February 25, 2014

China’s Land Experiment

Government land requisitions are giving way — slowly— to individual property rights in China. Qiren Zhou, professor of economics at Peking University, fills in the blanks at the recent N.T. Wang Distinguished Lecture.

Sharon Kahn

An elemental drama is playing out across the vastness of China. Corrupt bureaucrats and revenue-starved officials alike routinely stage land grabs from local farmers. In the past five years at least 60,000 mass protests, culminating in some 39 self-immolations on top of other forms of suicide dissention, have raged in rural areas. Land-rights advocacy group Landesa reports hundreds more deaths when whole villages stand up against demolition crews.

Qiren Zhou, professor of economics at Peking University, says the peril comes not just from massive social unrest, but also unsustainable revenue flows as local governments use one-time land sales (rather than collect taxes) to pay for urbanization. “It's dangerous for China if the country doesn’t enact land reforms,” he recently told a packed house at the N.T. Wang Distinguished Lecture, co-sponsored by The Jerome A. Chazen Institute of International Business and Columbia University’s Weatherhead East Asia Institute.

Beijing agrees. Even as the government commandeers land from 1.1 million rural households every year, the Communist Party this November pledged reform that would grant farmers more property rights and allow the market to play a decisive role in pricing. “It’s possible that a nationwide land market could emerge by 2020,” said Zhou.

The Chengdu Experiment

A few enterprising localities have not waited for central government mandates and are paving the way with what Zhou called “de facto reforms.” In his lecture, he concentrated on the efforts of the Sichuan capital of Chengdu, a city of 10 million people, half of whom are considered rural residents. Beyond building urban infrastructure, “the city needed a way to rebuild homes for the 90 percent of rural households that were destroyed during the 2008 earthquake,” he said. What resulted was a three-step process that is still underway.

The first step involved measuring properties, setting boundaries, resolving disputes and issuing official deeds to all landowners. In 1978, every family designated as Hukou, or part of the rural registry, received an equivalent plot of land. But the following 30 years blurred lines considerably as farmers transferred their rights, many moving to cities.

Step two involved a legal upheaval. China’s current laws restrict sales of agricultural land, giving urban buyers much shorter leases (20 to 30 years) rather than the rural buyer’s right to unspecified “long-term” leases, which imply “forever.”

Also, not all land is equally valuable with property closest to the city center worth more than more distant plots of land. Complicating matters further, China sets aside quotas that specify a certain percentage of land must remain available for agricultural purposes.

In response, Chengdu established a new village on the outskirts of the old city. That land became immediately more valuable since it was designated as urban property. Farmers displaced from the earthquake could rebuild there or were free to resell their newly pricey quota to developers and relocate to agricultural land beyond the new village. “The quota is like a ticket or stock that can be sold in the secondary market,” explained Zhou.

Step three involved an auction process and a land exchange that brought transparency in sale prices that helped establish the market price of land.

China's Land Challenges

Noting the five-year Chengdu experiment has been successful, Zhou said other areas of China are taking similar steps and the country’s four current property exchanges could grow to a national market that would set prices for land based on supply-and-demand within the next few years.

But mapping all of China’s property lines is a gargantuan task that will cost an estimated $3 billion to replicate throughout the country, according to a central government estimate. And beyond turning Chengdu's de facto process into de jure practice, ideological challenges — big ones — remain. Zhou cited three key issues:

  1. With the Hukou population dwindling as farmers move to the cities, agriculture must be made more efficient to support China's population. Easing land-sale restrictions allows for larger-scale agribusiness, which should help with efficiencies of scale.
  2. Local governments, which currently fund about 40 percent of their budgets from land sales, need new sources of income. Local debt loads are crippling and growing cities still need infrastructure. Currently, municipalities and states have little taxation capabilities with most revenues reverting to Beijing. That will need to change.
  3. Urban societies need to become more inclusive to rural migrants to avoid real class conflicts. The rural designation under Hukou means rural migrants cannot buy urban property and are not eligible for urban social safety net provisions. Most rural citizens who commute to the cities or live there part-time keep a rural home as a fallback should they become unemployed, or as a home for their school-age children who are not entitled to urban education.

Zhou is optimistic. “China has a lot of land, although not of agricultural land,” he noted. Opening up forests, mountainous regions, and other non-fertile land as suitable for factories, second homes and suburbs seems a reasonable approach, he noted.

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