Fifth, reform of the intergovernmental fiscal relations would allow poor regions to have the resources to carry out improvements in the social sectors.

Box 4. Rural Land Policy Reform

China's reform efforts were launched 30 years ago in rural areas. Rapid rural development has been reflected in substantial decreases in absolute poverty and continued rural income growth. However, as reforms deepened, urban incomes grew even faster, leading to an ever widening gap between urban and rural incomes.

On October 12, 2008, the CPC Central Committee approved a broad policy document aimed at a more balanced and integrated rural-urban development. It sets a goal of doubling rural per-capita incomes by 2020, and includes several major decisions on rural reform and development, with a new land policy at its core. Most importantly, under the new policy, farmers' leases on land will be extended from the current 30-year term to an open-ended one. Moreover, the new land policy will reduce the scope of land to which "eminent domain" can be applied. Land acquisition will only be permitted for public purposes and a market-value based compensation mechanism will be established. Plot level land registration and certification will also be introduced to grant farmers more tenure security and better protected land use rights, including the right of land transfer. Reconfirming national food security as a priority, the document commits to a stringent 'farmland protection system'.

The new land policy, together with the Property Law passed in March 2007, reflects China's determination to address the challenges facing rural development and narrow the gap between rural and urban sectors. The new land policy encourages an orderly evolution of agriculture from household-based towards larger-scale operations, promotes the development of a rural land rental market by improving tenure security, and strengthens farmers' bargaining position in land transactions and acquisitions. The new land policy can over time result in significant improvements in China's rural sector, including higher agricultural productivity, more rural-urban labor migration, an integrated land market, and higher incomes for China's farmers.

Effective implementation of the new land policy can be facilitated by a range of follow-up actions. First, changes in the legal framework may be needed, including amendments to the Land Administration Law, the Rural Land Contracting Law, and even land-related articles of the Constitution. Second, a large-scale pilot of rural land registration could serve as an effective model. As China has 250 million farm households, with each household having on average five plots, nation-wide land registration and certification will be a daunting task. Third, since land still functions as a rural safety net, it will be desirable to closely monitor the impact of potential land concentration on farmers' livelihood and social stability. Fourth, effective information campaigns and legal aid activities can strengthen farmers' awareness of the policy changes and their legal rights. Fifth, additional policy changes to enable farmers to enjoy a more complete bundle of land rights could be tested. One example could be a pilot to examine the impact of allowing farmers to use their land as collateral to access credit and granting a higher degree of marketability to farmers' residential plots. Finally, appropriate tenant rights are important for land leasing. Too strong tenant rights can be a deterrent to the development of rental markets; too weak tenant rights can lead to mistreatment of tenants, which also discourages rental markets. Thus, it will be important to find the right balance.

Notes:

1. The World Bank fears that, in addition to the normal effects of an economic slowdown, international trade is being affected by the impact of the credit squeeze on trade finance.

2. He and Zhang (2008) (HKMA Working Paper 14/2008) use input output tables and estimate that the share in value-added is currently 17.5 percent.

3. These shares are in terms of national accounts type gross capital formation, and thus adjusted for land sales.

4. The World Bank expects China's terms of trade to improve 5.5 percent in 2009, after worsening by 8.8 percent in 2008 (World Bank Development Prospects Group, DECPG, November 2008).

5. The deficit including extra-budgetary and social security funds was lower.

6. Remark made during his press conference discussing the November 9 package.

7. In Keynesian terms, direct spending has a higher multiplier.

8. See He and Kuijs (2007), "Rebalancing China's Economy--Modeling a Policy Package," World Bank China Research Paper No. 7; www.worldbank.org.cn/english/content/working_paper7.pdf.

9. Including extra-budgetary and social security funds, in 2007 general government revenues increased to almost 28 percent of GDP, the fiscal surplus was 2 percent of GDP, and the government debt estimated at under 20 percent of GDP.

10. The VAT rate for small firms will be reduced to a universal 3 percent from 6 percent for industrial firms and 4 percent for commercial firms.

11. Confirmed by the Ministry of Human Resources and Social Security on November 17, 2008.

(Source: World Bank Office, Beijing)