Net Outflow of Rural Capital in China: 1978-2012

Zhou Zhen 1, Wu Zhenjun 2 and Kong Xiangzhi 3

1,3 School of Agricultural and Rural Development, Renmin University of China, Beijing
2 State Council Development Research Centre, Beijing

Abstract:   This paper investigates the mechanism, scale, and development tendencies of capital flow between China’s rural and urban areas over 35 years of reform and opening up. The following conclusions are reached. First, between 1978 and 2012, the net capital flow from rural areas to urban areas through the fiscal and financial systems and the price scissors of industrial and agricultural goods amounted to RMB 26.66 trillion (by 2012 price level). Second, prior to 1994, the outflow of rural capital continued accelerating; starting from the late 1990s, the net outflow of rural capital slowed down but the overall scale remained significant. Third, the contributions by the three capital flow channels (the fiscal system, financial institutions, and the price scissors of agricultural and industrial products) to the net outflow of rural capital varied greatly across different historical periods: prior to the establishment of the market economic system (1978-1993), most of the rural capital left the countryside in the form of price scissors of agricultural and industrial goods; during the 15 years after the establishment of the market economic system in China (1994-2007), rural capital flowed into cities mainly through the fiscal system; with the market-oriented reform of the rural financial systems in recent years (2008-2012), financial institutions became a major channel for the extraction of rural capital. Based on our study, we believe that in the course of more than three decades of reform and opening up, China was in the stage of extracting rural capital and that the contemporary China should enter into a new stage of development by diverting resources to the countryside to support its development. Our recommendation is that the existing fiscal and financial policies be adjusted to boost fiscal spending on agriculture, farmers, and the countryside, and to establish an inclusive, modern rural financial system.

Keywords: net outflow of rural capital, price scissors of industrial and agricultural goods, agriculture modernization

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