (c) Improvement of the fishery investment structure. (i) Establishment and development of fishermen's cooperative funds to supply small short-term loans for fishery production pur- poses. (ii) Formulation of relevant policies as the guidance and framework governing the increment of production accumulation by fishermen and their enterprises. (d) Inst.tution of a wholesale market system. The opening of a whole- sale market for aquatic products which serves as a commodity distri- bution and price-regulating center, an information bank and a pro- cessing and storage factory, plus its galvanizing role in promoting the evolution of market-related laws and regulations, production and marketing organizations and the governumental system for regulation and control, has helped rectify the market order. 8.14 As of now, the experimental reforms at Huanghua and Shanwei have entered the application stage from the earlier phase of preparations. The Huanghua Experimental Zone has conducted two experiments--the establishment of fishermen's associations and fishermen's cooperative funds. The Shanwei Experimental Znne has started off with three pilot projects--experiments in fisher syndicaces, fishermen's cooperative funds and the wholesale market system. Preliminary progress has been made in all those trial runs. (a) Experiment in establishing fisherman's associations. The Huanghua Experitental Zone focussed its attention on two areas. (i) Prescription of regulations governing the existing fishermen's associations. Born in 1987, the Qikou Village Fishermen's Association is the first fishery production cooperative in the nation formed on a spotitaneous basis. The experiment helped boost the construction of the Association's internal structure. (ii) Development of Fishermen's Association. Now fishermen's asso- ciations have been formed in five fishing villages of the Zone. Affiliated members account for 45 percent of the city's total number of fishermen who are engaged in deep-sea fishing.  - 80 - (b) Experiment in forming fishery syndicates. There have been estab- lished in the Shanwei Experimental Zone five fishery shareholding companies whose operational structures may be split into two catego- ries: (i) Companies formed with fishing boats in lieu of shares. The fishing boat owners pay their company administration fees pro- portionate to the shares they hold while the company provides changed services to the former. (ii) With funds raised in shares form, companies have been estab- lished under which independent accnunting is done on the basis of fishing boats and production loans are exterded to the lat- ter. At present, the five companies command 47 deep-sea opera- tion vessels, with a total tonnage of 6,253 tons, accounting, respectively, for 21.9 percent and 44 percent of the total number and tonnage of the deep-sea vessels in operation in the area. Besides, the companies possess Y 60.8 million of fixed assets for production purposes. (c) Experiment in estalblishing fishermen's cooperative funds. The Huanghua Experimental Zone has established cooperative funds in two fishermen's association. The financial resources come from shares bought by the members and the collectives as well as earnings from the sale of discounted collective property which nominally belong by members of the original production teams. Fishermen's cooperative funds have also been set up in 7 of the 20 fishery administrative districts/villages in the Shanwei Experimental Zone. In January- September 1990, the cooperative funds built up a membership of 222, attracted Y 1,123,500 in shares and granted Y 1,061,500 of credit for fishery production. (d) Experiment in establishing a wholesale market system. Having chosen the site for the proposed wholesale market, the Shanwei Experimental Zone is now raising funds and drafting basic stipulations for market operation. e. Analysis and Tentative Plan 8.15 Basically, there are two categories of major problems encountered in experiments in tishery reform. (a) Difficulties inherent in the pilot projects. (i) NAttlre of fishermpn's associations. Judging from 'he present state of affairs in the fishing districts, the viliage council commards great authority as an administrative regime at the grass-roots level and is prone to over-emphasis on the indelen- dent decision-making power of fishermen's associations. There- fore, the formation and evolution of the associations will be a painfully slow process. Conversely, if the associations were to depend too much on the help of the village council in their development process, they would lose a large share of their autonomy.  - 81 - (ii) Determination of the nature of fishery shareholding companies. At present, determination of the nature of an enterprise in China is based on the form of ownerslhip of the enterprise con- cerned, but not on the form of responsibility deriving from its possessiutn of assets. This has caused great confusion over the nature of fishery shareholding companies. (iii) Problems in the establishment of a wholesale market system. Most people view the experiment in shaping a wholesale market system as building the necessary facilities for the trading houses. In fact, the wholesale market system is an integrated structure, including both the hardware (market infrastructure) and the software (market organization and regulations). The difficulty of the test lies in errors or deviations in the government's selection of objectives, a weak awareness of the legality of commercial contracts and the slow growth of commer- cial intermediaries. (b) Lack of financial backtup for the experiments. The success of the test depends a great deail on the amount of financial input. The shortage of investment, especially in the construction of a whole- sale market, is most likely tc leave this promising experiment proj- ect in a limbo. f. Experiments and Progress 8.16 The overall objective for the experimental reform in Suibin Farm was to improve and consolidate, based on family farms as operational units, a double-tier managerial regime of "farms within a Big farm," readjust the industrial setup, give shape to agricultural-industrial-commercial complexes and develop large-scale commodity production. 8.17 Successful results have been achieved in the first stage of Suibin Farm's experiments in reforming. (a) Steady growth of household farms: 3,073 household-based farms have been set up at Suibin. Among them, 369 have farm machinery (12 per- cent of the total), contracting 53,667 acres of arable land (70.1 percent of all arable land under contract) and averaging 145.3 acres per household; those without number 2,690 (87.5 percent of the total), contracting 23,833 acres of arable land (29.9 percent of the cuntracted total), with each household farming 6.5 acres on average; 14 family farms are engaged in sideline production, animal husbandry or fishery (0.5 percent of the total). (b) Estalblinhment and improvement of cooperative units of production; 186 cooperative units of production have emerged on the whole farm. Formed on a voluntary oasis, they bring together the tractors, com- binee :-id transport vehicles of the mechanized households. Ten to fifteen noniequipped households are coupled with each unit to operate approximately 330 acres of land. (c) Efforts to ease the contradiction between economy of scale and fair distribution.  - 82 - With the formation of family farms, a situation arose under which the small number of houselholds with machinery farmed most of the land while the major- ity--those without machinery--tilled very little land. The income disparity between the two categories was generally five to six times and, in some cases, as hligh as tenfold. The farm, therefore, adopted such measures as supporting the ill-equipped households in changing their crop structure, running other business in addition to farming and pooling funds for industrial pursuits as well as lowering the charges for land use. Thus, while efforts were made to seek economy of scale, consideration was also given to social justice. (d) Establishmpnt of a unified management regime governing farm tools and machinery. Methods for the Management of Fixed Assets of Family Farms and Methods for the Regulation of Agricultural Machinery, two documents adopted by Suibin Farm, lay down clear stipulations con- cerning procedulres such as establishment of files, registration of family onmership, certification and examination relating to various agricultural machinery owned by family farms and regarding the main- tenance, storage and standards for field operation of the machinery. (e) Reinforcement of prodture management. Under the farm's Methods for the Management of Grains and Legume, both the single-tier and dou- ble-tier systems for the sale of farm produce have been introduced internally. In other words, the sale of the produce comes under the farm's unified organization, with the portion sold under state quo- tas settled at the proportional price, and the surplus at a negoti- ated price while the shortfalls are made up for with payments. (f) Restructuring of Big Farm management. The 36 administrative offices have been reduced to 21, registering a 41.7 percent cut; managerial personnel in production teams have been slashed. This move saves tthe farm Y 1.1 million a year at two levels of adminiistrative estab- lishment. Eight companies have been formed, covering dairy cattle, materials, foodstuff and oils, trade, commerce, cater conservancy and R&D in paddy rice, respectively. Centers for counseling in science and technology, epidenmic prevention, education and cultural activities, settlement of accounts and grains treatment have also come inito being. The companies and centers are playing an important role in serving family farms. (g) Great efforts at the construction of production teams. Formulated by the farm in 1989, the Regulations on the Implementation of the Production Team Leader Responsibility System provides explicitly that the production team remains the primary unit of accounting. In addition to its own business operations, it represents the farm in the administration, coordination and leadership of family farms in the latter's production and business activities and of the whole team's social welfare and services. (h) Development of agricultural-industrial-commercial complexes. The farm has established eight companies related to dairy cattle, mate- rials, seeds, grains and oils trading, etc. Relying on family farms as raw material production bases, headed by modern processing indus- tries and linked to various supportive services, the complexes are displaying great vitality.  - 83 - g. Remaining Problems and Future Plan 8.18 In its transition from the old system to the new, Suibin Farm still faces many problems in its experimental reforms: (a) The restructuring of the Big Farm's administration is lagging behind and the socialized services syst:em, still in the process of estab- lishment and improvement, cannot meet the needs of the developing family farms. (b) Funds are in short supply. (c) Small "mosaic fields" have appeared in the neighborhood of most of thie family farms with machinery. Although the practice having smaller pieces of land has helped raise labor cost-effectiveness, it has nevertheless impeded the use of big machines and cured the fur- ther development of family farms. (d) There is too heavy a social burden. Annual expenses on cultural activities, education, medicare and subsidies for public security amount to more than Y 1.5 million, putting a heavy burden on the farm. In view of the problems listed above, the farm has targeted the following areas as priorities for its future endeavors. (a) Promoting agricultural development on the strength of scientific and technological advancement. (b) Beginning to tackle the problem of "mosaic fields." (c) Rectification of businesses with heavy losses. (d) Modernizing and increasing farm tools and machinery. (e) Stepping up administration of farm produce. Quotas for sales to the state under plan are fixed as priority targets; the surplus after quota-sales can be sold independently so that the staff's enthusiasm for grain production is mobilized. (f) Solving the problem of unfair distribution. A resources-use fee is charged on bigger family farms equipped uith machinery, to go to a special fund in support of the development of family farms without machinery. (g) Making greater efforts to establish a Big Farm service system. Experimental Reform in Poverty-Stricken Areas h. Experiment and Progress 8.19 The following areas were defined as those under the experiment:  - 84 - (a) Establishment, through full employment of economic, legal and the necessary administrative means, of an economic operational mechanism with planning as the mainstay and market regulations the auxiliary. (b) Vigorous efforts at developing collective, individual, privately- owned and mixed economies. (c) Changing helping poverty-stricken areas through relief to helping them through development and turning poverty-relief efforts from an administrative act into an economic one in a bid to speed up efforts to meet the basic needs for food and cloth. (d) Mohilizing people to plant trees and grass, reduce farmland in favor of afforestation and animal husbandry, keep water and soil under permanent and comprehensive conservation and speed up the ecological constructJon in karst areas. This was to be done one areas after another by following an order of priorities under plan. (e) Adoption of measures to curb the excessive population growth in a planned, systematic and practical manner while steadily improving the population quality. 8.20 Since the Experimental. Zone was born in June 1988, among other things, the following efforts were made: (a) Comprehensive agricultural development a. ological improvement. Specifically, vigorous efforts were made to increase grain produc- tion, develop various economic activities, improve low-yielding fields, accelerate the construction of water conservancy works and develop a multidimensional agricultural with forests grown on moun- tain tops, trees and shrubs planted half way up the mountains, grass and green manure crops cultivated on hilly land and grains harvested in the fields. This measure helped keep the soil covered with trees and grass, feed the livestock with grass, enrich the soil through livestock breeding, increase grain output with more manure and pro- mote animal husbandry through development while financial and tech- nological inputs wete increased. More than one year of effort brought about good results. In 1989, the total grain output reached 1,167,000 tons, a 12.3 percent increase over the previous year, the output value of animal husbandry rose by 4 percent over the same period, the gross agricultural output value grew by 8.7 percent to Y 1,110 million and the peasants per capita income came to Y 240, up 13.2 percent (b) Development of rural and private economic sectors. In 1989, the industries owned by the whole people turned out goods at a value of Y 860 million, i.8 percent more than in 1988. The rural and town- ship) enterprises created an ou ;:.t value of Y 620 million, register- ing a growth of 12 percent. (c) Practical efforts at freeing the areas from the yoke of poverty by changing purely economic relief to poverty relief through develop- ment aid. An examination of the 207 projects with over Y 100,000 of investment each reveals that 97 of them had good economic returns  - 85 - (46.9 percent), 62 were average (30 percent) anid 48 were poor (23.1 percent). (d) Strict control of population growth. As of December 14, 1989, 265,724 birth control operations had been performed in the whole prefecture, ritling by 45.2 percent over 1988. i. Remaitning Problems and Future Plan 8.21 The Experimental Zone faces quite a few economic difficulties resulting from the squeeze on money supply as well as a tall order in building the extremely weak infrastructure in agriculture. Its plan for the tasks ahead: (a) Readljuist the industrial structure and raise the production of grains and cash crops; increase tea cultivation to form a 1:3 ratio in tea and tree acreage; inicrease the share of agroindustries in the indus- trial setup; build more transport and telecommunication facilities. (b) Gradually readjust the ownership structure. While ownership by the whole people and collective ownership are to remain predominant, rural and township enterprises as well as individual, private and jointly-run economic sectors should continue to be developed. (c) Keep deepening the internal reform of enterprises and further improve the contracted management responsibility system. (d) Work hlard to develop Intra and interprefectural horizontal economic association. (e) Reinforce efforts at family planning.  - 86 - IX. SAIC AGRIBUSINESS TRUST AND INVESTMENT CORPORATION 9.1 As an outcome of the deepeninig reform of China's rural investment and finance system and as an implementing agency for the first installment of World Bank's RSAL, the fornmer China Agriblusiness Trust anc Investment Corpora- tion (CATIC) persisted for years in fulfilling its original purpose of pushing forward with the rural reform and the developnment of rural commodity economy. Engagedl in finance, industry, trade, real estate, etc., with the first installment of RSAL constituting a lion's share of its calital and with large amounts of idle funds it absorbed from other sectors than agriculture, it made a flexible and effective use of the funds in implementing the various rural reform policies and turninig the rural economy to a market economy. In the process, its operations grew to a considerably large scale and achieved satis- factory social results. It played a stimulative and exemplary role in explor- ing ways to deepen the reform of investment and finance systems in rural China, expand effective supply of agricultural products and bring about a prosperous rural commllodity economy. CATIC's niajor operations included: (a) Provide sutpport to the constrtuction of the rural reform experimental zones. It extended Y 100 million of long-term policy loans to 19 of the 20 zones in direct support of the various projects. (b) Develop rural investment and financial intermediaries. In the spirit of the Rural Reform Statement, 23 intermediaries were selected and developed in 19 provinces, autonomous regions ar,d municipalities directly under the central government (with Y 120 million invested in regions other than the experimerntal zones). (c) Invest in rural industry. According to its orientation of serving agriculture and the requirements set by the central government for the "Vegetable Basket Project"--a project designed to ensure a sta- ble supply of vegetables to urban residents; CATIC managed to raise over Y 400 million for a number of projects in such fields as live- stock and poultry farming and their sideline product processing, aquatic product cultivation anid processing, food processing, etc. (d) Develop rural markets. Invested by the State with multiple func- tions, CATIC devoted 280 million primarily Lo financial operations and secondly, to trade and real estate, with particular emplhasis on financing. Its efforts to establish ties between urban and rural economy and boost agricultural input led to fairly good economic and social results. 9.2 On JTuly 28, 190, the Politlutreau of the Central Committee of the Communist Party of China decided to have CATIC merged with the China State Agribusiness Investment Corporation (SAIC) under the State Planning Commis- sion. On February 17, 1990, the State Council gave its official approval, listed the new corpcration as an affiliate exclusively owned by SAIC and changed its name into SAIC Agribusiness Trust and Investment Corporation (thereafter called SATIC). The State Council also approved of its adopting CATIC's status as an enterprise, operating in the same fields and through the sante fund-raisiing channels, and continuinig to serve as an implementing agency  - 87 - for World Bank's RSAL in China. On September 14, 1990, the State Council once again gave the green light to SATIC to continue its probing efforts, as CATIC did, in thie reform of China's rural investment and financial systems and run the office under the State Leading Group for the World Bank China Rural Sector Adjustmenit Lending. On September 18, 1990, the corporation was officially registered under its present name. 9.3 With the approval of the competent ministries under the State Coun- cil, SATIC now has the right to transact financial, foreign exchange and real estate operations. It is expected to obtain the right to extend its opera- tions into foreign trade ,n the near future. SATIC is directly responsible to those competeut ministries in respect of the above-mentioned operations and the management of its workforce, salary and financial affairs. It still enjoys considerable autonomy. This shows that CATIC won extensive understand- ing and support for its contribution to the rural economic reform and growth. That is one of the important reasons why CATIC could be kept intact in SATIC, wlhich still enjoys considerable autonomy in its operations. 9.4 SATIC has the following three characteristic features: (a) It is the sole implementing agency for World Bank China RSAL; (b) It Is the nonlbank financial institution at the national level in the agricultural sector, which operates completely like an enterprise (i.e., operate independently with sole responsibility for its own profits and losses); (c) It is not exclusively aimed at profit-making, but serves also as a policy-implementing institution entrusted with the important task for making explorations in the rural reform. 9.5 The way the first installment of RSAL was used shows that although the economic results of the tremendous input CATIC made into the rural reform and the development of the rural conmodity economy were not satisfactory enough for the corporation itself, it did yield fairly good social results, and therefore, largely fulfilled its purpose as a policy loan. The following are some of the main problems that remain outstanding: (a) Funds were too muich spread over the various experiment zones to produce significant impact on any one single zone. RSAL was mainly used for the economic growth of the zones, not directly but indi- rectly in support of these zones. The loans have all been handed out. As no accumulation will emerge from this kind of loans and keep the ball of input rolling, and the second installment of RSAL cannot be introduced on schedule, SATIC has no more funds to draw on to sustain input. (b) The investment in industry assumed an unduly bulky proportion. Because of the excessively low prices for agricultural products in China and the absence of subsidies for agriculture from governments both central and local, the return of the investment is rather insignificant, hence lack of accumulation capacity. In addition, the influence of individual industrial project is too small to pro- mote the growth of local economy as a whole.  - 88 - 9.6 The resolution of these problems depends on the continuous external policy and financial support by SATIC as well as the readjustment of the development strategy. SATIC will continue to bring into play its strong points and draw useful lessons from experience. Based on the new conditions, its development strategy is as follows: adhere to the purpose originally defined for CATIC to carry the reform forward in depth and promote the growth of rural commodity economy, engage itself mainly in finance with both internal and external trades and real estate as subsidiary and industry as its basis, and develop gradually into a financial group corporation which plays an exem- plary role in the reform and exerts an overall influence in China's agricul- tural sector. Specifically, the strategy contains the following main ingredi- ents: (a) Continue to stt-dy and explore the approach to and measures for the deepening of the rural reform, to pursue and enrich the tentative plan put forward in the Rural Reform Policy Statement, to improve the State's investment behavior with regard to rural economy and to explore new ways and channels of input. Open up new financing ave- nues and improve the operational order in rural financial institu- tions to promote the expansion an-i diversification of the rural financial service. Develop rural market facilities and new-type organizations. Promote the development of science and technology in rural areas in order to give impetus to the integrated development of agriculture. (b) Continue to lend support to the reform and construction in the rural reform experimental zones. Conduct more effective management of the existing reform projects and identify and develop new ones. From now on, focus efforts on a certain specific fields and areas, and introduce forms and innovations directly in organization and regime with the object of gaining immediate results and thus providing firsthand experience for the comprehensive implementation of reform measures. (c) Lay emphasis on the imnprovement of economic results, especially on the achievement of better ones through teform and relevant policies. Raise the percentage of rural financial operations by readjusting its own strategy and rely mainly on the earnings from financial operations to form a sound mechanism and capacity for growth and snowball development on its own, so as to be able to effect continu- ous appreciation and expansion and speed up accumulation. (d) Give play to the advanitages it enjoys as a financial corporation and expand and strengthen its financial operations. First, set ul) a new division for financial operations at SATIC's head office and have it staffed with personnel who have financial expertise. Second, extend the finaticial functions of the corporation to localities, and gradu- ally form a network by opening a number of branch offices in a planned way or participate in local financial institutions in dif- ferent manners. Make necessary organizational arrangements to ensure that the policy intentions of the corporation are followed. Heighten the effect of the policy toward the restructuring of rural finance. At the same time, fortify the weak links in the existing rural financial setup (for example, rural collaborative finance) and  - 89 - study and explore practical ways to mobilize the surplus funds in farmers' harnds and channel them into agricultural sector for expan- sion of agricultural reproduction and effective increase of agricul- tural input. 9.7 SATIC has a strong interest in the discussion and cooperation with the World Bank in this and other respects nientioned above.  - 90 - PART 3: STATISTICAL INFORMATION Loan/Credit No.: Ln. 2967-CHA/Cr. 1932-CHA I. Basic Data (as of May 28, 1991) AMOUNTS ($/SDR million) original Disbursed Cancelled Repaid Outstanding Loan 200.0 200.0 0.0 0.0 200.0 Credit 72.24 /a 72.24 0.0 0.0 72.24 /a Equivalent to $100 million at tine of Loan Negotiations Original Loan/ Actual or Credit Dates Reestimated Initiating Memorandlum 01/25/88 02/09/88 (A) Letter of Development Policy 04/04/88 /a 05j25/88 (A) /b Negotiations 04/27/88 05/09/88 (A) Board Approval 06/28/88 06/23/88 (A) Loan/Credit Signing ---- 07/15/88 (A) Effectiveness 09113/88 09/19/88 (A) Loan/Credit Closing 07/31/90 Ln.: 09/18/89 (A) Cr.: 10/17/88 (A) la First Draft Lb State Council approved version  - 91 - CUMULATIVE LOAN AND CREDIT DISBURSEMENTS FY89 FY90 Planined Loan 100.0 200.0 Credit (SDR) 72.24 72.24 Actual Loan 195.1 200.0 Credit (SDR) 72.24 72.24 Percent Loan 97.5 100.0 Credit 100.0 100.0 Mission Data TRS Data /a Date No. P-rsons Dot. of Tsok FY88 FY89 FY90 FY91 Total Report ------