Land Report Calls for Thorough Reform

By Jiang Xingsan and Liu Shouying of the China Land Policy Reform Taskforce of the State Council Development Research Center, and Staff Reporter Chang Hongxiao

monopoly on the conversion of rural land into urban development sites has resulted in lower compensation rates for Chinese farmers.

Urbanization has fueled China’s remarkable growth since the late 1990s, when land available for development increased by 1.76 million hectares. Of that newly-acquired land, 81 percent was recently converted farmland.

However, the government’s monopoly on this land conversion process has generated numerous problems. One of these problems has been lower compensation levels for farmers who sell their land because they are not allowed to directly negotiate with developers of their converted farmland. They must accept whatever compensation the government offers.

According to experts, before October 30th, 1998, farmers were able to directly bargain with prospective developers of their farmland. However, since 1999, the government has eliminated this process in fear of the degradation and disappearance of Chinese farmland.

In Shaanxi Province, farmers from Chenyang Town of Xianyang City's Qindu District said that before 1998, they could be compensated up to 84,000 yuan (US＄10,400) per mu (0.0667 hectare). However, under the new system adopted in 1999, farmers say they typically only receive 60,000-70,000 yuan (US＄7,400-8,600) per mu.

The forced acquisition of rural land has destroyed the only form of livelihood for many farmers, their land. For example, from 1994 to 2003 about 980,000 farmers lost their land in Shaanxi Province.

The law hurts farmers as well because it stipulates that farmers should be compensated by, at most, 30 times the average output of their farmland in the last three years, creating a ceiling on the price of their land. This fact compounded with the lack of compliance with legal compensation standards has worsened the economic situation of many farmers.

Farmers’ complaints and refusal to have their farmland taken over has created social unrest, which is quickly becoming a problem. As a result, local governments have begun to devise new compensation methods to ease social tensions. For example, since 2003, Zhejiang Province has raised its compensation standards and other regions have begun allowing farmers to have a bigger share in the premiums of farmland converted for industrial and commercial development.
The government monopoly on the conversion of farmland for construction use also jeopardizes the interest of farmers, while creating new problems for public finances. Surveys show that although local governments reap substantial profits from selling land for commercial development, they also need to invest money in order to subsidize land development for public causes. For example, in eastern provinces, the government subsidizes about half of the land taken from farmers for public purposes.

On the other hand, local governments often sell the land designated for industrial development at low prices in order to attract investment from other provinces and foreign countries.

While land for commercial development can be sold at market-based high prices, that land accounts for only a small proportion of the total land supply. In many cities in the eastern regions, the ratio could be as low as 15 percent. In western regions, the ratio is less than 10 percent.

To maximize their monetary interests, local governments occasionally resort to the establishment of land reserve centers. In 1997, Hangzhou, Zhejiang Province became the first city to establish a center to purchase land under the name of bankrupt or inefficient State enterprises and trade the land on the market in order to supplement government revenues. The next year, the government expanded the program nationwide in an effort to 'enhance the ability of the government to regulate the land market.'

Local governments answered the call actively but their aim has gone far beyond helping inefficient State enterprises restructure. Instead, they used the low cost of farmland in order to extract huge profits for themselves. For example, in 2003 and 2004, 87 percent of the land in the land reserve center of Xianyang city, Shaanxi Province, was directly requisitioned from individual farmers and 3.9 percent from the collectively owned land of farmers.

Surveys show that the majority of reserved land is not used for public projects, but auctioned for commercial development with profits going directly to the government. The direct involvement of the government in land transactions may disrupt the market and affect the healthy development of land and real estate markets.

According to China’s taxation system, local governments keep tax revenues from city expansion and land development projects. This income accounts for a major portion of local revenues. Revenues from land transfers and fees collected from relevant businesses also constitute a major source of local governments' non-budgetary income.

Local governments also use the land as guarantee for loans from banks to develop local infrastructure, which has become a common practice across the country. However, this practice is not legally sound and creates the possibility of legal risks as China's Guarantee Law does not contain specific articles governing this form of guarantee. Moreover, there is no government department to register guarantee information, which may lead to repeated guaranteeing and jeopardize the interest of commercial banks.

In order to solve these problems, the country needs to unify the current two-tiered rural-urban land market and ensure that farmers can participate directly in land deals in order to protect their interests. The draft property law should include the article, 'the State protects farmers' ownership of collective land' to respect farmer’s property rights and their right to sell their land for developmental purposes. The government monopoly on land transfers should be broken up, allowing the market to play a larger role in allocating land resources. Lastly, the collectively-owned land of farmers should be allowed directly into the market.

English version by Xin Zhiming and Roland Chang