This paper describes the evolution of China’s agricultural policies, principally those dealing with food supply, increasing farmers’ incomes and restoring degraded agricultural lands, and their impacts on payments for ecological services. China has many unique environmental, demographic, social and economic features. It is the world’s fourth largest country and the most populous, supporting 22% of world’s human population. It is biologically diverse, containing 10% of the world’s higher plant species and 14% of animal species, many of them endemic. This diversity reflects the wide variety of ecosystems and diverse climates expected for such a large area. China’s large and multi-ethnic human population, much of which was, until recently, extremely poor, underdeveloped and dependent on agriculture for livelihoods, has posed many challenges in terms of governance, ensuring food security, and fostering orderly economic and social development. In recent years, China has had one of the world’s fastest growing economies. Since 1990, real GDP has grown at an annual average of 9.7%. China is now the world’s third largest trading economy and the fourth or fifth largest economy overall (depending on how its currency is valued).

The contribution of agriculture to the national economy, measured in terms of gross production value, has declined continuously since 1949, when the People’s Republic of China was founded. In 1952, agriculture contributed over 50% to China’s GDP but this had fallen to about 15% in 2004. The contribution of secondary and tertiary industries has correspondingly risen. The number of people depending on agricultural production for their livelihoods has not declined to the same extent, however, with just under half the population still engaged in agriculture in 2004. This decline in both the status and significance of agriculture was particularly marked after implementation of free-market reforms beginning in 1979.

Within the agricultural sector, crop production and, particularly, livestock rearing and aquaculture have grown rapidly in recent decades. Crop production is the main contributor to gross agricultural production, though its proportional contribution has declined. The contribution of both the livestock and aquaculture industries to China agricultural production value has gradually increased and will contribute more in the future. Within the crop production industry, food crops account for most of the production value, though the input of cash crops and others is increasing and will likely become dominant in the future.

There have been four main stages in the evolution of China’s agricultural policies since 1949. From 1949 to 1978 China’s macro economic policy was geared to industrialization. The primary goal of agriculture was to increase grain yields so as to eliminate grain shortages and provide enough food and raw materials for the cities and industrial sectors. In essence, the policy was “Development with grain production as priority” though in practice it was implemented in a way that became “Forest should be cleared for grain production”: forests were destroyed; wetlands were drained to become farmland; grasslands were overgrazed. Excessive reclamation and over-fertilization damaged and polluted the environment without any significant compensating gains in grain yield. Instead, it made subsequent ecological restoration difficult and costly.

From 1978 to 1989 the government changed its strategy on agricultural development. The new policy became “Vigorously develop mixed farming without reducing efforts for grain production”. The emphasis on diversified production reflected the growth in population and the gradual improvement of people’s living standards. This change in emphasis was mirrored in the promulgation in the 1980s of the first laws dealing with management of natural resources. The structure of agriculture was substantially adjusted, so that by 1990 crop production was contributing only 64.7% to the total value of agricultural output, down from 79.3% in 1978. The contributions of the other agricultural sectors rose accordingly (agriculture, 15.5% to 25.8%; forestry, 3.6% to 4.3%; and fisheries, 1.6% to 5.4%). Nevertheless, the conflicting policies of resource protection and resource utilization meant that the environment continued to deteriorate despite notional protection.

The third stage lasted from 1989 to 2003 and was characterized by a policy of “High yield, good quality and high efficiency”. By the end of the 1980s, agricultural reform in China had achieved remarkable success, with the result that most peasants could live a hunger-free life. Total agricultural output exceeded demand, though there was an imbalance in variety. This success was based on an over-exploitation of natural resources with resulting environmental degradation. With the gradual expansion of the economy, agricultural needed to become more closely integrated into the broader economic system. The government therefore launched a policy designed to achieve high yields, improve quality and increase agricultural efficiency. This policy nevertheless focused more on economic results than on ecological benefits.

The latest stage, from 2003 to the present, extended the previous policy of high yield, good quality and high efficiency to include ecological security. With the establishment of a market economy in the 1990s and continued rapid macro-economic growth, the goals of economic development started to shift to the construction of a wealthier and more harmonious society. This further reduced the importance of agriculture in the national economy, with higher output no longer being the primary or sole objective for agriculture. The environmental degradation caused by previous misdirected development strategies became more apparent with an outbreak of a range of ecological problems in the 1990s. This led to a nation-wide reflection on questions of environmental integrity. Ecological security was highlighted as a goal in agricultural policy, and led to a series of ecological reconstruction projects such as the conversion of agricultural land to forest. Nonetheless, agricultural policies continue to be significantly affected by concerns for grain security and questions about the stability and sustainability of the ecological projects.

Given the changes in agricultural policies over time, we analyze impacts of these changes on payments for environmental services from the perspectives of government and the private sector as purchasers of these services. The policies of rigorously protecting arable land, aiming at guaranteeing grain output, and of direct subsidies for grain production, both negatively affected the establishment of mechanisms for the purchase of environmental services by government and the development of markets for these services. Therefore, in addition to estimating the real value of environmental services, government needs to push forward with supporting reform measures that will help build environmental-service markets.

The major policies for raising incomes include restructuring agriculture, relocating surplus rural labor, and developing secondary and tertiary industries in towns and villages. Promoting the relocation of surplus rural labor helps by reducing pressured on the environment, but the dual nature of the Chinese economy impedes the assimilation of surplus rural labor into the urban economy, leading to the creation of a huge migrant labor force. Though the development of secondary and tertiary industries is raising incomes, the resulting environmental pollution in rural areas is hampering the supply of environmental services and their purchase by government.

The influence of agricultural restructuring on government-purchased environmental services is complicated. The goal of high yields, high quality and high efficiency conflicts with that of environmental protection, though the policy is favoring the supply of environmental services at a farm level and the purchase of those services by the government. With the optimization of regional agriculture, modes of production are being developed that are more in line with the natural resource endowments of the regions, especially the ecologically vulnerable middle and western areas. This is reducing environmental pressures and fostering a demand for environmental services. The commercialization of agricultural management introduces the modern enterprise as the link between agriculture and market, which serves to improve the ecological environment and to set up the substitution mechanism for payment on environmental services.

The impact of policies to enhance farmers’ incomes by setting up compensation payments for environmental services purchased on the market is quite complicated. Some of the policies, such as the transfer of surplus rural labor, stimulates the growth of the environmental services market, while the development of secondary and tertiary industries in urban areas is polluting and damaging the environment and severely restricting the market demands for and the supply of environmental services. Meanwhile, the “absence” of the government in the policy designed to increase farmers’ income is curbing the development of the environmental service market. Generally, this policy has not lead to a proportionate rise in incomes, so supply capacity is inadequate in the service market.

Since their implementation in the mid 1990s, the agricultural ecological construction policies have had a positive impact on the establishment of the compensation mechanism of environmental services purchased by the government as well as on the compensation mechanism of the government-led market purchase of environmental services. But those policies have had a negative effect on the purely market-based purchases of environmental services, and have checked its development and growth.

In conclusion, we argue that future agricultural policies should place equal emphasis on ecological and economic benefits, and that the government should take steps to set up and improve the market mechanism for compensating the suppliers of environmental services, gradually encouraging the market participants rather than the government to become the major buyers of environmental services.