The Story So Far
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 converting rural land for development use 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 source of revenue to finance fiscal expenditures. 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 (or household registration) system that limits mobility. Replacing land transfers as one of the limited revenue sources available to local governments is another necessary element of land reform.
In February 2015, Beijing approved a pilot program for 33 counties that allowed rural nonagricultural land to be transferred at market prices, with an intent to treat such land the same as urban land. Among the counties involved, 15 piloted direct sales of rural nonagricultural land in urban land markets, 15 counties were allowed to repurpose rural nonagricultural land designated for residential use for other purposes, and 3 counties experimented with state requisition of land at market prices. These pilot programs were to expire by the end of 2017, but that deadline was extended until the end of 2019. The August 2019 Land Management Law ended the practice of rural land transfer pilots.
In June 2015, Beijing published the results of its first comprehensive audit of land sales nationwide. The audit found considerable evidence of missing revenue and fraud, while also confirming the dependence of local governments on land sales revenue. The audit revealed how easily land-related revenues can be misappropriated within the fiscal system.
In October 2016, Beijing divided households’ contractual rights to rural agricultural land into “land use rights” and “land management rights.” Land use rights could then be transferred to other households or enterprises as long as the land was used for agricultural purposes, while rural households were allowed to maintain land management rights to receive rental payments from the use of their land. These measures were meant to encourage more efficient agriculture, incentivize rural households to resettle in cities, and improve rural income from property.
China revised the Rural Land Contracting Law in December 2018 to codify the division of “land use rights” and “land management rights” and to extend rural residents’ rights to agricultural land for another 30 years. China also revised the Land Management Law in August 2019 to allow rural nonagricultural land to enter the urban land market but only under strict conditions with heavy involvement of the government. This revision is below expectations and will limit the scope of future reform.
Quarterly Assessment and Outlook
We maintain our negative assessment of land reform this quarter, as authorities concluded past pilot programs and offered unambitious plans to replace them.
Rural nonagricultural land transferred at market prices remains just 0.1% of China’s total rural nonagricultural land by area. Local governments still over-rely on land sales to narrow their budget shortfalls, though their ability to do so may be more constrained going forward.
Beijing announced new pilots for transferring rural land to the urban market. But as with prior experiments, the impact of this is likely to be limited, given that restrictions remain on reassignment and the legacy of a dual land ownership system.
This Quarter's Numbers
No progress on land reform was made this quarter, keeping our assessment in negative territory. With the introduction of a revised Land Management Law in August 2019 and the conclusion of past pilot reforms, the debate about reform direction seems over for now. Policy efforts will focus on implementing the new law, which only grants limited rights to rural residents while reinforcing a strong government role (see Fall 2019 edition). More pilot projects were announced in December, but they are likely to be ineffectual. It is increasingly clear that the time for cautious and modest pilots has passed. Rural nonagricultural land transferred at market prices will remain a tiny fraction of China’s total rural nonagricultural land for the foreseeable future.
Local governments continued trying to patch revenue shortfalls with land sales this quarter (see Land Requisition Financials). This relies on speculative demand for land from property developers. Two forces constrain localities’ ability to continue this pattern in the future. First, at the December Central Economic Work Conference (CEWC), leaders repeated that “houses are for living, not for speculation,” squelching rumors of more open national property policies for 2020. This stance, if maintained, depresses land prices, which are already rising at their slowest pace in two years (see Urban Land Prices).
Second, the new Land Management Law effective January 1, 2020, requires local governments to compensate rural residents for expropriated land at “fair and reasonable” prices based on local conditions rather than on agricultural output values. This significantly lowers the arbitrage margins to local governments from transferring land out of farming and into commercial or industrial use. Governments face shrinking income from land sales, even though they will still turn to it for quick cash in the short term for lack of better options.
While reform of nonagricultural land has delivered minimal impact, Beijing’s partial reform of agricultural land still helped improve rural residents’ incomes. By 2018, nearly 40% of agricultural land had been leased out for agricultural use, according to official data, allowing farmers to generate some rental income even though not as much as selling the land to the urban market. Growth of rural property income thus accelerated to 10.1% in 3Q2019 from 8.7% in 2Q2019, contributing to a slight improvement in rural disposable income growth to 9.7% from 9.0% (see Rural Credit). Farmers’ income growth may be overstated: African swine fever is rumored to have destroyed more than half the stock of pork in China. The epidemic may have slowed aggregate farmer income growth over the summer, but that is not reflected in the current data.
Policy Analysis
Beijing announced a new plan to expand land reform that will likely be ineffectual. On December 30, the National Development and Reform Commission and 17 other government bodies, including MoARA and the Ministry of Natural Resources (MNR), issued a policy promoting urban-rural integration, identifying 10 pilot counties to “establish a mechanism for rural non-agricultural land to enter the urban market” by 2025.
At first glance, this may seem more promising than the previous 33 pilots undertaken between 2015 and 2019. The new project covers a rural and urban land area of 127.5 million mu (21 million acres), 50% more than the 85 million mu (14 million acres) covered by previous pilots, and is situated in economically developed regions including Zhejiang, Shandong, and Chongqing, where land is more valuable than in poorer areas.
However, the scale of pilot expansion is disappointing. The previous pilots transferred 360,000 mu of rural nonagricultural land (59,305 acres, or just 0.1% of China’s total rural nonagricultural land) at market prices over four years. The new pilots at maximum will address less than 1 million mu (165,000 acres) of rural nonagricultural land (0.4% of China’s total) over the next five years.
This is still a timid approach: at this rate, it will take more than a century to get the job done, even though substantial progress was expected by now. Furthermore, these limited transfers will be subject to restrictions. The new plan emphasizes that rural land transfers must conform to official land planning goals while entering the market at a “proper pace.” The meaning of that is not defined and thus subjects the process to local government discretion based on property market interests, politics, and other non-reform-friendly considerations. In other words, the government will still control rural land transfers even though technically rural land is free to enter the urban market.
In addition, the new plan continues to identify rural collectives as the counterparty (i.e., the title holder, “on behalf of” the peasantry who farm it) to rural land transfers, meaning that rural and urban lands are still subject to different ownership structures and therefore are unlikely to be transferred on equal terms. Leaders show no intention of changing this system: the revised Land Management Law preserved the “dual ownership” doctrine that underpins it, and the October Fourth Plenum of the Communist Party leadership offered no new thinking on rural land rights.
Methodology
Given Beijing’s 2013 Third Plenum commitment to make rural nonagricultural land marketable the same as urban land, our primary indicator for land reform tracks the area of rural nonagricultural land offered in the market for the best purchase price – which we consider “reformed”. 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 per 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.