Here's one way to unleash the economic potential of rural China: implement reforms that encourage farmers to take out mortgages.
Doing so would offer the nation's near 900 million rural residents a new channel to raise capital to fund innovation and entrepreneurship, according to a report published by the Paulson Institute. That's because land use rights are a main constraint to farmers getting credit -- even after major reforms since 2003, according to the report.
Because the government owns all arable land, farmers only hold the rights to use the land and those permits aren't easily sold or transferred even if they move away, according to the analysis by professors Yanling Peng of Sichuan Agriculture University, Calum Turvey of Cornell University, and Rong Kong at Northwest Agricultural and Forestry University in Shaanxi province.
"Lack of access to credit is an inhibiting factor that constrains rural entrepreneurship," they wrote. More than half of farmers cite access to credit as one of the top three barriers to business creation, according to their survey of 1,465 farm households.
More than 250 million of the farming population migrated to work in urban areas or industrial sectors in recent years, with remittances often exceeding farm income, the researchers said. Reforms since 2014 let some farmers transfer operating rights for their land to third parties, typically other farmers, cooperatives, or companies that can manage more land and operate better equipment.
The goal was to improve investment and economic output and reduce the rural inequality that has plagued China's leaders for decades. "Chinese farmers have faced several obstacles that ensured many lived a life of poverty or near-poverty," the researchers wrote.
The authors say four pilot programs show the changes are having an effect. When farmers have access to credit, they become more entrepreneurial and start more businesses, they said, adding that more than half of rural residents would leave farming if they could.
Such overhauls aren't without precedent in China. In the 1990s, policy makers ordered government work units and state-run companies to sell their urban apartments to citizens. That boosted city housing prices, triggering a massive transfer of wealth.
(For more economic analysis, see Benchmark)
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