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Yueran Zhang senior contributor

How Will Chinese City Governments Break Their “Land Addiction”?

(Ioan Sameli/Flickr)

On November 28, China’s powerful State Council submitted a proposal to amend the country’s Land Management Law to the standing committee of the National People’s Congress (NPC). The amendment, which observers expect the NPC to approve soon, will be followed by promulgation of the new Administrative Regulation on Rural Land Appropriation and Compensation.

According to the Beijing Times, the two moves aim to raise the standard governing compensation to farmers whose land the government appropriates. The news, deemed by many as the first step in comprehensive land reform, has aroused a new torrent of introspection about how the current system works.

It’s time to compensate farmers–fairly

The recent undertaking is a practical response to a speech given by the former Party secretary Hu Jintao at the opening of the 18th Party Congress. Mr. Hu stated that “reform will befall the land appropriation system to increase farmers’ share in the distribution of land value increase.”

The spiraling value of rural land is a direct result of China’s speedy urbanization, with the country’s cities showing insatiable demand to expand their borders. Because of this agglomeration, much more value can be extracted from agricultural land on city outskirts by repurposing it for development. But because the current Land Management Law does not allow farmers to sell their land, only the government can make this switch by appropriating the land from farmers and reselling it.

When compensating farmers, local governments have evaluated their land by looking at its agricultural utility. This means farmers get a disproportionately small share of the increase in the value of their land, with most of the increase flowing to the government. According to China Business News, in 2005 the government’s share of land value increase was 9.7 times that of farmers. By now, seven years later, that disparity is almost certainly much higher. In recent years, revenue generated from this “land finance” system has become the backbone of local governments’ finances.

This disproportional distribution system has caused phenomenal social instability, with huge annual increases in the number of mass demonstrations by farmers resisting unfair land appropriation. Now, the central government is trying to take action.

But a simple legislative step may be insufficient. On Sina Weibo, a Twitter-like Chinese micro-blogging platform, user @福建毛立平 argued that land reform can only serve its purpose if local governments are willing to sacrifice part of their revenue. “Such drastic elevation of land compensation standards is very likely to incur another round of housing price increases. If [local] governments … are not willing to transfer their excess gains to farmers, they will just sell land for higher prices.”

Professor Yu Jianrong (@于建嵘), a specialist in rural sociology, is also unsatisfied. He wrote that as long as the compensation standard is still set by the government, the game cannot be fully fair to farmers: “The thing I care about most is who determines the compensation standard. If farmers do not have the right to negotiate when their land is appropriated, forced appropriation and demolition will still happen. I prefer entitling farmers with more rights.”

@和尚混混 added that monetary compensation is not enough. For those displaced farmers, the government must provide education, job training and a safety net to allow them to find new livelihoods in non-agricultural sectors. “Land appropriation is a double-edged sword for farmers. If their land is appropriated, they have no way to make a living in the long run; if not, they cannot make enough money from farming.”

The ultimate goal remains unclear

Despite the recent legislative move, comprehensive reform of the land management system has yet to arrive. Zhou Qiren (blog here), president of the National Development Research Institute at Peking University, has long joined other scholars in arguing that the core issue–monopoly of the government in land deals–must be tackled. In their opinion, the government should only appropriate land when the planned use would benefit the public; otherwise, farmers should be entitled to sell their land directly to buyers and negotiate on the price.

For those who believe in the power of the free market, this proposed reform is undoubtedly the right course. A free market could distribute resources in a more efficient manner, in contrast to potential waste and abuse of resources by local government monopolies. In addition, direct negotiation between sellers and buyers is more likely to bring about reasonable prices.

Yet those in China who view “free market favoritism” with a jaundiced eye question whether a free land market would truly be fair. He Xuefeng (blog here), professor of rural management at Huazhong University of Science and Technology, argues that the beneficiaries of marketization are likely to number far fewer than advocates believe. More profoundly, he argues it is unfair that farmers living on urban outskirts could cash in, while farmers far from cities could not. Rising land prices, he argues, are the result of a massive social change in which all Chinese have played a part, and the spoils should be distributed more equally.

Even if the ideological debate were settled, pragmatic obstacles hinder the realization of a free land market. To begin with, this market is not compatible with the Chinese Constitution as currently written, which regulates that all urban land is owned by the state and all rural land is owned by rural communities. Thus, all land slated to be repurposed from agricultural to non-agricultural use must first be appropriated by the state. Without a constitutional amendment, a free land market would have no legal basis.

More troublesome is the structural impediment posed by the public finance system. At this moment, revenues from land finance are indispensable to local governments across the country. Just as the exploitation of cheap labor has provided the fundamental driver for industrialization, exploitation of cheap land has been the most powerful engine for urban development. This system is one of the keystones for China’s current economy. Unless governments find significant new sources of revenue, the outlook for land management reform remains gloomy.

Local governments: hooked on land

Since the beginning of 2012, it has been reported that many local governments are trapped in a financial deadlock. For example, according to Beijing News, the government of Funing County in Jiangsu Province asked each public servant to fundraise; they responded by persuading friends and relatives to lend money to the government. In Dafeng City, also in Jiangsu Province, public servants were even required to lend money to the government out of their own pocket. Local governments have created various types of informal bonds and investment funds to attract much-needed capital.

Underlying those desperate attempts is the same story. The government has been investing heavily on urban development in recent years, which is mainly supported with revenue from land sales. But in order for cities to expand so that land on the outskirts can fetch high prices, the government must build infrastructure first. As a result of this cycle, local governments are pervasively in debt. The National Auditing Bureau said that by the end of 2011, the total debt owed by local governments was 10.7 trillion RMB (about US$1.7 trillion), more than fifty percent of which is due by the end of 2013.

In 2012, two phenomena converged to undermine the once-reliable system of land finance. First, at the end of 2011 the State Council implemented strong measures to cool the real estate market. Second, local governments are simply running out of land. Since 2006, a State Council law referred to as the “Red Line for Arable Land” has required that total arable land in China must exceed 1.8 billion acres, with the quota subdivided to each province, city and county. Now, whenever local governments want to appropriate and sell arable land, they must reclaim wasteland of the same size.

Zhoukou City in Henan Province provides a famous example of wasteland reclamation run amok. Starting this June, the government initiated a large-scale grave-razing program, with plans to turn approximately 30 thousand of graveyards into arable land. The practice shows how profoundly local governments are starving for saleable land.

Despite local governments’ addiction to land finance, the current system cannot endure. It is estimated that China’s urbanization will reach its limit within twenty years, leaving no further opportunities for governments to flip land at cities’ growing margins. Instead, the government will have to find other revenue channels, such as taxing urban dwellers simply for owning land, a practice common in the United States. Such taxes are likely to eventually be levied. But as ongoing critique of land reform shows, it will be a long slog.

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Yueran Zhang

Yueran Zhang is a student at Duke University, class of 2015, currently majoring in sociology and math. He spent all of his life before college in Beijing.
  • http://www.chinavortex.com pdenlinger

    The issue of land compensation strikes directly at the heart of party rule in China, which is why I’m skeptical that it can be changed. When attracting foreign investment for factories, etc. the favored vehicle is the LGFV (local government financing vehicle), which allows the local government to bundle up land for sale, even IPO, while making a minimal payment to farmers. If farmers were paid “fair market compensation” for their land, who would make the assessment of land value? How would they withstand local party pressure to keep the value low and to minimize the payment to the displaced farmers? It also assumes that there is a tax system in place which would take up the shortfall from paying out farmers fair value for their land. So, all of a sudden, local Chinese governments are going to change from being tax cheats to being tax collectors? How is that going to work? For this reason, I believe that as long as the Chinese Communist Party is in power, the current system is going to continue. Talk about reform is just talk.

    • Paul Schoe

      @Pdenlinger, Thanks for adding an interesting twist to this already fascinating development. In China, there are almost always so many hidden cards on the table, that it is difficult to oversee the full game.