Land policy reform in China: assessment and prospects

Land Use Policy 20 (2003) 109–120

Land policy reform in China: assessment and prospects Chengri Ding* Urban Studies and Planning Program, University of Maryland, College Park, Maryland, USA Received 18 April 2001; received in revised form 12 March 2002; accepted 3 April 2002

Abstract China has launched a series of land policy reforms to improve land-use efficiency, to rationalize land allocation, to enhance land management, and to coordinate urban and rural development. These land policy reforms have yielded positive impacts on urban land use as well as negative socioeconomic consequences. On the positive side, they have contributed to emerging land markets, increased government revenue for the financing of massive infrastructure projects and provision of public goods, and improved the rationalization of land use. On the negative side, problems such as loss of social equity, socioeconomic conflicts, and government corruption have emerged. This paper reviews China’s land policy reform in a historical context and then examines the impacts on urban development and land use. Policy implications are discussed at the end. r 2003 Elsevier Science Ltd. All rights reserved.

Introduction Land policy in the People’s Republic of China has changed dramatically in the past two decades. Not long ago, the constitution banned all land transactions and land was allocated free of charge. Land was neither considered as a commodity nor as an asset for producing economic wealth. The land allocation system produced enormous land-use deficiencies, which manifested in low and flat land density curves, the disconnection of land use and transportation, and the presence of warehouses in central locations (Dowall, 1993; Bertaud and Renaud, 1992; Li, 1999). For instance, in the City of Changchun with a population in excess of two million people, for instance, the average height of buildings was only 1.74 stories. Residential and commercial properties were only slightly higher, at 1.99 stories. The average floor–area ratios were 1.36 m for commercial properties, 0.33 m for industrial properties, and 0.69 m for residential land uses (Li, 1997). Low and flat land-use density curves and the presence of warehouses in Chinese cities suggested that economic efficiency was not a factor in site determination. There was no incentive for businesses to choose sites where their profits could be maximized. The acquisition of a

*Tel.: +1-301-405-6626; fax: +1-301-314-9897. E-mail address: [email protected] (C. Ding).

prime site was more or less reflected in the sequence of development, which was a random event that could not be explained by rational behavior models and which depended upon the political atmosphere prevailing at the time when the application for land was made. It, thus, was not surprising to find warehouses in the city center in many Chinese cities. Industrial use was one of the most dominant land-use categories in Chinese cities.1 Industrial land use, including storage facilities, accounted for 20–30 percent of the land (see Table 1). Residential land use accounted for less than 50 percent of all urbanized land.2 Table 1 reveals a land-use pattern unlikely to be observed in western countries where industrial use accounted for only 4–10 percent of built-up areas (Hong Kong 5.3 percent, Seoul 6 percent, and Paris 5 percent) (Bertaud, 1992). The share of industrial use in planned economy countries was more than twice as high as that in industrialized countries (Bertaud and Renaud, 1992). 1 Rapid urbanization and massive restructuring, particularly in cities like Beijing, have altered this pattern. The Beijing municipal government is launching a massive plan to relocate industrial establishments to the outskirts of the urbanized area in order to improve the environment for the 2008 Olympic games. Thus it is expected that the industrial share will decline dramatically. However, there are few cities in China that have the capacity to launch a massive industrial relocation. 2 According to Li (1999, p. 20), residential land accounted for about 23 percent in Shanghai.

0264-8377/03/$ - see front matter r 2003 Elsevier Science Ltd. All rights reserved. PII: S 0 2 6 4 - 8 3 7 7 ( 0 2 ) 0 0 0 7 3 - X

C. Ding / Land Use Policy 20 (2003) 109–120

110 Table 1 Land use in major Chinese cities in 1991 (%)

Residential Industrial Infrastructure Green Special Space uses Shanghaia Beijinga Tianjin Guangzhoua Shenzhen Shenyang Chongqing Wuhan Zhenzhou Nanjing Hangzhou Kunming Taiyuan Xi’an Harbin

49.63 39.09 26.07 35.94 59.86 29.56 34.04 26.84 25.51 36.79 36.17 28.69 20.96 44.51 38.01

30.54 20.11 35.04 37 22.12 27.95 33.41 30.38 28.26 23.08 29.89 23.06 26.73 29.31 26.34

7.28 5.54 29.56 17.12 14.09 23.8 26.99 24.96 37.76 9.55 15.78 38.47 32.83 25.91 26.61

0 0 4.27 0 3.02 6.89 3.12 7 7.89 1.85 14.94 3.08 19.47 0.08 6.64

12.55 35.3 4.27 9.94 0.42 11.79 5.44 8.75 0.57 28.73 3.21 6.7 0.16 1.84

Note: Infrastructure includes public services and transportation, etc. Source: Nanjing University of Geography and Lake Study, 1999. a Shanghai, Beijing, and Guangzhou did not survey public services and infrastructure.

These land-use patterns directly resulted from China’s longstanding national policy. In the early stages of the Chinese Community Party’s regime, industrialization was among the top priorities. In order to achieve this, the nation had taken several concrete measures. First of all, massive economic and human capital was channeled into industrial sectors. Second, the system of the ‘‘tong goutong xiao’’ (the state monopolized the purchase and sale of crops) was developed and prices of industrial goods were set much higher than that of crops. And finally the nation advocated the propaganda of ‘‘Sheng Chan Di Yi, Sheng Huo Di Er’’ (‘‘production first and living second’’). As a consequence, China was distinguished from other countries by: (1) rapid industrial growth at the expense of the agricultural sector, (2) a mismatch of industrialization and urbanization, and (3) an imbalance of industrial sectors. More specifically, the industrial sector grew faster than the agricultura sector; the economy grew more quickly than the expansion of urban areas; heavy industry grew faster than light industry sectors and the housing and real estate sectors. Urban and housing development lagged far behind economic development, compared to the trajectories of developed countries. Lack of investments in urban and housing sectors resulted in inadequate infrastructure, an over-crowded population, poor housing conditions, and a worsening urban environment. In terms of land allocation, industrial use was over-allocated whereas the housing sector was under-allocated compared to developed countries. Many land-use problems in Chinese cities were deeply rooted in the land tenure system that was adopted since 1949. In cities, the state confiscated land and proclaimed state ownership. The state allocated land-use rights free

of charge to socioeconomic units, called Dan Wei. Since these Dan Weis were also state owned, land-use rights and land ownership were institutionally inseparable and land transactions were considered unconstitutional. Land markets virtually vanished. The location and amount of land allocated to a Dan Wei depended on its political connections as well as the political environment in which socioeconomic functions and productions were planned and organized (Wong and Zhao, 1999). The lack of economic and administrative channels for the transfer of land-use rights and ill-defined property rights not only resulted in land-use deficiencies but also created social conflicts and land disputes. These problems can be better understood in a historical context. Hence, this paper provides a review of urban land policy in the People’s Republic of China over the last 50 years. Its purpose is to illustrate how far China’s land policy has come toward developing fully functional land markets, to examine the impacts of land policy reforms on urban development, and to highlight lessons that might be valuable for international communities and scholars. This paper is organized as follows. First, there is a discussion of land policy in China before 1978, after this introduction. A presentation of the land policy reforms in China and an initial assessment of these policy reforms follow. Finally, potential land policy reform is discussed and policy recommendations are made.

The land policy system before 1978 Before 1949, private land ownership existed and land transactions were quite frequent. A household’s wealth directly correlated with the amount of the land it possessed. After 1949, land reform (Tu Gai) was launched in a bid to reduce social inequality by confiscating land from the rich (landlords) and then redistributing it to the poor. By 1958, all land was either state- or collectively owned. Urban land was state-owned whereas farmland was collectively owned with a few exceptions (Yang and Wu, 1996; Zhang, 1997; Zhao et al., 1998). This type of land ownership structure remains to the present day and continues to play an important role in urban development of the pro-reform period. The state owned all urban land and allocated it to Dan Weis free of charge for an indefinite period and the constitution banned land transactions. Land was not considered a commodity and had no value. Under the planned economy, state-owned enterprises were established using state revenue, and they were required to return their economic profits to the state. The state and local governments decided what and how much these enterprises produced. The state-owned enterprises did not have their own identities as independent economic bodies. The interests of the state-owned enterprises and

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the state were inseparable, which was believed to be one of the main reasons for economic deficiency. Under the planned economy, land value and land income were hidden in the overall profits of the stateowned enterprises. When they were allowed to keep a percentage of their profits, enterprises virtually kept land rents. Because land rents varied across space due to locational and/or access advantages, this implied that some enterprises might have larger profits than others. Spatial disequilibrium prevailed across Chinese cities. Competitive advantages might have had nothing to do with technology innovation, management improvement, and economic scales. Instead, it might have been derived from the practice of the no-land rent system. This explained the presence of warehouses and low-value added sectors in central places. Collectively owned land in rural areas was converted to state-owned land through land acquisition. The state did not pay market prices to acquire land from peasants. Instead, it provided a compensation package that included job opportunities for farmers, housing compensation, compensation for the loss of crops, and the granting of urban residency licenses. Although peasants were not paid market prices, they were willing to give their land to the state. This was because, by doing so, they would be granted a city residency license (called Hukou), making them eligible for social welfare such as medical insurance, pension and retirement plans, access to high-quality schools and subsidized agricultural goods that were not previously available to peasants at all. A Hukou was a locality residence license that allowed the Hukou holder to access social welfare that was geographically confined and to access local public goods (including schools) and crops at subsidized prices. Denying access to public goods and subsidized goods made it very difficult, if not impossible, for people without a city’s Hukou to live in the city. Substantial differences in social benefits between cities and rural areas created the so-called dichotomous urban–rural structure in which there was no equilibrium of satisfaction between urban and rural residents. In this spatial disequilibrium, urban residents had a higher standard of living than rural residents and the residents of large cities had an even higher standard of living than small city residents. By tightly controlling rural–urban migration through the Hukou system, the Chinese government had avoided problems prevailing in prime cities in other developing countries. The Hukou system not only greatly limited labor mobility, but also helped to maintain a dichotomous urban–rural structure. Thus, when farmers were granted urban residency they were happy to give their land to the government and even considered themselves fortunate when they were chosen to do so. The state and municipal governments were responsible for the administration of land allocation. The state

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and provincial governments first worked out shortrange (1-year) and/or middle-range (5-years) socioeconomic development plans. These plans laid out specific goals for economic growth measured by industrial outputs. After examining existing capacities, the governments decided where capacity should expand and how much was needed to achieve economic development goals. Urban planning also focused on project planning (called Xiang Mu Gui Hua). Limited capital and lack of skilled labor were the two major bottlenecks in capacity expansion planning. Since land did not have value and did not affect the equation of total project costs, land input was the last factor to be considered. The fact that the state-owned land made it easy for the governments to acquire land in order to accommodate the land needed for economic development. The governments often substituted land for capital to overcome the poor cash flow. Consequently, many projects (particularly industrial establishments) occupied more land than they needed, fencing it off by building walls.3 Since danweis were either state or collectively owned, not only were the land-use rights granted to them not separable from land ownership but transactions between them were prohibited by the law. Although the law also required that Danweis should give unused lots back to the state, there were no economic incentives for them to do so, nor were they penalized for not returning land to the government. Land transactions and land markets had not existed in China for nearly a half-century.

Land policy reform after 1978 Land-use systems in China have gradually evolved over the last two decades. Changes included the adoption of the land leasehold system—land-use rights, land taxation and use fees, farmland protection, land administration, and regulations on land markets (Liu and Yang, 1990; Tang, 1989a, b; Zhang, 1997). These changes will be discussed in the following section. Land-use rights The land tenure system was first challenged when China adopted its famous ‘‘open door’’ policy in 1979. The policy not only ended China’s decades-long political 3 Unused land within fenced walls may enter land markets in the proreform period. Most of them entered land markets illegally or unlawfully, which created the so-called ‘‘hidden’’ land market. This ‘‘hidden’’ market not only distorted land prices but also contributed to billions in the loss of state assets. It was difficult to monitor land markets due to the lack of basic infrastructure such as a land registration system. This partly explained why the so-called ‘‘hidden’’ land market was so widespread despite the governments’ determination to put an end to it.

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isolation from the West, but also improved the political and economic environments. Since then, direct foreign investment and the number of joint ventures has increased exponentially (Jiang et al., 1998). The surge in foreign business challenged the land-use tenure system as the demand for access to land increased. The old land allocation system also conflicted with the ultimate goal of economic reform whose purpose was to introduce market mechanisms in resource allocations in order to improve economic efficiency, to correct government failures in land allocation, and to minimize negative consequences of the land tenure system. In the early 1980s, China established special economic development zones (SEDZs) along its east-coast areas to attract foreign investment.4 In these SEDZs, businesses and enterprises enjoy special privileges not available in other geographical areas. These privileges included tax exemption and the ‘‘land-use rights system’’. The landuse rights system, similar to the land leasehold system in Hong Kong, was first developed to accommodate the needs of foreign direct investments. It allowed foreign investors to access land by leasing them land for a certain period of time. Investors paid up-front land-use rights fees and rents. This early reform in the land tenure system marked a new era of land policy in modern Chinese history. For the first time land-use rights and land ownership were separable. Although this practice was limited only to the SEDZs, its impact on land policy reform was profound. The most significant changes to land policy, however, occurred in the late 1980s. The bureau of land administration was established in 1986. The bureau was responsible for, and in charge of land policy reform, land allocation and acquisition, monitoring of land development, comprehensive land-use plans, and implementation of land laws. Land Administration Law passed in 1986 had legalized private organizations and individuals to access the state-owned land in an attempt to develop the land market in China. The Law had been criticized as unconstitutional because the 1982 constitution had banned any transferring of land-use rights. Thus the Constitution was amended in 1988 to resolve the constitutional challenges and paved the way to promote land markets. A separation of land-use rights and land ownership and the state’s remaining ownership of land not only avoided political turmoil but also helped to promote land market development. In order to provide concrete legal guidance, the State Council announced ‘‘The Provisional Regulation on the Granting and Transferring of the Land Rights over State-Owned Land in Cities and Towns’’ in 1991. Now, land users were allowed to let, transfer, rent, and 4

Initially, there were only four special economic zones: Shenzhen, Shantou, Xiamen, and Tianjin. Many policy experiments started in these SEDZs.

mortgage land-use rights (Valletta, 2001). Since then, land-use rights have spread throughout the country. The objectives of the provisional regulations were to reform the land-use system for state-owned land in cities, to rationalize land development and land use, to enhance land management, and to promote urban construction and economic development. According to the 1991 regulations, there are two kinds of land transaction. One is the sale of land-use rights and the other is the transfer of land-use rights (Hu, 1990). The former defines the ‘‘first’’ level land market, where a municipal government, as a representative of the state, sells land-use rights to buyers for a fixed period through auction, tender, or negotiation. The transfer of land-use rights defines the ‘‘second’’ level of land market. In both ‘‘first’’ and ‘‘second’’ levels of land markets, the price of land-use rights depends on landuse type, location, land-use density, and neighborhood externalities. That is similar to the way in which land prices are determined in western countries, although in China land markets are far from mature (Ding et al., 2000). The state intends to control land markets through its monopolization of the first level of land markets (or its monopolization of land supply). The government is not involved in the transfer of land-use rights except for land registration, legal protection, and taxation (Liu and Xie, 1994; Walker and Li, 1994). The objectives and goals of land-use rights reforms, articulated by Vice Premier Zou Jia Hua in 1994, are to:5 Improve land management through land markets instead of administrative channels. Improve land-use efficiency. The intention is to make land an important and valued asset. Increase government revenues. Land-related revenues include land-use fees, land development fees, and taxes. Manage the supply of land and coordinate land development throughout the country. Preserve farmland and control the illegal land conversion of farmland to urban land.

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Farmland protection Rapid urban expansion caused the depletion of farmland at an unprecedented rate, particularly on the urban fringes where the most productive land was located. Between 1986 and 1995, farmland lost more than 1973,000 ha to non-agricultural construction (China Statistic Bureau, 1990–1996). It was estimated, however, that the actual number could be 2.5 times

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Zou Jia Hua: ‘‘Intensify reform, strengthen management, and establish a healthy and speedy economic growth’’ (In his speech at the 1994 National Meeting on Land Use Rights Reform).

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higher (Li, 1997, p. 3). A survey between 1986 and 1995, using the remote sensing technique, found that 31 big cities had expanded their urbanized areas by more than 50 percent (Li, 1997). Urbanized areas increased from 9386 km2 in 1985 to 17,940 km2 in 1994, a 7.5 percent rate of annual growth.6 In 1995, the world average per capita farmland was 2333 m2 whereas it was only 1167 m2 in China. The rapid reduction of farmland had alarmed top officials who believed that ‘‘selfreliance’’ in agricultural crops was very important to maintain not only sovereignty but also social stability. The state council responded to the fast depletion of farmland by passing the ‘‘Basic Farmland Protection Regulations’’ in 1994.7 These regulations prohibited basic farmland conversion to non-agricultural activities and mandated counties and townships to designate the basic farmland protection districts in accordance with provincial farmland preservation plans. The basic farmland protection districts are divided into two levels. The first level consists of high-quality farmland with high productivity and cannot be converted to nonagricultural uses in the long term. The second level consists of good-quality farmland with moderate productivity and cannot be converted to non-agricultural uses in the planned periods (usually 5–10 years). Designate basic farmland protection has to be approved by higher levels of authority and is protected by law.

Land management law The real legal framework shaping the urban land-use rights reform was the 1988 Land Management Law (first drafted in 1986 and then revised in 1998). The purpose of this law is to protect environmental and agricultural lands, to promote market development, to encourage citizen involvement in the legislative process, and to coordinate the planning and development of urban land. The law requires that annual land quotas be set for land conversion from agricultural and unused categories into construction land (to accommodate the industrial, energy, transport and social projects set forth in the Five Year, sectoral and city development plans). Based on the annual quotas and the city development plans, 6 An investigation into 24 large cities indicated that urbanized areas grew at an annual rate of 3.4 percent, whereas the urban population grew at a rate of 2.6 percent between 1950 and 1980. This is compared to annual growth rates of 4.5 percent and 2.3 percent for urbanized areas and population respectively, from 1980 to 1995. 7 Basic farmland consists of: *

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agricultural production bases (such as crops, cotton, edible oils, and other high quality agricultural products) approved by government, farmland with high productivity and a good irrigation system and that has been exploited, vegetation production bases for large and middle cities, and experimental fields for science and educational purposes.

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the number, location and character of grants and allocations of construction lands are fixed. The law clearly defines the rights and responsibilities of citizens, enterprises and governmental agencies, in order to achieve the following goals: * full preservation of cultivated land (no net loss), * preservation and improvement of other agricultural land, * incorporation of market mechanisms in the use of urban land (valuation and payment for land, secondary transactions in use rights by citizens and enterprises), * enhancement of environmental protection and a balance in the use, development and preservation of land resources (sustainable development), and * advancement of the rule of law by clarifying citizen and enterprise rights and the responsibilities and jurisdictions of government agencies, authorizing access to courts and mediating bodies, and strengthening criminal and civil sanctions. The profound impacts of the land administration law are associated with two major articles that are related. One is the mandated no net loss of cultivated land and the other requires that developers must either exploit or reclaim an amount of farmland that is equivalent to farmland lost due to development, or pay the full development of farmland exploitation. Thus the total volume of farmland for each municipal government will not decline as a result of urban development. Land development costs, however, will inevitably increase and urban economies will suffer. Land-use taxation Land-use fees were first introduced in 1979. China started to impose land-use fees on foreign enterprises and joint ventures. The annual rates of land-use fees were 1–20 RMB/m2. The fees were incredibly low, merely reflecting land ownership rather than functioning as economic leverage to guide resource allocation. The state passed the ‘‘Provisional Act of Land-Use Taxation on State Owned Urban Land’’ in 1989.8 The Act was drafted to improve and rationalize urban land use, to adjust land rent differentials, to improve land-use efficiency, and to enhance land management. According to the law, all work units (Dan Wei) and individuals were obliged to pay land-use taxes if they used land in cities, towns, and industrial and mining districts. The rate of land-use taxes depended on city size.9 8 9

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Land-use tax is also known as land-use rights assignment tax. The general ranges of land-use taxes per square meter are: large cities (with a population of over one million people) charge 0.50–10.00 RMB, medium cities (with a population of between one and half a million) charge 0.40–8.00 RMB,

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114 Table 2 Land transactions in China 1987–1996 Year

Lot

Area (ha)

RMB (million)

Price/area (RMB/m2)

Average size (m2)

Price/lot (million)

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

5 118 127 482 545 2800 42,076 97,405 105,473 103,921

15.7 389.1 625.2 948.2 1036.1 2189.0 3822.5 3295.5 2872.8 2269.9

35.2 416.2 447.2 1052.0 1136.9 52500.0 40529.3 35928.5 33285.7 29048.4

223.5 107.0 71.5 110.9 109.7 2390.8 1060.3 1090.2 1158.6 1279.7

31460.0 32972.9 49229.9 19672.2 19011.6 7817.9 908.5 338.3 272.4 218.4

7.0 3.5 3.5 2.2 2.1 18.8 1.0 0.4 0.3 0.3

Note: current prices are used. Sources: Yang and Wu (1996); China Statistic Bureau (1990–1996).

In 1993, the state passed the ‘‘Provisional Act of Land Value Increment Tax on State-Owned Land’’. It specified that parties or individuals that transfer landuse rights be taxpayers. The Act required that taxpayers should pay a land value increment tax if they gained a net profit through land-use rights transfer and the net profits exceeded more than 20 percent of total costs (including land improvement costs, construction costs, management fees, transaction fees and taxes). The state set progressive flat tax rates.10

Primary assessment of land policy reform In general, the goals and objectives of these land policy reforms are to improve land-use efficiency, to enhance land management, to increase government revenues, to finance urban infrastructure, and to protect farmland. These land policy reforms have produced both wanted consequences and unwanted effects. Unwanted effects include the loss of social equity resulting from income redistribution effects of land policy reforms, negative impacts on economic growth associated with the increasing costs of land input, and rising social costs (transportation and externalities). An evaluation of land policy reforms should cover both the wanted and the unwanted consequences. This paper (footnote continued) *

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small cities (population of between 200,000 and half a million) charge 0.30–6.00 RMB, and towns and industrial and mining districts (population of less than 200,000) charge 0.20–4.00 RMB. 10 They are: if the net profits are less than 50 percent of total costs, 30 percent of the net profits will be taxed; if the net profits are between 50–100 percent, the tax rate is 40 percent; if the net profits fall in the range of 100–200 percent of total costs, the state charges 50 percent; and if the net profits exceed 200 percent, the tax rate is 60 percent.

assesses land policy reforms in China from the following aspects: land market development, land use, revenue generation, urban growth, and social equity. These aspects should also be considered as evaluation criteria.

Land-use rights The adoption of the land-use rights system in China has had a remarkably positive impact on land development, government finance, real estate and housing development, infrastructure provision, and urban growth. Land markets began to emerge and land prices started to rationalize land-use allocation and land use (Ding et al., 2000; Xue, 1994). For the first time in modern Chinese history, land now has value and can produce economic wealth. Land sales slowly increased from 5 lots in 1987 to 545 in 1991. Land markets too received a boost from 1992 to 1994. The total number of land transactions jumped to 2800 in 1992, 42,076 in 1993, and 97,405 in 1994, respectively. Since 1994, the number of land transactions has fluctuated at around 100,000 a year (see Table 2). As expected, the land-use rights system helps to improve land-use efficiency. Before the land-use system reforms, 3–5 percent of industrial land in cities was unused and 40 percent was used inefficiently (Yang and Wu, 1996). Since the adoption of a series of land policy reforms, Dan Weis have returned unused land to the governments and there has been a decline in the amount of vacant urban land. There have also been some changes in urban land-use patterns: commercial and residential developments outgrew industrial use and low-value added activities moved out of central locations, and were replaced by high value-added activities such as retail and commercial businesses. In Shanghai, for instance, land rents began to influence the land-use pattern. Office space, commercial and public uses dominated the central location, whereas industrial use was kept far away from the CBD. Clearly, land policy

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reform led to the restructuring and reshaping of the urban landscape (Wu, 1997). The Government has benefited substantially from these land policy reforms. Sales of land-use rights generated only 35 million RMB in 1987. Land revenues, however, increased to 29,048 million RMB in 1996 (see Table 2). Sales of land-use rights now account for 25–50 percent of a city’s revenue. Guanghai City in Sichuan province, for instance, collects 10 million RMB annually; 25 percent of its total city revenue. Dunhuang City, Gansu province receives more than 40 percent of its revenue from the sale of land-use rights. Shanghai City has been collecting more than 10 billion RMB annually since 1992, and Guangzhou province has more than 20.5 billion RMB from the sale of land-use rights (Yang and Wu, 1996). Local governments’ revenues, which are directly linked to land policy reforms, can be multiplied if indirect impacts (such as employment and backward and forward linkages) of land development are taken into account. In regions without strong industrial bases, revenue from the sale of land-use rights has become an important source of revenue for municipal governments allowing them to fund infrastructure and provide public services (Zhu, 1999; Yeh and Wu, 1996). The price of land per square meter and the total revenue from the sale of land-use rights peaked in 1992. In this year in particular, the aggregate land prices rose and fell remarkably, compared to previous and subsequent years (see Table 2). This pattern can be explained. After the Tiananmen square crackdown in 1989, economic reform was slowed down significantly. In response, Deng Xiao Ping visited the South in 1991 to promote his policy of economic reform. The trip had an enormous political and economic impact. Land speculation peaked in 1992 and 1993 in many coastal cities in China when investors and developers speculated that policy changes would result in huge economic opportunities in real estate development and housing construction. Land-use rights were usually transferred several times before finally reaching the developers’ hands. This over-supply of land, loss of control of the first land markets, and the absence of sufficient capital all contributed to an immediate recession in the real estate and land markets in 1993. In 1991, the central government had extended the land-use rights system, which had previously been granted only to SEDZs, to virtually the entire country. This resulted in a diversification of investments geographically and partly explained the drop in land prices in 1993. The adoption of the land-use rights system has enabled municipal governments to launch large-scale infrastructure provisions, particularly in cities along coastal areas (Li, 1992). Fuzhou City, for instance, collected 2 billion RMB from the sale of land-use rights between 1987 and 1993 and used them to construct urban infrastructure and housing. It raised per capita

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housing consumption from 3.98 m2 in 1980 to 8.2 m2 in 1993. Houses with utilities (gas, electricity, sewerage, water, telephone) increased from 24.43 percent in 1985 to 53.85 percent in 1993 (Yang and Wu, 1996). Finally, land reform had promoted real estate development and housing construction. The total for investment in real estate and housing construction in 1994 was 188.13 billion RMB, a 43 percent increase compared to the previous year. There are, unfortunately, numerous problems arising from the land reforms. These include over-supply of land and loss of control of land markets, widespread hidden or invisible land markets, over-designated special land development districts that have caused repeated construction, bribery and corruption, increasing social conflicts, and the violation of land laws and land-use plans. According to the department of construction, the state planned to sell 133,000 ha of land but actually sold more than 240,000 ha in 1992 alone. The municipal governments have established special economic development districts of 15,000 km2, which equal the total size of urbanized areas in 1992. Total land development costs will be 3000 billion RMB, if 0.2 billion RMB per km2 is needed to provide basic urban infrastructure. Due to the lack of capital, only 2 percent of land in development districts is fully developed. This leaves many lots undeveloped. In addition, these lots are not used for agricultural purposes. The over-supply of land by local governments is motivated by ‘‘extra’’ or ‘‘off’’ budgets generated by selling land-use rights (the state allows local governments to keep up to 60 percent of land revenues to encourage land-use rights sales). The strong economic incentives make it difficult for the state to control and monitor the sales of land-use rights. ‘‘Hidden’’ or ‘‘invisible’’ land markets were very active, particularly in cities with rapid economic development areas.11 Huge profits provided economic incentives for illegal land transactions while loopholes in land regulations and laws tempt people to take risks with little fear of the consequences. These hidden markets had caused substantial revenue losses to the state and local governments, adversely affecting urban development under the guidelines of urban comprehensive plans, increased social inequality and corruption. They had also triggered land opportunism and distorted land markets. Both Fushun City and Chongqi City was reported to have lost 13 million RMB of land revenue 11 These hidden land markets include: 1. transfer land-use rights through housing sales and rents, 2. rent or sell unused land, which was obtained free of charge, 3. transfer land-use rights in exchange for housing and other commodities, 4. obtain stock shares by granting land-use rights, and 5. transfer land-use rights through mortgage, merging, and restructuring of state-owned enterprises. (Yang and Wu, 1996).

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annually (Yang and Wu, 1996). ‘‘Invisible’’ land markets distort land markets, so land prices might not fully reflect the market conditions (Ding et al., 2000; Li and Walker, 1996). The inability to implement land regulations and control land markets and the absence of a land registration system made it hard to accurately estimate the impacts of ‘‘hidden’’ land markets on urban land development. The coexistence of land allocation systems creates the so-called double-track system, where land-use rights are adopted and at the same time the old land tenure system is still functioning. That is to say that there are two channels through which land-use rights can be obtained (Fig. 1). One channel is to obtain land-use rights without payment, and the other is to buy land-use rights from the state or other parties. The double-track system mirrors China’s gradual approach in transforming its planned economy system into a socialist market economic system. This gradual approach has proved to be quite successful and less problematic than, for example, the system in the former Soviet Union.12 Although the state prohibits the entry of land allocated free of charge into land markets pending payment of full market prices, many units illegally participate in land markets by renting and transferring land-use rights. It is very profitable for people to bribe government officials to obtain land-use rights at low prices and then to resell these rights to developers at high prices. Corruption is a serious issue and the double track system has been blamed for it (Zhu, 1994; Chan, 1999). Social conflicts emerge with the land reforms. Two major types of social conflict emerge with the land reforms. One is a conflict between urban governments and peasants and the other is a conflict among peasants. The former conflict happens mainly in two cases. In the first case, it is related to the fact that granting of an urban residency is no longer appealing to peasants. With the deepening of socioeconomic reforms, social welfare programs such as medical insurance, pension, and retirement homes in cities that used to be accessible primarily to urban residents have now been restructured to reach out to all people, regardless of where they live. Unlike before, living in a city does not necessarily mean a better life. Labor mobility has been continuously improving and Chinese governments keep releasing their control on migration (including migration from rural to urban areas). Moving and living in a city is less difficult now than before. But finding a decent job has become increasingly difficult, partly due to the rapid expansion of the urban population and partly because of the poor 12

The old land tenure system still applies to public organizations/ institutions, state, or military agencies; urban infrastructure and public projects; key industrial sectors (energy, transportation, and water conservancy facilities/irrigation works); and others stipulated by law or administration.

performance of state-owned enterprises and the largescale bankruptcy, resulting in massive layoffs of stateowned enterprises. In the second case, conflict is associated with compensation packages farmers receive for their land-use rights. These compensation packages do not match the kind of profits that farmers can make if they develop the land themselves. Farmers thus reluctantly sell their land-use rights to the governments and social conflict arises when the governments exercise the power of eminent domain to acquire land. The latter type of social injustice arises when the law prohibits land development on quality farmland. Farmers would quickly realize that if they were to develop the land themselves they might generate profits 200–300 times higher than the net profits they receive from farming. Without income transfers and/or a spatially differentiated tax rate system, farmers in quality farmlands will be economically disadvantaged, compared to farmers whose land is not restricted for land development. Farmland protection and land administration laws These regulations protect farmlands in order to maintain China’s self-reliance in food terms of crop production. In this regard, the laws have been successful. These regulations, however, have also had a negative impact on urban land use and urban development. Sites allowed for development may have locational disadvantages and are not economically profitable compared to prohibited land. The farmland protection law not only creates urban villages surrounded by urbanized areas but also promotes urban sprawl. This occurs when quality farmland is located on fast-growing urban fringes and the farmland protection law forces economic activities further into the periphery, leaving farmland in between. This in turn increases transportation costs as well as generating negative externalities. Negative externalities occur when incompatible land uses are spatially clustered. Theoretically, separating incompatible land uses improves social welfare and also minimizes the negative externalities that they impose on each other. The separation is usually achieved through zoning regulations in countries such as the United States. Externalities, unfortunately, are not well understood by Chinese scholars and officials. Land policy reforms have made land an expensive input for developers. In Beijing, for instance, land costs account for 30–40 percent of total land development costs if it is developed on farmland. Land costs consist of the price of land-use rights, resettlement of farmers, and compensation for agricultural losses. These land costs can rise to 60 percent of the total land development costs if development is located in existing urban areas. This high price tag has often been associated with tenant resettlement and destruction. Tenants can be very

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Land-Use System: State-Owned Land in Cities and Towns

Land without payment

Land with payment

2

1

3

4

5

Block 1 = land-use rights granting through administration (free of charge); Block 2 = land-use rights granting through administration but land-use fees are required; Block 3 = land-use rights granting through administration but land users are required to pay for land-use rights Block 4 = land-use rights selling (tender, negotiation, and auction) Block 5 = land-use rights transfers Fig. 1. Land allocation system.

demanding and will be reluctant to move out unless they are satisfied with their financial compensation. Resettlement is probably one of the biggest problems that developers have to deal with. This makes urban fringes the primary areas for land development, which in turn results in rapid encroachment into farmland. The New Land Administration Law mandates that developers are responsible for the depletion of farmlands resulting from development and that developers should make up for the loss of farmland. It, hence, adds a new cost item to the land development equation if a land project is taken place on farmland. The item will exponentially increase over time because of the fixed political territory in which exploitable land will be quickly depleted due to rapid urbanization. This inevitably makes horizontal land development (urban spatial expansion) increasingly difficult over time and will slow down urban development. The law also presents an opportunity for urban renewal. As exploitable land becomes depleted and land conversion costs increase, existing urban land becomes more attractive for developers and redevelopment may be able to provide needed space at least to a certain degree. Urban policy can facilitate urban renewals through subsidies for resettlement, infrastructure provision, and cleaning of sites. Land-use taxation The initial assessment of land taxes in China yielded a mixed result. The ‘‘Provisional Act of Land Use Taxation on State-Owned Urban Land’’ ended the long-time land tenure system that favored free land use. It marks the beginning of the determination of land use

through price mechanisms and tax policy. Land-use efficiency is improving and there is now an economic incentive for Danweis to return unused land that has been allocated free of charge. In Fushun City, for instance, unused land of 250,000 m2 was returned to the government in 1985.13 Land taxes provide a new revenue source for local governments to finance urban infrastructure that has been long overdue. Fushun City collected 28,470,000 RMB from land-use fees from 1984–1986 and financed the development of urban infrastructure such as streets, water, gas and heating provision, and green space development. Land taxation has become a popular public policy instrument in developing countries. It is widely believed that government intervention in the land market is essential for achieving an efficient allocation of resources and balancing private rights and public interests. Revenues generated from land taxation can be used to finance public services such as schools and transportation networks, to reduce other taxes, and to stimulate economic growth. The importance of land taxation is also reflected in its ability to reallocate social welfare through income redistribution and reduction in poverty, as argued by Henry George. More important, land tax is a pure tax that does not distort resource allocation in markets (Brueckner, 1986; Nicholson, 1998; Nechyba, 1998; Mills, 1998). This is because land supply curves are price inelastic. The moral base for land value tax is to reduce unearned income for landowners due to population growth and improvements in infrastructure made by the community.

13

There is no recent data available.

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The land tax system in China, however, cannot perform these functions except for partially financing local governments. In China, private land ownership does not exist and land taxes are not based on value. Land taxes merely reflect land ownership. According to the way land tax rates are set up, total land taxes and land-use fees depend on the size of the land used. This uniform land tax may produce injustices, particularly when some users pay high land taxes and enjoy a lower level of public service, whereas others enjoy a high level of public service even though they pay lower land taxes. The land tax system in China has several drawbacks. First of all, many land uses are entitled to tax exemption, which undermines the role of land taxation in managing and rationalizing land use.14 Second, there is confusion among officials and scholars since foreign investors are charged land-use fees whereas domestic land users are charged land-use taxes. Third, even though tax rates are moderate or low, land-use taxes increase the costs for large and medium sized stateowned enterprises significantly. Many large and medium sized state-owned enterprises are established on large lots of land. Many of them have been having a hard time balancing their budgets since the 1980s (it is estimated that about 30–40 percent of state-owned enterprises have been in deficit over the last decade). Land taxes based on size might be significantly higher than those based on value or rent because land taxes are neither taxes on capital value, nor taxes on site or rental values. Finally, municipal governments may not be interested in tax collection, especially when there are many stateowned enterprises within their administrative boundaries. This is because most land taxes go to the state rather than municipal governments. It is challenging for the state to stimulate local governments to actively collect land taxes on the one hand and to avoid the state tax revenue losses on the other hand. This explains why the revenue sharing agreement from land-use rights sales between local and central government has been modified several times in the last ten years. It is difficult and expensive to collect land-use taxes because of the lack of land registration and trained staff. Revenue generated from land-use taxes has not met 14

(a) (b) (c) (d)

The following land uses in urban metropolitan areas are exempt:

government branches, people’s organizations, and military units; non-profit enterprises whose budgets come from governments; churches, parks, districts where there is historic preservation; transportation networks, public squares, green space, etc., as well as public land-use areas; (e) agricultural, forestry, pasture, fishing; (f) land exploited from mountains and hills and water and redeveloped land from brownfields; (g) other land used for energy, transportation, and irrigation, etc. that have been specifically exempted by the Department of Finance.

expectations. The state expected land-use taxes to generate 10 billion RMB of revenue annually, but instead it collected only 2.5 billion RMB from 1988 to 1990 (Yang and Wu, 1996). Given the current land tax system, it is hard to foresee that it may be able to achieve the predetermined goals: to rationalize land-use allocation, improve land-use efficiency, and adjust land-use structure. Beside a limited contribution to municipal governments’ finance situation, land taxes may not affect urban land-use efficiency as theory has suggested otherwise.

Prospects and challenges of land policy reform Land policy reform in China has brought initial success in improving land-use efficiency, rationalizing land allocation, increasing financial support for the provision of urban infrastructure, and establishing land markets. It has also boosted real estate development and created job opportunities. There are, however, a number of important issues and challenges that policy makers have to deal with. The first challenge is how to balance the demand for land due to rapid urban growth and increasing pressure for farmland preservation. Low costs and the presence of a high demand for land are two major reasons for rapid development in the urban fringes. Since land ownership and administrations are fragmented, it is difficult to contain and control urban growth there. It is estimated that the cost of land accounts for 30–40 percent of the total costs in urban fringes, significantly lower than 60–70 percent if land is developed in urbanized areas. The second issue is related to inconsistency and/or conflicts between land regulations and/or policies. There are, for instance, conflicts between the land-use rights and farmland protection. The adoption of land-use rights aims to rationalize land use and land allocation through market principles and price mechanisms. By contrast, the implementation of farmland protection regulations aims to restrict land development sites through the designation of farmland protection districts so that development cannot access locations even though these locations might yield high economic returns. Society as a whole may be better off if developers were allowed to develop quality farmland at favorable locations, instead of being forced to develop low-quality land in remote locations. The occurrence of conflict in laws and regulations is deeply rooted in the Chinese political and administrative systems. Ministries are the government units responsible for carrying out and implementing laws and regulations. At the same time, they are also units responsible for drafting laws and regulations. In other words, a government body is both the law carrier and law drafter. This conflict of interests between government

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authorities is reflected in the conflicts and contradictions in the regulations and laws. It is unlikely that these kinds of problems will be easily solved and it is unlikely that these will be resolved in the future without major political reforms. The third challenge is how to deal with increasing social injustice arising from land policy reform. Profit differentials between agricultural and non-agricultural activities make it tough for the officials to convince farmers not to develop their agricultural land themselves. The basic farmland protection regulations penalize law-abiding farmers by stripping their land development opportunities and indirectly reward farmers who are able to gain windfall wealth from land development in sites that are unrestricted. Spatially differential tax rates may help to address the issue. The fourth challenge is how to improve land-use efficiency. Beijing and Tokyo are similar in terms of geographical size. Tokyo, however, houses more than 26 million people, whereas Beijing has only 9 million. Highdensity development seems to be a good solution, if we address the increasing demand for land due to rapid urbanization and high pressure for farmland protection for self-reliance in crops at the same time. This urban development strategy requires changes in land-use regulations and city policies to promote high-density development as well as to make urban redevelopment economically profitable. Furthermore, the high pressure for farmland protection will inevitably increase land prices. Urban theory suggests that one of the factors used to measure land-use efficiency is the degree of freedom to which land and capital can be substituted (Brueckner, 1986). An increase of land prices will encourage developers to use more capital so as to maximize profits. The process by which land-use rights prices are determined and the rigidity of urban planning’s control on floor–area ratio, however, limits the role of price mechanisms in land development (Ding, 2001). The substitution between land and capital inputs is restricted by the predetermined and inflexible floor– area ratios as well as by the fact that land prices are linearly correlated with the floor–area ratio. Finally, land value increments can be attributed to two major components: private investment and public effort (including public investments such as highways). High land value increment tax rates (30–60 percent) were designed to protect losses of national properties (including land). But they also discourage private investment in land improvement, since municipal governments do not distinguish these components and impose uniform land tax rates. The absence of policy instruments to capture land value increases resulting from public investments also creates social injustice. Urban residents who benefit more from public investments may pay less than residents who might not benefit from public efforts. In addition, the lack of value-

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capturing instruments hurts the local government’s ability to finance public services.

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