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 under-compensated 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.

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 the magnitude of unfinished land reform. We complement the data with policy analysis to gauge progress.

Quarterly Assessment and Outlook

Our land reform indicators show no real progress being made on the goal of allowing market-based rural land transfer – as set out in the 2013 Third Plenum and reiterated since. Land reform is difficult to gauge due to data reliability and transparency problems. Our primary indicator tracks the area of rural land not classified for agricultural use that is transferred to the market; liberalizing this land is the focus of ongoing land reform pilot programs. However, our data show that after three years of experiments, only 129,000 mu (21,500 acres) of rural land have been transferred at fair market value, an almost negligible amount compared with 280 million mu (46 million acres) of unreformed rural construction land in China. Local governments remain dependent on land sales for revenue, contrary to stated reform intentions. Rural households have enjoyed faster property income growth in recent quarters – another key land reform goal – but starting from a low base.

Policies this quarter did not reflect any urgency for pursuing land reform. Government restructuring approved at the National People’s Congress (NPC) in March did not resolve overlapping MoARA and MoNR responsibilities (unlike in other areas we track), instead expanding portfolios to include social and environmental issues. This may further complicate land-related policymaking. The State Council introduced a new land quota transfer mechanism to encourage agricultural provinces to sell construction land quotas to nonagricultural provinces. This may ease fiscal conditions for some provinces and promote larger-scale farming, a stated reform goal. But local governments, not households, will receive these proceeds, leaving unmet the long-standing objective of using land reform to more fairly distribute land transfer gains to households.

Local governments remain dependent on land sales for revenue, contrary to stated reform intentions.

This Quarter's Numbers

Our primary indicator shows no real momentum toward intentions to promote market-based rural land transfers. The slim red area in the chart illustrates the area of rural nonagricultural land legally transferred at market prices. It is almost indiscernible compared with the vast majority of land untouched by reform. Market-based transfer pilots have been underway in 33 counties since 2015 but have made limited progress. According to a May 28 MoNR report, by March 2018 a total of 16,000 mu (2,636 acres) of rural nonagricultural land was sold in the urban land market for RMB 18.3 billion. This is up from 10,300 mu (1,697 acres) at the end of September 2017. In addition, 71,000 mu (11,700 acres) of rural nonagricultural land were transferred for other purposes, up from 59,000 mu (9,719 acres) as of June 2017. In total, nonagricultural land transferred under the county-level pilots amounts to 129,000 mu (21,251 acres); however, there are 1.4 million mu (230,631 acres) of nonagricultural rural land in these 33 counties and 280 million mu (46 million acres) throughout the country.

Our indicator also tracks a new program kicked off in 4Q2017 to allow rural collectives in 13 big cities to build urban residential buildings on their land. These rural collectives are in fact “urban villages,” whose agricultural land was compulsorily purchased by the government years ago. Residents have since then lived an urban life, but they are unable to sell their properties as do their urban peers because the land they occupy is owned by the rural collective and thus not transferrable in the urban market under the current Land Management Law. This new program avoids that legal constraint by allowing rural collectives to monetize their land rights at market price without directly selling their land. We previously discussed the success of this program in alleviating urban land supply constraints in Beijing (see our Spring 2018 edition), but there is no additional data available to evaluate progress this quarter.

One key defect of the current land allocation mechanism is that profits from land transfers go mostly to local governments, which compensate farmers at low rates for their land use rights and then resell the land at much higher rates to the urban market. Beijing is well aware of this exploitative situation and pledged in the 2013 Third Plenum Decisions to rectify it by restricting governments’ land acquisition and increasing compensation for farmers. However, our indicator shows that local governments are still reliant on land sales to finance expenditures (see Land Requisition Financials). This quarter, revenue from land sales rose by 40% year-on-year, up from 35% last quarter. This is not encouraging; the more that local governments rely on land sales for financing, the less inclined they are to reform land policy.

Despite the lack of meaningful progress on rural nonagricultural land reform, one positive point in the data is consolidation of rural agricultural land – another stated reform goal. Rural agricultural land cannot be converted for construction use but can be transferred within the rural collective to another household or shareholding company for agricultural purposes. This is meant to encourage more efficient farming. MoARA data show at least a third of all agricultural land has been transferred in this manner. Most progress was made between 2009 and 2014, though tighter documentation requirements have slowed transfers since (2017 data are not available yet). The program is driving income growth as rural residents collect rent on transferred land. Rural household property income accelerated to 13.1% in 1Q2018 from 11.4% in 4Q2017, helping lift rural disposable income growth to 8.8% (see Rural Credit).

Policy Analysis

Policy developments in the review period do not imply urgency behind land reform efforts. For many reasons, authorities at multiple levels remain wary of relinquishing control over land use and sale proceeds. Local authorities rely on the money, regulators are mired in internal debates and turf wars, and central leaders worry about social stability and farmer welfare. The government restructuring approved at the NPC in March addressed many bureaucratic redundancies in other areas (see Labor and Shared Welfare, Competition Policy, Environmental Policy) but did not profoundly touch land-related policymaking, which continues to be governed by overlapping jurisdictions between MoARA and MoNR.

The NPC also assigned MoARA and MoNR new responsibilities that could distract them from land reform. MoARA was given responsibility for rural affairs, likely including implementation of the Xi administration’s “rural revitalization” initiative (also evaluated in our Spring 2018 edition). MoNR, which will now oversee not just land but all state-owned resources including oceans and forests, has become the super-regulator for natural resources promised by the Communist Party during the 19th Party Congress in October 2017. The impact this new arrangement will have on the approval process for converting collective-owned agricultural land to state-owned nonagricultural land is uncertain.

Central authorities appear to want local governments to have a stronger ability to negotiate land transfers. On the surface, this undermines the 2013 Third Plenum objective of empowering household land interests. In March, the State Council rolled out a plan to coordinate land allocation across provinces. The plan employs a land quota market structured similar to the carbon emissions market. The central government will set a quota for the amount of land that can be set aside for construction use by each province. Provinces in need of construction land can buy unused quotas from other provinces at a predetermined price based on the land’s agricultural value and the buying province’s agricultural capacity. Nonagricultural provinces and municipalities (such as Beijing or Zhejiang) would likely need to pay up to four times more to develop a piece of construction land than would agricultural provinces. The intent is to more efficiently release land for development from restrictions on its use across locales, while maintaining ample land supply for agriculture. The program should generate new land transfer revenues for poorer and more agricultural provinces and incentivize them to specialize in agricultural activities. The 2013 Decisions sought to put more emphasis on entitling rural denizens to the value of the land they occupy and work, rather than bolstering revenue for rural governments. Five years later, the eternal tension between those two objectives is clearly still in evidence.

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