The development of China's agriculture industry has entered into a new phase as the era of undersupply has gone.

Producing enough farm products has been a long-sought goal of the Chinese people.

However, the country was no sooner elated by the resolving of this long-standing problem than some disturbing issues cropped up in rural areas, and the growth slump in farmers' income has been the most alarming.

During the Ninth Five-Year Plan period (1996-2000), income growth of rural residents has steadily declined, with annual net income growth rate plunging from 9 per cent in 1996 to 2.1 per cent in 2000.

Two factors have contributed to the continuous income decline of farmers.

First, income from agriculture has declined, although earnings from the non-farming sector have risen.

The average per capita income from farming has dropped by 30 yuan (US$3.6), 57 yuan (US$6.9) and 43 yuan (US$5.2) in 1998, 1999 and 2000 respectively.

The volatile agriculture market is to blame for farmers' declining income in recent years. In the past, farmers used to rely heavily on raising agricultural output in order to increase their incomes when the market situation was faced with supply shortages. However, the transformation from a "seller's market" to a "buyer's market" has made that tactic obsolete.

Also, the fact that prices for domestic farm produce are higher than international prices means that there's limited room for further price hikes.

Second, unemployment in rural areas also drags down farmers' income growth.

According to statistics, rural labour accounts for 68.4 per cent of China's total labour force, while the agriculture output value amounts to only 15.9 per cent of the gross domestic product (GDP). Labour productivity in the agriculture sector is only one third that of the country's average productivity level.

During the Eighth Five-Year Plan period (1991-95), more than 10 million rural workers were employed in non-farming sectors, thanks primarily to booming township enterprises. But about 4.63 million workers have been added to the agriculture sector during the Ninth Five-Year Plan period, further exacerbating the employment situation.

The sluggish growth of farmers' income has hindered further expansion of domestic markets.

Since 1998, rural areas have seen their consumption levels continuously shrink in line with their income growth curve.

Following the outbreak of the Asian financial crisis in 1997, the central government has adopted the strategy of expanding domestic demand to spur the national economy, which has seen initial positive rewards.

But the measures taken by the government are mainly concentrated in large infrastructure projects and strategies to raise the income of urban residents. Both areas contribute little to farmers' income growth.

Yet the huge domestic market potential hinges on raising the purchasing power of rural residents, who account for 63.8 per cent of the nation's total population, according to the Fifth National Census.

Four guidelines have been set for the development of agriculture and rural areas during the 10th Five-Year Plan period (2001-05).

By the end of that period, it is expected that the percentage of agriculture output value in the GDP will drop below 13 per cent as industrialization and urbanization progress.

The animal husbandry output value should account for more than 35 per cent of the overall agriculture output, an increase of 5 percentage points in five years.

Another arduous task is to transfer a surplus of 40 million rural labourers into non-agriculture jobs. This task is of great significance to increasing farmers' income.

The target of annual income growth for rural residents is 5 per cent, one percentage point higher than that during the Ninth Five-Year Plan period.

Pushing forward the strategic readjustment of agriculture should serve as the main theme guiding the development of agriculture and the rural economy.

First, by optimizing the structure of farm produce, emphasis should shift from merely raising output to improving the quality and efficiency of agricultural production. Efforts should also be focused on the establishment of an information network and quality standards for farm produce, as well as a system for examining and testing farm produce.

Second, the distribution of farm-producing regions needs to be optimized according to local comparative advantages.

Third, the farm produce processing industry should be strengthened because it could add value to farm products and expand their markets.

Fourth, the urbanization process should be accelerated to absorb redundant rural labourers, but in an orderly manner.

Currently, two issues concerning the country's basic rural policy deserve special attention.

The first is reducing the financial burden of farmers.

While a series of measures have been taken in this area, in reality, farmers today are shouldering more financial burdens than ever.

Statistics from the Ministry of Agriculture reveal that, in 2000, various kinds of fees levied on farmers increased 3.3 per cent compared with 1999.

This awkward situation shows that these measures alone are unable to resolve the problem.

The tax-for-fee trial reform, drafted in early 2000 and currently being carried out in Anhui Province, has produced some positive results, with fees shouldered by local farmers being reduced by 30 per cent - some 30 yuan (US$3.6) per capita in 2000.

However, the reform has also exposed problems such as the complicated taxation calculation.

The second issue is the need to stabilize the household contract responsibility system and establish a legal basis for the free transfer of land use rights.

The small scale of farming operations is a major problem faced by farmers seeking to raise their operating efficiency, which has seriously hampered the mechanization of the entire agriculture sector as well.

Thus, the concentration of land could speed up that process and raise farming efficiency.

But the transfer of land rights should only be carried out under the household contract responsibility system and at the will of the farmers.

Industrialization and urbanization efforts are necessary to transfer surplus rural labourers into non-farming sectors. It is also the precondition for land concentration and larger scale operations.

The author is the vice-director of the State Council Development Research Centre. The article was originally published in the monthly magazine Macroeconomics.