When I first came to China 33 years ago, 80% of China's population was rural, mainly small-scale peasant farmers. Today, half the 1.3 billion population is off the farm, living in cities. Two obvious results: China is over twenty times richer per capita in dollar terms. And, from a country with a handful of major cities three decades ago, China now has 160 cities with a population of at least one million.
The Chinese government's plan is for another 150 million Chinese to go from farm to city in the next decade. This population shift from rural to urban will remain an important theme for many China investors. Urban Chinese, unlike peasants, are fully in the cash economy, providing enormous net new demand for packaged foods, travel, housing, healthcare. This is great news for US companies with large market shares in China's urban markets - P&G (NYSE:PG), 3M (NYSE:MMM), Pfizer (NYSE:PFE), McDonald's (NYSE:MCD), Apple (NASDAQ:AAPL), Nike (NYSE:NKE), Kimberly-Clark (NYSE:KMB).
Long-term, the question is how many peasants China needs, and will have, ten or even twenty years from now. How many net new customers will these US companies, and their competitors, get to scoop up each year? According to reliable estimates I've seen, China could be efficiently farmed by as few as 100mn full-time farmers, or 7% of the total population. In the US, less than 2% of the population works on farms. They live well. A farming family in the US now earns on average $108,000, 53% above the national household average.
In China, peasants earn on average one-third as much as urban Chinese. As peasant numbers decline, the incomes rise of those remaining. A depopulating countryside, however, won't directly solve rural China's age-old problem: farm plots are too small and often on uneven terrain. This limits the use of farm machinery and modern farming methods. Farm yields remain stubbornly below US and European levels. This, in turn, means food imports must rise inexorably. Year by year, China moves farther away from an often-expressed goal to increase its food self-sufficiency.
The solutions aren't hard to formulate. China needs fewer and bigger farms with more leveled ground to permit efficient mechanization. But, achieving this remains, for now, all but impossible. Part of the problem is that all rural land in China is owned by the state, so there's no way for peasants to buy land from one another. A larger problem is the adverse impact this would likely have on Chinese society.
China's describes itself, even today, as a 农业大国, "nongye daguo", or "agricultural great power". This is in some sense an artifact of history. But, it also reflects a deeper reality, that most Chinese, even the most thoroughly urban, still have some concrete connection to village China. Often this is through extended family members still engaged in peasant farming.
More directly, many people living in cities - if not the majority than close to it - still hold rural "hukou" and so generally have an entitlement to farm a plot of land in their ancestral village. This hukou system, though much criticized for depriving many city-dwelling Chinese of full rights to low-cost healthcare and schooling, acts as an almost-universal national insurance plan. Those now long-removed from farming life still have the comfort of knowing, if things ever got really tough, if they lost their jobs or the small business they started goes bust, they could go back to where they or their parents came from. They always have a place to live and enough land to feed themselves and scratch out a bare living.
China is the most entrepreneurial place in the world, which creates huge benefits for everyone living here, including better products, services and fast-growing incomes. Small farm plots widely held is one reason for this. They act as the safety net.
So, creating a more efficient farming system by giving peasants the right to sell or mortgage the land they farm or hold title to might ultimately do more economic harm than good. Chinese government has so far stalled on major reforms of peasant land ownership. Instead, city-dwellers are renting the rights to farm their rural plots to local peasants who have the energy and ability to manage larger holdings. The incremental effect is that average farm size will grow gradually. But, of course, renting land isn't the same as owning it.
No one will invest in improving the quality of the land if they are renting it year-by-year It's not only efficiency that suffers. The levels of heavy metal soil contamination is reaching alarming levels in many areas, especially Hunan Province, source of 13% of the rice grown in China. Who will pay to clean up the soil and so improve food safety in China is a national problem without an obvious answer.
The price of fruits, vegetables and grains are all rising in China, lifting peasant incomes. But, so are cash salaries for low-skilled jobs in cities. Run the numbers and it still looks to be wiser in many cases to leave the land. The standard land measurement in China is the "mu", equal to one-sixth of an acre or about one-twentieth of a hectare. The income from farming one mu in China is about equal now to one week of low-pay wages, for example, the salary for sweeping up factory floors. Not many peasants own and farm 50 mu. In other words, peasant farming may only become highly economically attractive if farm size at least triples.
As I wrote this, I was intermittently staring out the window of a high-speed train traveling 300kph through rural parts of Shandong Province. It takes less than a second for the train to pass a typical small plot of farmed land. The spring wheat is already about 18 inches high. There is no one out in the fields. Thanks to pesticides and chemical fertilizers, far fewer people are needed to grow food than when I first came here in 1981. Every day people leave the land and will continue to for decades to come. But, who should own China's land and who should farm it remain the central questions of China's five-thousand year-old civilization.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.