ONE-THIRD of China's one million villages and 56,000 towns have set up village and township committees vested with autonomous powers. The promotion of grassroots level self-government and administration according to the rule of law has been touted by the official media as a major thrust of political reform. In a report from Shandong province, where grassroots self-government has been best developed, the New China News Agency (NCNA) said yesterday: ''A campaign to promote democracy and management by law is spreading in China's vast countryside, inhabited by 900 million people. ''The system is designed to enable farmers to manage, educate and help themselves according to law and to grant them the right to manage their village affairs,'' the official news agency said. Four years ago, farmers in Shandong were encouraged to set up village committees, which enjoy considerable autonomous powers in economic and social affairs. The system has since spread to other provinces. The committees report to villagers' representative assemblies, which have a final say on matters including medium and long-term economic and social development plans, new industrial projects and income distribution. The NCNA quoted Zhangqui Mayor Mr Meng Xianjie as saying that under regulations passed by the county-level city of 900,000 people, ''villagers now have the right to participate in managing village affairs and to oversee the management''. The director of the village committee of Fuxi, Zhangqiu, Mr Xu Jianchun said the days when village leaders managed affairs according to their own will were gone forever. ''In a market economy China is shifting to relying on laws, regulations and approved systems to manage village affairs'', he said. Chinese sources said the authority of local-level Communist Party committees, which used to be the centre of power, had been considerably diminished. They said rural entrepreneurs had replaced party functionaries as the effective rulers of villages. But there is no indication the Communist Party is willing to expand the experiments in limited self-rule to higher-level administrative units. - WILLY WO-LAP LAM