China faces unique land policy reform challenges. Unlike economies where landowners have full property rights, in China rural land is owned by collectives (the rural political unit), and urban land is owned by the state. Rural households can only transfer “contractual use rights” within their collectives, while urbanization of land can only happen via state requisition. This incentivizes local governments to expropriate rural land at modest, fixed prices and develop it at a profit, which is a major element of financing for fiscal expenditures to meet GDP targets. Rural households are limited to subscale farming and are under-compensated for their land when relocating. More efficient land allocation is needed to balance urban-rural interests and encourage mobility. Recognizing this, the Third Plenum program pledged to promote agriculture of commercially viable scale by permitting consolidation of small plots into larger farms, to make rural nonagricultural land marketable like urban land, and to end the hukou system (legal permanent urban residency) that bars mobility. The question is whether and how these plans are being realized.

Our primary indicator for land reform tracks the area of rural land that can be offered at market for the best purchase price – which we consider “reformed,” the slim red area in the chart. All other rural land remains constrained in terms of marketability. The Ministry of Agriculture releases agricultural land turnover data once or twice a year. For rural nonagricultural land, the Ministry of Land and Resources publishes a yearbook annually and holds occasional press conferences on pilot programs. These fragmented data sources are far from adequate. Supplemental indicators look at land requisition financials, land requisition area, newly urbanized land by use, urban land prices, and rural credit. Most of these indicators are updated only annually with a one-year lag. That said, they provide a basic statistical picture of magnitude of unfinished land reform. We complement the data with policy analysis to gauge progress.

Quarterly Assessment and Outlook

Though our data indicators are largely limited to lagged, annual updates, land reform finally saw some policy movement this quarter, after a long wait for a debate to start on Land Management Law revisions. Officials are finally taking some stock of lessons learned from the past years of pilot programs. There is not yet consensus on bold reforms, and the small steps in evidence are driven as much (or more) by urban property market concerns as by long-term reform thinking. Rural construction land pilots are positive but modest, but the agricultural land use rights registration process is moving toward completion. Debate on revisions to the land law plus the recently concluded Communist Party Congress are likely to add momentum to what has been a patently slow process to date.

This Quarter’s Numbers

Our primary land indicator reflects the slower-than-expected pace of reform – starting with the reality that this indicator can only be updated annually. In 2Q2017, the only data update came from a Ministry of Land and Resources (MOLR) announcement in June of progress on one component of nonagriculture land reform, concerning rural property land (on which farmers can build homes). MOLR reported that 32,000 mu (1 mu is about 1/6 of an acre) of property land assigned to 70,000 households in pilot project counties had been reclaimed by their collectives for future reallocation. Compared to a total of 67 million mu of property land, this is a minimal area. The idea is that recycling this unused land will improve efficiency. However, the pilot reallocation is limited to household property construction; while it may rationalize how close to their farming plots some farmers live, it does not address farm-size scale or promote structural adjustment. As urbanization continues to encroach on farmland, more basic reform of rural land conversion to different uses (cropping, construction, property) is needed.

The 2016 Land Statistical Yearbook from MOLR was published this quarter, with updates through 2015. Past land-related social unrest has brought attention to local land requisition finance abuses. In the 2015 data reported by the Ministry of Finance, more than 60% of land requisition funding went to farmer compensation and resettlement, up from less than 40% in 2009 (see Land Requisition Financials). This is positive, and perhaps partly as a result local government land requisitions from farmers continue to decline from a 2011 peak, albeit at a slowing pace (see Land Requisition Area).

Related to this fall in rural requisition, the annual growth of rural land reclassified as urban (or newly released from urban land banks) also continued to fall in 2015, from a 2013 peak (see Newly Urbanized Land by Use). An increasing portion of this new urban land growth is allocated to infrastructure projects. According to the Land Statistical Yearbook, rural governments sell land for infrastructure use at the average price of only RMB 330 per square meter, less than half of the average price for industrial land, and only a fraction of the price for high-demand residential and commercial land (see Urban Land Prices). This suggests that local governments are running out of valuable land for urban residential and commercial use and are increasingly relying on government-led infrastructure projects to support growth.

Finally, the lack of formal title to land – only entitlement to limited duration use rights subject to requisition by local government at whim – prevents rural dwellers from using their land as collateral for borrowing to invest in productivity, to scale up, or to exit agriculture for some other business. Policymakers have attempted to remedy this capital formation problem by promoting an array of rural lending channels, with separate (confusingly named) programs for various rural themes. Rural Credit shows growth rates for agricultural and non-farming-related rural lending, with the latter growing three times faster than the former in 2Q2017. If farmers could collateralize land, investment in farming productivity would likely rise, and with it – hopefully – rural incomes.

Policy Analysis: 2Q2017

This quarter saw both positive and disappointing land policy developments. The most important development was a draft revision of China’s Land Management Law, which dates to 1987 and was revised in 1988, 1998, and 2004. An update was pledged at the November 2013 Third Plenum, and this has taken longer than expected. The release of the draft shows that changes may finally be starting.

Many policy analysts hoped the revision would emphasize market forces for managing land allocation, incorporating some of the successes with market approaches achieved in various pilot programs. The May 23 draft revision is less than satisfying in that regard. Article 4 reiterates that “the state will plan the usage of land,” “strictly restrict conversion of agricultural land to construction land,” and “all entities and individuals must use the land strictly according to its usage defined in the plan.” A clear role for the market is absent. The draft is silent on a fundamental rationale for treating rural and urban land distinctly. All urban land must still be state owned; for rural land to enter the urban market, it still must go through requisition by the state at government-fixed prices that are nonnegotiable. Although a more flexible market is allowed in 33 pilot counties, no lessons from that are drawn. Under China’s Constitution, the state is supposed to acquire rural land only for “public benefit.” Rather than allow the market to play a greater role in allocation of land for various usages, the new draft expands the definition of “public benefit” to include resettlement and rezoning projects, which include industrial parks and development projects undertaken by private, for-profit developers. Rural citizens have little recourse.

If farmers could collateralize land, investment in farming productivity would likely rise, and with it – hopefully – rural incomes.

The new draft does take a step forward by specifying that “use rights” for commercial construction land owned by collectives can be transferred, leased, or mortgaged. On August 29, MOLR and the Ministry of Housing and Urban-Rural Development jointly issued a policy announcing new pilots in 13 big cities (including Beijing, Shanghai, Nanjing, Hangzhou, Xiamen, Guangzhou, and Shenyang), allowing rural construction land – owned by collectives – to directly enter urban rental markets without having to be bought at fixed prices by urban authorities first. This move is driven more by overheated urban property markets than rural development. These and other modifications were added to the draft Land Law, which was then submitted to the State Council for review.

While the draft law reflects the debate over rural-urban land conversion, the Ministry of Agriculture is managing pilot programs on another element of reform: shareholding-based agricultural land management. On May 31, Communist Party organs and the State Council jointly issued a notice encouraging land turnover and scaling up of agricultural farms and diversified management structures. The notice recognizes the legality of farmer shareholding entities, production industrialization (farmers taking on higher value-added processing of their produce), and the use of dividends according to shareholding percentages – all practices that embody corporate governance innovations and are meant to be more efficient than collective-style governance. The notice also touches on fiscal, credit, marketing, and human resources practices. This is encouraging and merits close attention in the coming quarters.

Another key step toward rural land marketability is basic use rights registration. The process of registering and documenting agricultural land use rights is now reported as complete in 22 provinces. Thirty-five percent of rural agricultural land has been transferred based on these registrations (within collectives, which means the collective is the sole available buyer and prices are nonnegotiable for the farmer), as seen in our primary indicator chart. The Ministry of Agriculture, which is responsible for implementing this process, announced that six additional provinces would commence registration drives this quarter and that the process would be finished in 2018.

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