Report: Unlocking the Potential: Harness Impact Investing to Revitalize Rural China

Rural revitalization is pivotal to the Great rejuvenation of the Chinese nation. During the 13th Five-Year Plan period, China made significant progress in modern agriculture and attained a complete victory in the fight against poverty, which marked a good start for rural revitalization. In the 14th Five-Year Plan period, accelerating agricultural and rural modernization to advance rural revitalization across the board has become the major task for economic and social development.

The fulfillment of this task requires the active participation and joint promotion of all parties, especially in capital support. The report "Unlocking the Potential: Harness Impact Investing to Revitalize Rural China" (hereinafter referred to as "the Report") was released on July 1. The following questions have been discussed in the Report: 

1) What are the features of financing demands for rural revitalization? 

2) What roles can socially responsible investment (SRI) play? 

3) What are success stories that we can refer to? 

4) What are the remaining challenges?

To better understand the above questions, the Financial Times interviewed the author of the Report, Xu Hu, Deputy Head of Research at CAFI of the Renmin University of China. Hu said that while advancing the rural revitalization strategy, timely and appropriate engagement of SRI can help fill the capital gap to accelerate agriculture modernization from multiple dimensions. With growing rural industries and improved well-being in rural areas, SRI can help build a beautiful countryside with a pleasant living environment and finally achieve the overall development goals by focusing on both quantity and quality.

Financial Times: In what aspects can SRI contribute to advancing rural revitalization and filling the funding gap of local governments?


Xu Hu: The foundation of rural revitalization lies in industrial revitalization and talent cultivation. SRI can support rural industrial revitalization either by investing in leading enterprises to leverage the value transfer of the industrial chain to benefit agriculture, rural areas, and farmers or by engaging in the establishment of earmarked investment funds led by local government to support the farmers through investments and industries. In terms of public services such as education and healthcare, SRI can help improve the efficiency of public funds or give financial support for specific projects to further narrow the urban-rural gap in education and healthcare, laying the foundation for talent cultivation in rural areas.

Apparently, many local governments are short of capital. In China, sub-county governments at village and town levels can play irreplaceable roles in rural revitalization. However, they are struggling to deliver quality rural public products due to the shortage of local financial resources caused by unbalanced economic development. We estimate that for the quality and level of public goods in rural areas to catch up with the national average, an annual addition of 1.67 trillion yuan (about 240 billion USD) of fiscal expenditure of sub-county governments will be needed. Taking high-standard farmland as an example, according to a plan to advance agricultural and rural modernization during the 14th Five-Year Plan period, by 2025, China is expected to cultivate a total of 1.075 billion mu (about 71.67 million ha) of high-standard farmland. As per the standard of 3000 yuan/mu for high-standard farmland (about 437.76 USD), the total investment in 2022 is expected to reach 300 billion yuan (about 43.8 billion USD), among which the central government has earmarked a subsidy fund of 58.27 billion yuan (about 8.5 billion USD). However, the remaining funds need to be filled by local governments themselves, which is quite heavy pressure for some provinces and regions. Therefore, we believe that SRI can make a difference in easing the pressure on local finances, replenishing the capital of small and medium-sized rural banks, and investing in the rural private sector.

Specifically, in terms of infrastructure, SRI can subscribe local government bonds for high-standard farmland and can also provide public-oriented projects with loans whose interest rates are lower than the market to help them save financing costs. In addition to directly providing financing for the development of rural industries, SRI investors can invest in rural small and medium-sized financial institutions to reach rural areas in an indirect manner.

Financial Times: Do you have success stories to share with us in terms of SRI’s role in rural revitalization?


Xu Hu: Yes, there are many investors focus on the long-term benefit and are willing to integrate into the rural community and create win-win results with the local residents; they are the poster children of successful SRI creating co-benefits. Internationally, the Yield Uganda Investment Fund established by the European Union, injected 360,000 euros into a soybean products processing workshop to establish a mechanism for purchasing soybeans and other raw materials from small farmers regularly. While supporting the development of the agro-processing industry, small farmers are brought on board and enjoy the benefit together.

Financial Times: Considering China's national conditions and economic development status quo, what issues should be the focus of SRI at this stage in order to effectively support rural revitalization?

Xu Hu: There is a lot to do to support rural revitalization. In my opinion, further enhancing the carrying capacity of small counties can make a lot of difference. There are around 2,000 counties in China, which serve as a link between the city and the countryside. They can help absorb rural people who wish to live in cities nearby and serve as distribution centers for production factors flowing to the countryside. In 2021, there were about 290 million migrant workers in China and about 170 million’s household registration is not registered in the place where they work. These people leave their hometowns and migrate like migratory birds every year, separating from their families almost all year round. This has adversely impacted the mental health of the elderly and children left behind in rural areas. If small counties around their hometowns could provide suitable employment opportunities and public services, they could live and work in these counties and would not have to be separated from their families.

In addition, in the process of developing county industries, production factors flowing to the countryside require a certain degree of spatial aggregation to better support industrial development, such as processing of farm produce, financial services, market transactions, logistics sorting, business negotiations, R&D and applications, education and training, accommodation and catering. Counties can serve as a hub for the flow of goods, people, and capital between urban and rural areas.


Financial Times: "Mission drift" is often seen in the practice of rural development. Investors had good intentions but eventually go down the beaten path of pursuing commercial returns only. So how to make the capital truly "responsible to the countryside"?

Xu Hu: Yes, "mission drift" is found from time to time in the rural revitalization drive. That is why we emphasize the "social responsibility" feature of investment. However, only good intentions are not enough. In my opinion, we also need data and methodology to measure and evaluate the social benefits of investment. Internationally, some SRI institutions will report their ESG performances to some extent. A third-party audit can effectively improve the reliability of the report and can serve as a supervision to make sure they stay true to their mission. The combination of good intentions, necessary ESG measurement, stewardship, disclosure, and independent third-party audit is an SRI solution that can facilitate responsible investment in the countryside.


In addition, it is important not to cut corners for quick profits. Such capitals may behave irresponsibly. For example, capital is used to develop large-scale planting without thinking of small farmers’ interests, or to support the rapid development of rural industries while failing to consider the environmental benefits. These are important aspects that require scientific planning and risk management when channeling capital to the countryside.