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 supposed to expire by the end of 2017, but that deadline has been repeatedly extended.
- 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.
- Rural agricultural land reform is progressing faster than rural nonagricultural land reform: revisions to the Land Management Law, which governs rural residents’ rights to rural nonagricultural land and the scope of lawful land requisition by the government, were released for public comment in May 2017 but have not since come forward for legislative review. Revisions to the Rural Land Contracting Law that enshrines farmers’ rights to transfer agricultural land, in contrast, were reviewed three times in just more than a year by the Standing Committee of the National People’s Congress, passed in December 2018, and took effect on January 1, 2019.
Quarterly Assessment and Outlook
Our assessment of land reform is unchanged: rural nonagricultural land reform progress remains nonexistent, though we see mild improvement in land-related economic conditions.
Authorities did not report new data for our key gauge of nonagricultural rural land reform. Contracting local government land sales revenue this quarter may lead to less resistance to land reform going forward. Rural income growth improved to 10.2% in 1Q2019, but the recovery is likely temporary under the weight of deleveraging.
Policy developments reinforced rural resident ties to agricultural land, rather than loosening them. These policies may improve agricultural productivity and address food security concerns but contradict the objective of enabling rural households to monetize their land rights to pursue more remunerative opportunities.
This Quarter's Numbers
Land reform in China remains stalled. We define progress as expanding the area of rural nonagricultural land transferred at market prices, but authorities have not published any new data on land transfers this year. Thus, our primary indicator remains the same: only 0.1% of rural nonagricultural land was marketized in the five years since Beijing announced land reforms at the 2013 Third Plenum, while the rest is captive to less productive uses (see Marketizing Land).
Economic conditions for rural nonagricultural land reform improved slightly this quarter, which is why our overall assessment improved from negative to neutral. One of the biggest systemic hurdles to rural residents transferring their land rights for nonagricultural use is that local governments want to retain their near-monopoly on land sales, enabling them to inflate prices and boost revenue. In 1Q2019, however, local government land sales revenue contracted by 10% year-on-year (yoy) (see Land Requisition Financials) compared with double-digit growth in 2017–2018.
Land sales are becoming a less stable source of local government revenue and thus present less of an obstacle to land reform going forward, unless Beijing reverses course on controlling property market speculation to prop up economic growth. The deleveraging campaign squeezed developer funding channels, reducing their ability to buy new land. Policy controls on property speculation remain in place and keep investment demand in check. Demographic changes point to structurally weaker demand for new homes in the medium term. In addition, local government spending on land development exceeded land-related revenue for the first time since 2015, further pressuring local government finances. In sum, these factors reduce local government incentives to rely on inflated land sales for revenue.
Reform of agricultural-use land is moving faster and benefiting rural households, which saw property income growth improve modestly to 10.2% yoy in 1Q2019 from a weaker fourth quarter in 2018. The recovery is consistent with China’s economic stabilization in 1Q2019 and with gains from ongoing agricultural land transfer pilots, but it is likely temporary: agricultural lending fell in 1Q2019 (see Rural Credit), which will dampen the value of agricultural land and rural income growth in aggregate. Under the current agricultural land reform, rural households can transfer their rights to use agricultural land, but only within their collectives and for agricultural use, tying their land value to agricultural output. Reform progress means making rural economic welfare less dependent on agricultural productivity.
Though Premier Li Keqiang pledged to accelerate land reform this year at the March National People’s Congress (NPC), policy developments over the review period fell short. In May, the Central Commission for Comprehensively Deepening Reform discussed improving the market for transfer, lease, and mortgage of nonagricultural land in a Guiding Opinion and reiterated the goal of unifying the market for urban and rural nonagricultural land transfers. However, the commission named no new measures or timelines to achieve that goal.
Rather than marketizing land transfers to facilitate urbanization, recent policies reinforce rural ties to agricultural land and direct more resources to the rural area. In early May, the Communist Party and the State Council jointly issued an Opinion on removing obstacles such as residential permit rules and different land rights to facilitate integrated urban-rural development. That the Opinion was published jointly by both institutions signifies the highest level of political consideration, but the document itself is not positive for land reform: it insists upon no changes to land ownership, agricultural area designations, or the government’s role in planning land use. Instead, it pledges incentives to attract people and capital back toward rural areas and agricultural activities.
Agricultural land reform would improve agricultural productivity. As discussed in our Winter 2018 edition, allowing rural households to exchange their agricultural land use rights with shareholding companies for equity should promote larger-scale farming, boost agricultural productivity, improve labor mobility, and increase rural household income. MoARA has rapidly expanded this line of effort since 3Q2017, driving property income growth for rural residents. In May, MoARA expanded its agricultural land reform pilot program—which already covers more than one-third of China’s counties—to 12 provinces, 39 cities, and 163 counties. Authorities say the work of transferring land from farmers to shareholding companies in the first 130 pilot counties is complete, and MoARA plans for the remaining pilots to follow suit by October 2020.
Prioritizing agricultural activities could help offset the impacts of the trade war on China’s farming sector but will further diminish rural residents’ ability to transfer agricultural land. At an April press conference, MoARA earmarked 1.1 billion mu of land (180 million acres, or 60% of China’s total agricultural land) for planting “key agricultural products” such as corn and soybeans to address food security concerns—effectively further reducing farmers’ ability to choose how to cultivate their land. Despite improved first quarter economic conditions discussed above, the political environment is less supportive of land reform.
Given Beijing’s 2013 Third Plenum commitment to make rural nonagricultural land marketable like 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,” 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 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.