China faces unique land policy reform challenges. Unlike economies where landowners have full property rights, 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 undercompensated for their land when relocating. More efficient land allocation is needed to balance urban-rural interests and encourage mobility. Recognizing this, the 2013 Third Plenum reform program pledged to promote agriculture at a 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. Fiscal Affairs reform to replace land transfers as one of the limited revenue sources available to local governments would also be helpful to facilitate land reform.

Our primary indicator for land reform tracks the area of rural land that can be offered at the 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 and Rural Affairs (MoARA) releases agricultural land turnover data once or twice a year. For rural nonagricultural land, the Ministry of Natural Resources (MoNR) publishes an annual yearbook and holds occasional press conferences on pilot programs. These fragmented data sources are far from adequate. Supplemental indicators look at land requisition financials, 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 the magnitude of unfinished land reform. We complement the data with policy analysis to gauge progress.

Quarterly Assessment and Outlook

Our assessment of land reform remains negative. New data show that rural agricultural land transfer reforms are accelerating modestly, while nonagricultural land reforms are stagnant. Other data indicate that local governments are asking developers to pay up early for land purchases because of bleak local fiscal conditions. This reflects the extent to which local governments still depend on land transfer fees and are incentivized to resist relinquishing land allocation to market forces. Rural agricultural land reform supports property income growth, a 2013 Third Plenum objective, but nonetheless overall rural wage growth decelerated modestly in the second quarter. Tight credit conditions for the agricultural sector as a result of deleveraging (see Financial System) are likely to further weaken rural income growth going forward.

New land policy developments during this review period were limited and focused on expanding current rural agricultural land transfer pilot projects. These reforms have expanded consistently since 2015 and should continue to scale up quickly for the remainder of the year. However, rural nonagricultural land liberalization remains mired in delays, constrained by dire local fiscal conditions (see Fiscal Affairs). This is especially problematic in Tier 3 cities where land prices are rising rapidly.

A key determinant of land reform success is the extent of local government reliance on land sales for revenue. Local governments should be relying less on land revenue if reforms are succeeding. Recent data show the opposite.

This Quarter's Numbers

Our primary indicator tracks the total amount of rural nonagricultural land transferred at market prices. Second quarter data show that after more than three years of policy experiments, the government allowed the transfer of only 129,000 mu (21,251 acres) of rural nonagricultural land at fair market value, an almost negligible amount compared with 280 million mu (46 million acres) of such land eligible for reform. This is only half the size of Brooklyn, New York, in a nation of China’s size. We noted in last quarter’s update that there had been no real momentum toward market-based rural land transfer. Our assessment remains unchanged. No updates have been announced since May by MoNR, which oversees rural nonagricultural land reform. Data also show that progress toward achieving the 2013 Third Plenum promise to “allow rural collectively owned profit-oriented construction land to be sold, leased, and appraised” is negligible.

In contrast, agricultural land transfers were a relative bright spot this quarter. Agricultural land can be rented out to other rural households or, under recent pilot programs, to shareholding companies. These transfers promote at least temporary farmland consolidation, and thus larger-scale and more efficient farming, a key 2013 Third Plenum goal. New data from MoARA show that land transfers under these reforms are increasing. As of 2Q2018, land occupants transferred 497 million mu (83 million acres) of rural cultivated land usage rights, accounting for nearly 37% of all rural land farmed by households. This represents an increase of 1.4 percentage points from 2017. However, farmers still need approval from their collective – the legal land owner – to transfer their land usage rights to others outside the collective, meaning that this is still not a purely market-based process. Also, because Chinese officials view food security as a strategic priority and are committed to maintaining a large base of agricultural plots, farmland cannot be converted to nonagricultural land without state approval. This limits the potential scope for agricultural land reform and inhibits higher value-added land use.

As occupants transferred agricultural land to other households or shareholding companies, rural property income grew, in line with 2013 Third Plenum goals to promote more profitable farmland use. In 2Q2018, property income grew at 13.8%, continuing to outpace other components in rural disposable income (see Rural Credit). Despite strong property income growth, our indicator suggests rural disposable income growth faces downside risks. Lending growth for agricultural activities slowed to 3.6% year-on-year (yoy) this quarter from 4.6% in 1Q2018, as deleveraging efforts limited available credit. If prolonged, tighter credit will impair farmers’ ability to invest in and upgrade agricultural machinery, limiting future income gains. Chinese farmers also remain under the threat of repercussions from the U.S.-China trade war, which will raise prices for key farm inputs like feed and agricultural equipment.

A key determinant of land reform success is the extent of local government reliance on land sales for revenue. Local governments should be relying less on land revenue if reforms are succeeding. Recent data show the opposite. If official data are to be believed, land sales revenue growth remains impressively high at 35% yoy, a slight deceleration from 40% in the prior quarter (see Land Requisition Financials). Yet field reporting suggests these official data significantly overstate actual growth in land sales revenue. We estimate that land sales revenue grew by approximately 20% in 2Q2018 (see Fiscal Affairs). One explanation for the discrepancy lies in land sale payment schedules. We believe cash-strapped local governments are requesting more rapid land-sale payments in order to meet budget shortfalls. Local governments thus remain extremely reliant on land sale revenue, despite being an unstable foundation for local spending.

This over-reliance on land revenues provides a strong incentive for local governments to keep local housing markets strong as well, despite central government efforts to contain rapid property price growth. Land price growth has slowed in Tier 1 cities since 4Q2016. This has now begun in Tier 2 cities this year (see Urban Land Prices). However, land price growth in Tier 3 cities remains strong, reinforcing deep resistance to further land reform.

While agricultural land reform experiments accelerated, nonagricultural land reform developments were nonexistent.

Policy Analysis

Policy in the review period focused on expanding current land reform pilots, rather than new reforms. While agricultural land reform experiments accelerated, nonagricultural land reform developments were nonexistent.

In June, MoARA expanded its rural collective transfer pilots to 1,000 counties (a third of all China’s counties), a rapid increase from 100 counties launched in late 2017 and 29 counties in 2016. As noted in the Winter 2018 Dashboard edition, pilot programs allow rural farmers to transfer land use rights to shareholding companies in exchange for equity. MoARA allowed three provinces (Jilin, Jiangsu, and Shandong) to implement pilots in all their counties. Such province-wide implementation presents two advantages over the previous small-scale trials. First, provincial officials tend to have more autonomy to manage programs and can offer direct support to county officials implementing the pilots. Second, province-wide pilots can provide more extensive and consistent impact data for leaders to evaluate and decide whether to roll out the program nationwide.

Official reports on the results are encouraging. In the previous 29 county pilots, the program monetized RMB 88 billion ($12.7 billion) in agricultural assets, generating RMB 18 billion ($2.6 billion) in shared value for rural shareholders. If such numbers are accurate, and with 1,000 counties now participating, total distributions to farmers could exceed RMB 1 trillion ($144.4 billion) – or about RMB 5,400 ($780) per rural resident in those counties. That would be equivalent to 36% of average annual rural disposable income. However, even if these pilots prove successful, they constitute only a small part of the broader land reform promised at the 2013 Third Plenum. Agricultural land still cannot be converted to nonagricultural land by the farmers who live on it. And transfers outside of one’s collective, even to shareholding companies, still require collective approval.

While reform of rural agricultural land made some progress, nonagricultural pilots were stagnant. The government does not associate rural nonagricultural land with critical priorities like food security, and thus it is not subject to the same degree of central-level oversight. For this reason, land analysts believed it could reasonably be turned over to the market; it is precisely for this reason that our primary indicator for land reform focuses on rural nonagricultural land. But lower political sensitivities also mean local governments are able to rely on such land more for revenue. Thus, land reform directly depends on fiscal reform to replace this local government revenue source. However, our Fiscal Affairs assessment is even more negative than our assessment of land reform, leading us to believe that serious breakthroughs in land reform are unlikely in the near future.

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