Opinion: The Turning Point of Rural Land Reform: Homesteads

China’s path to prosperity started with the rural reform in the 1980s, establishing the household responsibility system. The year of 2018 marks another milestone in rural land reform, with the core focus on homesteads — rural land allocated for villagers to build homes. In January 2018 the central government announced a policy to separate the homestead property rights into three categories — collective ownership, contractual rights and tradable land-use rights.

The three-right separation is not a new concept, as it has been exercised in land for agricultural use for several years. The results were largely positive — by the end of 2016 over one-third of the agricultural land was on the rental market, according to data from the Ministry of Agriculture. Land consolidation also accelerated. However, homestead reform hardly budged. Mortgaging or selling a village home is a sensitive issue. The main resistance comes from farmers, who consider homestead land as their last financial resort. If unemployed, they would always have a home to fall back on, as was the case during the 2008-09 global financial crisis.

Yet issues around homestead land rights have become more urgent in recent years, with the urban economic slowdown and dilapidated rural economy. The massive rural-urban migration in the past 20 years has mostly left migrants’ rural housing vacant, and they have no intention to return. Those houses and land were not legally allowed to be used for commercial purposes. The housing boom in recent years has driven some farmers to sell or rent their homes under the table, creating a grey area for land transactions. Especially around large cities, illegal transactions involving homestead land are not uncommon.

Since 2017 the government has tried various ways to tap the homestead land market in an effort to revive the rural economy. Several provinces, including Shandong, Sichuan and Shanxi have piloted programs to compensate farmers who exit their homesteads with a lump-sum payment. Farmers received between 100,000 yuan ($15,779) and 300,000 yuan for their homesteads in designated areas, according to media reports. The latest policy announced in January 2018 stipulates that farmers can rent out homestead land or rural homes, though there are restrictions. For instance, urban residents are not allowed to invest in homesteads to build homes for themselves, but building rural hotels for tourism is encouraged. The policy design is careful to avoid making homestead a new market to develop commercial housing. Rather, the development should aim to help rural economic growth.

The reform will increase farmers’ wealth and rural entrepreneurship. It is in ways similar to the urban property reform in the 1990s that allowed privatization of state-owned housing. That went on to become a strong engine of economic growth. However, the rural land reform will not have the same impact as the urban property reform because the central government does not intend to privatize rural land. Rather, the government wishes to maintain the country’s self-sufficiency in agricultural production. Stability is also a concern. Landless farmers in countries like India have created city slums where poverty and crimes are concentrated — a situation the Chinese government has been trying to avoid. The current reform is encouraging nonetheless. A more flexible operational right will enable farmers to capitalize on their land to finance entrepreneurial ventures. Simply renting out land can also generate a stream of rental income, which is a complement to the social security system that is far from complete in rural China.

The long-term impact of including homesteads in the land market can be substantial, for the segment’s sheer size. The total area of homestead land in China has reached 170,000 square kilometer (65,637 square miles), while the newly built urban area was only 633 square kilometers in 2017. Starting from January, Beijing, Shanghai and 11 other cities were selected to pilot the program of developing homestead land into low-rent homes in and around the city. This is likely to put a downward pressure on commercial housing prices if pushed forward on a large scale.

The land reform will further promote urbanization, but in a passive manner. In the past 20 years, fast urban economic growth has attracted millions of surplus farm laborers from rural areas. Rural workers who have the ability to survive in the city have mostly migrated there. Most villages are populated with the old, children and others with capacity constraints. Thus, the active urbanization has slowed significantly in recent years. In 2017 the number of Chinese migrants (mostly rural-urban migrants) was 820,000 less than the year before, according to data released by the National Bureau of Statistics.

To push urbanization forward, many local governments have adopted the practice of “centralized living” by relocating villagers to a centralized location near a township, after selling off their land to the village. The feedback is mixed. Some such communities are essentially senior centers that take care of the elderly who pay for services with their land payment. They have largely received positive feedback by providing a public service. However, these relocations are often against people’s will since they are done in a hasty manner and new communities often lack employment opportunities. Thus they have also caused a great deal of backlash, especially from the young.

Politically, land reform is welcomed by the local government. By giving farmers ways to exit their homesteads, local governments have made some room to rely on land financing longer because they have access to more land to sell. Against the backdrop of tax reform that reduced local government revenue through a more centralized tax regime, it will be a temporary relief for local public finances.

As it is, farmers may like the idea of having more uses for their land, but not as much as they want good jobs in the city. Much of the rural business depends on demand from urban consumers. A sustainable urban sector will remain the key to reviving the rural economy.

Dan Wang is a China analyst at The Economist Intelligence Unit (The EIU). Her specialist subjects include agriculture, development, land and macroeconomics.

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