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 suggest little progress in the third quarter of 2017. Several pilot programs designed to allow market forces to set rural land prices moved forward but barely touched the large swath of rural nonagricultural land available for reform. In the rest of the country, prices that farmers received for land remained far below actual market rates, meaning disproportionally more land wealth was transferred to local government budgets. Quickly growing credit numbers suggest a higher debt load for rural families, even as much of that credit was used to fuel consumption rather than being put to more productive use such as investing in agricultural upgrading.
It is unclear why additional pilot projects are needed to further verify the need for reform, rather than moving to general implementation.
Policymakers settled on a centrist position on land policy in the third quarter that will allow some reform pilots to move forward in coming quarters. The Ministry of Agriculture (MOA) announced 100 new rural collective land reform pilots early in the quarter that enable farmers to better monetize the usage rights for their land. MOA expanded those pilots to 300 locales just two months later after strong uptake and top-level political support. The Ministry of Land Resources also responded to the overheated property market in August by launching a new program in China’s 13 biggest cities, allowing collectives to develop their land and offer rental units for urban residents.
Taken together, these programs remain piecemeal and insufficient – it is unclear why additional pilot projects are needed to further verify the need for reform, rather than moving to general implementation. In the view of many Chinese land economists, economic realities including rapid property price growth, fiscal constraints, regional inequalities, and looming social welfare obligations require more urgent and comprehensive action than a relatively small number of pilots.
This Quarter’s Numbers
Our primary indicator shows limited progress toward market-determined rural land pricing in 3Q2017. Out of all 33 counties where pilots for land reform are currently underway, the Ministry of Land and Resources (MOLR) announced in November that 37 rural construction land plots (919 mu or 153 acres) were sold at market prices. Since the pilots started in early 2015, in total 577 land plots covering 10,300 mu (1,716 acres) were sold for RMB 8.3 billion. This is a negligible amount of land when compared with the total 40 million mu (6.7 million acres) of rural construction land that is available for reform. On average, the price per square meter was RMB 1,208, which is slightly lower than the average price of RMB 1,477 per square meter for industrial land in first-tier cities sold since 2015, but significantly higher than RMB 717 for land in second-tier cities during the same period. Such high prices for rural construction land reflect a shortage of supply as a result of the slow pace of reform.
In addition to sales of rural construction land, in August MOLR updated its numbers for other land reform pilots underway, including a new rural property land reallocation system and new land requisition mechanisms. On the former, MOLR data showed that 59,000 mu (9,800 acres) of rural property land from 76,000 households were reallocated since the pilots started in 2015, up from 32,000 mu (5,333 acres) of land from 70,000 households announced in June. The goal is for collectives to buy abandoned rural property land from farmers and redevelop it for construction or agriculture. An improved land requisition mechanism attempts to limit forced requisitions by the government and improve compensation for farmers (e.g., by valuing land based on other property nearby rather than by agricultural output). Yet despite a promise to expand land requisition reform to all 33 pilot counties early in 2017, MOLR only reported 63 transactions for 39,000 mu (6,500 acres) from the original 3 pilot counties identified in 2015. This suggests strong resistance from local governments to improving land requisition practices, which is likely attributable to their heavy reliance on land sales revenue.
Land sales were strong, with local government land transfer revenue increasing 35% year-on-year (yoy) in the third quarter (see Land Requisition Financials). The types of land sold and cost breakdown are not available absent data from the land management fund maintained by the Ministry of Finance, or from the MOLR’s Land Statistical Yearbook. As noted, these data are only announced on an irregular basis, usually annually with a year lag. However, we expect that local governments likely made a bigger profit from these sales, instead of more equitably distributing gains to farmers. Compensation standards (what governments pay citizens for land) are adjusted by provincial governments only every two to three years (if not longer), so compensation does not keep pace with higher land prices. For example, the city of Shanghai increased its compensation rates by 40% from the 2013 level effective June 1, 2017, whereas land prices in Shanghai increased on average by 65% during the same period. Even after the adjustment, the highest price that farmers can receive in Shanghai is RMB 65,600 per mu (about RMB 98 per square meter), which is so low as to be incomparable with Urban Land Prices in any city we measure.
Finally, Rural Credit numbers raise concern about growing indebtedness on the part of China’s rural communities. In 3Q2017, rural disposable income grew by 9.1% yoy, but loans to rural households grew by 15.4% yoy. This credit was spent primarily on consumption rather than on upgrading agriculture as the government hoped – credit for agricultural upgrading grew by just 5.4% yoy in the third quarter.
Documenting land usage rights is a critical first step in land reform, which will serve as the basis for evaluating which individuals have rights to which plots of land as future reforms progress.
Policy Analysis: 3Q2017
On September 29, MOA officials held a press conference during which they trumpeted progress on rural reform and development work over the past five years (just ahead of the October 19th Party Congress). The MOA announced that it had successfully documented land usage rights for more than 1 billion mu (167 million acres) of agricultural land, an effort started in 2013 and due to be completed in 2018. At a completion rate of 78% today, it seems the government will be able to meet this goal. Documenting land usage rights is a critical first step in land reform, which will serve as the basis for evaluating which individuals have rights to which plots of land as future reforms progress. MOA officials also portrayed the land reform pilots underway in 33 counties as a major success. Our data suggest otherwise. It came as no surprise to us that in November (technically just beyond our review period), the National People’s Congress discussed extending these pilots, originally due to end in 2017, for another year before deciding whether to roll them out on a wider scale.
In September, MOA launched a new land reform trial in 100 pilot rural collectives across the country. The plan is to divide farmers’ “contractual usage rights” for land into “contractual rights” and “usage rights,” while maintaining the concept of collective ownership. Doing so should allow farmers to monetize their land with more flexibility, including by forming shareholding companies, taking out mortgages, and transferring usage rights. For example, a farmer would be allowed to transfer 10 mu (1.6 acres) of land to a company in return for 10% of that company’s shares, and then work for the company for salary income in addition to 10% profit out of its operations. This approach accommodates both conservative and reform camps in the land reform debate: it reinforces the collective ownership concept but improves transfer mechanisms within that framework. After President Xi emphasized rural revitalization and poverty alleviation as key priorities in his speech to the 19th Party Congress in October, just two months later on December 1, MOA announced that it would expand the pilots to 300 cities, possibly including several provinces.
On August 31, MOLR and the Ministry of Housing and Urban-Rural Development announced a pilot program for developing rental units on collective land in China’s 13 biggest cities, including Beijing. The plan is likely in response to rapid property price growth in recent years, which is accelerating demand for rental properties. The notice allows rural collectives to develop their land into housing units and rent those units out for profit. This pilot is now being rolled out in big cities. By October, it was reported that 5,600 households had already moved into units under the pilot – suggesting these units existed before the pilot was approved.
In short, land reform policy remains piecemeal and mired in institutional constraints. New reform pilots may improve the transferability of land usage rights and compensation for those rights in some locales. Yet, the land reform pilots underway touch only a small piece of the total amount of land available to be sold or transferred. President Xi made clear his determination to maintain a strong role for the state in land policy during his report to the 19th Party Congress, when he said that in order to revitalize rural areas, China would maintain collective ownership over rural land for another 30 years until 2057.