The introduction of the HRS has clearly changed the incentive system in the agricultural sector. As a result of this reform and an increase in producer prices of grain products in 1979, China's grain output increased 3 per cent per annum, and farm family income increased 7.3 per cent per annum between 1978 and 1995. In addition, rural township (formerly commune), village (formerly brigade) and privately-owned enterprises have experienced extremely rapid growth, especially since 1983.

The rural economy as a whole has undergone a two-pronged transformation. First, the better production incentives associated with the HRS caused a sharp rise in labour productivity which, in turn, created a large agricultural surplus. Second, the implicit surplus of agricultural labour which was a characteristic of the pre-reform era became explicit. Despite these changes, the regulations separating urban and rural economies did not change significantly, at least until the late 1980s.

The combination of barriers to migrate to the cities and an agricultural production surplus led to industrialisation in the countryside. Hundreds of thousands of manufacturing, construction and other non-agricultural enterprises were set up, first in the southeast and coastal areas of China, and then all over the country. These enterprises absorbed surplus agricultural labour and raised the income of the rural population. By 1995, about 29 per cent of the total rural labour force was employed in the rural non-agriculture enterprises, while 56 per cent of the value of national industrial output was from the rural industrial sector (table 4.1).