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The paper examines the factors contributing to the sharp recovery of China's agricultural production in the 1990s in contrast to the stagnation in the late 1980s, and analyzes the policy effects during this period paying special attention to the role of technological progress. Using data from 28 provinces covering the years 1991–1999, a conventional production model and an extended production model with time-effects are estimated using random-effects estimation and a growth accounting for land productivity is evaluated. The results show that technological progress plays the dominant role in the recovery, accounting for 58% of total productivity growth during the sample period, while an increase in fertilizer use is second, with about 19%. Extension of the land tenure to 30 years for farm households could be a policy encouraging adoption of new technologies and more investment. The contribution of this policy change accounts for 21% in the productivity growth in the period. Increase in mechanized farming, plastic film input and education are all factors contributing to China's agricultural growth in the 1990s.

We focus on rural capital formation, with particular attention to the direction of rural household saving toward housing versus “productive” investments or savings deposits in financial institutions. A two-period model of rural household behavior is developed, from which three equations for investment in housing, business-agricultural capital, and savings deposits are derived. These equations are estimated using data for 28 provinces over the period 1986–1989. The econometric results confirm that housing investment is sensitive to both the nominal deposit rate of interest (negatively) and to the rate of inflation (positively). Household agricultural and business investment is also negatively related to the real deposit interest rate, while savings deposits are positively, although weakly, related. These results suggest that if the expected real deposit rate of interest had been a positive one percent instead of an average of a negative three percent during the period studied (1986–1989), total expenditure on housing would have declined substantially; indeed, the decline in housing outlays would have been equal to three-fourths the amount spent by rural collectives on fixed capital. This finding leads us to recommend improvements in financial intermediation, possibly including a stock market, in order to increase the rate of rural economic development.