You are thinking of what scholars refer to as "tuntian" (military farms) or "military colonization." Around the time of the Qin and later Han dynasties, most Chinese peasants paid two kinds of taxes: a tax on crop production, and a tax on physical labor. This physical labor tax meant that they could essentially be drafted by the government to work on public projects like roads or bridges or walls or what have you.

For the "soldiers," their "labor" tax was instead to serve military service. It was reasoned by the government that by settling peasants in border areas, that when a border incursion occurred the peasants would not only fight to defend their land but that any military organization attempt could draft the peasants moved to those areas, thus avoiding placing logistical pressures on the rest of the country. At the same time, by having them farm and feed themselves, the government could avoid having to spend money to sustain and support the soldiers. Sounds like a smart deal, right?

The problem with this system is that for the most part these "so-called" professional soldiers were really nothing more than glorified peasants that would be given arms and armor during times of conflict and sent off into battle. Unlike what we think of as "professional troops" in this day and age, most of these peasant soldiers had little training (and what training they did have was primarily "martial training," like pointing the sword <this end> at the enemy, rather than organizational training of fighting in units and formations along the lines of the Roman cohorts and legions). The lack of discipline among the soldiers (many of whom were criminals and other unwanted/unsavory types of people) also made them hideously vulnerable to enemy cavalry. The trope of frightened peasant soldiers breaking and running before a cavalry charge, followed by the now-unimpeded heavy cavalry smashing through any remaining defenders in the line and then hunting down fleeing troops is well known. It is thus hardly a surprise that Chinese armies continued to struggle against the mounted warriors of the steppe for many years.

This trend continued as far as the Ming Dynasty, where Chinese forces behind walls and fortresses were able to fight off Manchu invaders, but in pitched field battles against the Manchus in northeast China and the Japanese in Korea, their performance was abysmal despite having gunpowder technology. That is not to say an evolution in tactics did not take place-for instance Qi Jiguang, a Ming general, wrote a military treatise where he descried soldiers fighting in small organized units for anti-piracy operations-but it was still a much different environment than the much more drilled Spanish tercios that dominated warfare around this time in Europe.