Since 2001, the Chinese central government has begun to take on more financial responsibility for basic education beginning with a modest RMB100 million to provide free textbooks to poor students in western rural areas. This practice has been gradually expanded with the central government providing free textbooks to a widening pool of poor rural students according to numbers reported by the participating provinces. In order to obtain subsidies (the first exemption), the central government has required that provinces commit to providing exemption from "miscellaneous fees" to the same students (the second exemption), along with a subsidy to defray living costs for boarding students (the one subsidy). This approach--the "two exemptions and one subsidy" policy and (TEOS)--has been introduced to ease the financial difficulties shouldered by local governments and reduce the financial burden of rural families for schooling their children. In this article, the authors discuss the development and expansion of the policy and practice which lead to the direction of fully free compulsory education (no charge under any circumstance). They state that the free compulsory education in rural areas would be the next step after the TEOS in order to assist management and enable better monitoring of the program by parents. (Contains 3 tables and 2 notes.)