The supermarket revolution has arrived in China and is spreading as fast as or faster than anywhere in the world. As the demand for vegetables, fruit, nuts and other high valued products has risen, urban retailers are handling increasingly more of these high value commodities. The experience of many developing countries suggests that there could be serious distributional impacts of the emergence of supermarkets. And, in China, as elsewhere in the world, there is concern among policy makers and academics that poor, small farmers might be excluded from the market for horticulture commodities.

The main goal of our paper is to understand what types of farmers have been able to participate in the horticultural revolution, how they interact with markets and how supply chains affect their production decisions and incomes. We also want to understand if (and if so, then how) the rise of supermarkets have changed supply chains. Our analysis uses spatially sampled data from 200 communities and 500 households in the Greater Beijing area and supplemented by data collected in Shandong Province, China's fruit and vegetable basket. In contrast to fears of some researchers, we find small and poor farmers have actively participate in the emergence of China's horticulture economy. Moreover, there has been almost no penetration of modern wholesalers or retailers into rural communities. We also conducted surveys and interviews in wholesale markets and with procurement agents in Beijing supermarket chains and document the fact that supply chain shifts have only affected the downstream segments of food markets and China's wholesale markets (midstream in the food supply chain) are only being affected marginally.

The purpose of this paper is to present estimations of indicators of direct and indirect interventions of China's government in agriculture. In order to put these indicators in context, the paper reviews China's experience with policy reforms since the 1950s and the measures the effects of these reforms on the agriculture sector. Unfortunately, due to data constraints, we can only produce quantitative measures of distortions since the early 1980s, that is for the past 25 years. Due to the nature of China's agricultural experience over the last six decades, this review emphasizes the sectoral and macroeconomic policies and elements of the institutional framework that have influenced the incentive framework facing the sector and factor markets. The tradeand price/marketing-policy-related changes in incentives for different products are reflected in estimated rates of government assistance (Nominal Rates of Assistance, NRAs, Direct Rates of Assistances, DRAs and consumer subsidies).

The history of groundwater in China is one of extremes, or apparent extremes. Before the 1960s, the story was one of neglect; only a small fraction of China's water supply came from groundwater (Nickum, 1988). Almost none of the Ministry of Water Resource's investment funds were allocated to the groundwater sector until the late 1960s. Certainly, to the extent that underground water resources were valuable, China was ignoring a valuable resource. Since the mid-1970s, however, the prominence of the groundwater sector has risen dramatically. Over the last 30 years, agricultural producers, factory managers and city officials, far from ignoring groundwater resources, have entered an era of exploitation (Smil, 1993; Brown and Halweil, 1998). Arguably, there have been more tube wells sunk in China over the last quarter century than anywhere else in the world. As a share of total water supply, ground water has risen from a negligible amount across most of China to being a primary source of water for agriculture, industry and domestic use in many of the nation's most productive regions. Unfortunately, the resulting fall in groundwater tables has been one of China's most serious environmental problems.

The main question that we examine in this chapter is whether policy makers, farmers, and traders in China have met and will be able to meet the growing demand for high-valued fruits and vegetables. Such questions, of course, have great implications for producers of fruits and vegetables in the US and other nations. To answer these questions, we explore three main issues. First, we briefly describe changes to China's policy approach to managing agriculture. The objective of this inquiry is to understand how the environment within which producers make decisions has changed during the past two decades. Second, we track the changes in agricultural supply in China. In this section we seek to understand how producers have responded over the past ten years to rising demand in both the domestic and external economies. Finally, we examine both enabling factors and constraining elements that will either push China towards or inhibit China from becoming the major supplier of horticultural products domestically and globally.