China: China: Integrated Land Policy Reform in a Integrated Land Policy Reform in a

Context of Rapid UrbanizationContext of Rapid Urbanization

Li Guo, Sr. Agricultural Economist Li Guo, Sr. Agricultural Economist and and

Jonathan Lindsay, Sr. Counsel Jonathan Lindsay, Sr. Counsel

The World Bank The World Bank

Prepared for SDN Week Land Conference Prepared for SDN Week Land Conference February 14-15, 2008February 14-15, 2008

Contents of the presentation…Contents of the presentation…

a) A brief introduction;a) A brief introduction;

b) A fundamental feature of existing land b) A fundamental feature of existing land policy;policy;

c) Consequences of the fundamental c) Consequences of the fundamental feature; andfeature; and

d) Options for moving forward; andd) Options for moving forward; and

IntroductionIntroduction

Over the past 30 years, China has undergone a Over the past 30 years, China has undergone a profound economic and social transformation…profound economic and social transformation…

IndicatorsIndicators 19781978 20052005 Growth Growth

Rate (%)Rate (%)

GDP (RMB, Billion)GDP (RMB, Billion) 365365 1830918309 9.79.7

of which: Agricultureof which: Agriculture 28%28% 13%13%

Urbanization Urbanization

Population (million)Population (million) 173173 562562 4.54.5

Percentage (%)Percentage (%) 2727 4343

Per Capita Income Per Capita Income (RMB)(RMB)

381381 1404014040 7.67.6

Introduction (continued)Introduction (continued)

Land is a key factor in China’s quest for Land is a key factor in China’s quest for economic growth, urbanization, national food economic growth, urbanization, national food security, social harmony, and even the security, social harmony, and even the stability of the banking system.stability of the banking system.

Chinese Government is actively reforming Chinese Government is actively reforming land policy in response to China’s economic land policy in response to China’s economic and social changes….and social changes….

Introduction (continued)Introduction (continued)

* China’s Constitution: urban land is owned by * China’s Constitution: urban land is owned by the State, while the principal holders of rural the State, while the principal holders of rural land rights are collectives.land rights are collectives. However, within this However, within this framework increasingly strong private rights framework increasingly strong private rights over land have begun to emerge.over land have begun to emerge.

* Land Administration Law: farmers have 30-* Land Administration Law: farmers have 30-year rights over land allocated to them by year rights over land allocated to them by collectives; in urban area, marketable use rights collectives; in urban area, marketable use rights up to 70 years;up to 70 years;

Introduction (continued)Introduction (continued)

* Law on Property (March 16, 2007): all types of * Law on Property (March 16, 2007): all types of property in China—state, collective, private—are property in China—state, collective, private—are entitled to the same level of legal protection. entitled to the same level of legal protection. LLand rights of individual farmers are and rights of individual farmers are in rem in rem propertyproperty rights, as opposed simply to rights, as opposed simply to contractual rights.contractual rights.

China, however, continues to face significant China, however, continues to face significant challenges in effectively managing the diverse challenges in effectively managing the diverse and competing roles of land in the economy. and competing roles of land in the economy.

A Fundamental Feature of A Fundamental Feature of Existing Land PolicyExisting Land Policy

The persisting and strict separation between The persisting and strict separation between the treatment of urban and rural land. the treatment of urban and rural land. Generally speaking, urban land enjoys a more Generally speaking, urban land enjoys a more complete set of rights than rural land does. complete set of rights than rural land does. Rural land and urban land are also Rural land and urban land are also administered by separate institutions. administered by separate institutions.

The Government basically enjoys unrestricted The Government basically enjoys unrestricted “eminent domain.” Rural land must be “eminent domain.” Rural land must be compulsorily acquired by the government compulsorily acquired by the government before it can be used for urban construction. before it can be used for urban construction. This is true whether the construction is for This is true whether the construction is for public, quasi-public, or even clearly private public, quasi-public, or even clearly private uses.uses.

A Fundamental Feature of A Fundamental Feature of Existing Land Policy (Continued)Existing Land Policy (Continued)

These features are unusual by international These features are unusual by international standards – no other major market economy in standards – no other major market economy in the world maintains as absolute a split the world maintains as absolute a split between urban and rural land rights, between urban and rural land rights, administration and markets as does China. administration and markets as does China.

In the case of China, given the increasing In the case of China, given the increasing integration of urban and rural economies, the integration of urban and rural economies, the speed of urban growth and the accelerating speed of urban growth and the accelerating mobility of people and capital markets, it is mobility of people and capital markets, it is increasingly clear that these features have increasingly clear that these features have had some undesirable ramifications.had some undesirable ramifications.

Consequences of the Consequences of the

Fundamental Feature Fundamental Feature

a) Weak land rights of farmers; a) Weak land rights of farmers;

b) Over-reliance of local governments on b) Over-reliance of local governments on revenue from land transfers and land-related revenue from land transfers and land-related financing; and financing; and

c) Inefficient forms of urban growth and c) Inefficient forms of urban growth and difficulties in reducing the rate of farmland difficulties in reducing the rate of farmland conversion.conversion.

First, Weak land rights of farmers:First, Weak land rights of farmers:

The extensive use of land requisition and the low The extensive use of land requisition and the low levels of compensation are perceived to be unfair levels of compensation are perceived to be unfair to farmers, and have often been a source of to farmers, and have often been a source of grievances. Over grievances. Over 65% of complaints received by of complaints received by the Ministry of Land and Resources in recent the Ministry of Land and Resources in recent years relate to disputes on land requisition and years relate to disputes on land requisition and on low compensation.on low compensation.

The distribution of the compensation between The distribution of the compensation between collectives and farmers is often non-transparent. collectives and farmers is often non-transparent.

DRC field survey confirmed that a prevailing DRC field survey confirmed that a prevailing feature of land acquisitions in practice has been feature of land acquisitions in practice has been that farmers are largely uninformed about the that farmers are largely uninformed about the process and their rights, and unaware of or process and their rights, and unaware of or unable to use mechanisms for seeking redress unable to use mechanisms for seeking redress when grievances arise.when grievances arise.

First, Weak land rights First, Weak land rights of farmers (Continued):of farmers (Continued):

There are also some issues related to the There are also some issues related to the implementation of Rural Land Contracting Law implementation of Rural Land Contracting Law ----

- Illegal land readjustments continue to - Illegal land readjustments continue to happen; happen;

- There are substantive limitations in - There are substantive limitations in farmers’ rights themselves (prohibition of farmers’ rights themselves (prohibition of using land as collateral, unclear and severely using land as collateral, unclear and severely constricted rights over residential plots);constricted rights over residential plots);

- Farmers have limited knowledge about their - Farmers have limited knowledge about their rights. rights.

Second, Over-reliance of local Second, Over-reliance of local governments on revenue from land governments on revenue from land transfers and land-related financing:transfers and land-related financing:

Studies show that land transfer fees account for Studies show that land transfer fees account for some some 30-50% of total sub-provincial government of total sub-provincial government revenues. In some regions, transfer fee revenues. In some regions, transfer fee revenues were even higher than the revenues were even higher than the government’s budget revenues. government’s budget revenues.

In many cities, it is very common that over In many cities, it is very common that over 90% of funds for financing urban expansion comes of funds for financing urban expansion comes from leasing of the state-owned land use rights from leasing of the state-owned land use rights or loans from the Bank by using land as or loans from the Bank by using land as collateral. Nationwide, the volume of lending collateral. Nationwide, the volume of lending backed by land is large and could create a backed by land is large and could create a serious exposure of the already fragile banking serious exposure of the already fragile banking system to variations in land prices.system to variations in land prices.

Issues of land-related revenues:Issues of land-related revenues:

Unsustainability: A one-time revenue item Unsustainability: A one-time revenue item (once for 40 to 70 years) and its source is not (once for 40 to 70 years) and its source is not sustainable in the long-run; sustainable in the long-run;

Corruption: Lack of transparency and Corruption: Lack of transparency and accountability because they are usually kept accountability because they are usually kept “off-budget;” “off-budget;”

Financial risks: Some worrisome phenomena Financial risks: Some worrisome phenomena associated with “land banks”, which pose associated with “land banks”, which pose certain risks to the financial sector certain risks to the financial sector

Third, inefficient forms of urban Third, inefficient forms of urban growth and difficulties in reducing growth and difficulties in reducing the rate of farmland conversion:the rate of farmland conversion:

The artificially low price of rural land The artificially low price of rural land encourages a land-intensive urban growth encourages a land-intensive urban growth that leads to a huge waste of land resources. that leads to a huge waste of land resources.

One survey conducted by the One survey conducted by the Government in Government in 2003/04 showed that about 2003/04 showed that about 43% of of requisitioned land is left idle.requisitioned land is left idle.

Third, inefficient forms of urban Third, inefficient forms of urban growth and difficulties in reducing growth and difficulties in reducing the rate of farmland conversion: the rate of farmland conversion:

The need to protect farmland from inefficient The need to protect farmland from inefficient urban growth is self-evident urban growth is self-evident

Only Only 14% of all land in China is arable, of all land in China is arable, whereas the government is strongly whereas the government is strongly committed to food self-sufficiency. committed to food self-sufficiency.

Government estimates that no more Government estimates that no more than 0.3% farmland should be converted than 0.3% farmland should be converted to urban land each year between now to urban land each year between now and 2030. The rate had already reached and 2030. The rate had already reached 1% by 2002.1% by 2002.

Options for Moving ForwardOptions for Moving Forward

1.1. Clarify, secure, and broaden the rights Clarify, secure, and broaden the rights of rural and urban land users.of rural and urban land users.

Making collective construction land marketable Making collective construction land marketable Developing an effective registration system for all Developing an effective registration system for all

land rights land rights Introducing the right to mortgage farmlandIntroducing the right to mortgage farmland Strengthen rights over rural residential land Strengthen rights over rural residential land Empowering farmers to better understand and Empowering farmers to better understand and

use their rights.use their rights.

Options for Moving ForwardOptions for Moving Forward

2. Ensure fair treatment and adequate 2. Ensure fair treatment and adequate compensation for those affected by compensation for those affected by compulsory acquisition.compulsory acquisition.

Improve methods for calculating compensation Improve methods for calculating compensation Take steps to ensure that compensation reaches Take steps to ensure that compensation reaches

the dispossessed farmers the dispossessed farmers Experiment with alternative forms of Experiment with alternative forms of

compensation; compensation; Developing limits on the purposes for which land Developing limits on the purposes for which land

can be compulsorily taken by government.can be compulsorily taken by government.

Options for Moving ForwardOptions for Moving Forward

3. Reduce the conversion of farm land 3. Reduce the conversion of farm land and improve the efficiency of urban land and improve the efficiency of urban land use.use.

Reduce current incentives for land use Reduce current incentives for land use conversion, for example, examining the impact of conversion, for example, examining the impact of subsidizing land for industrial use by setting subsidizing land for industrial use by setting artificially low prices; artificially low prices;

Promote coordination and integration of urban Promote coordination and integration of urban and rural planning functions and objectives for and rural planning functions and objectives for more efficient land use strategies. more efficient land use strategies.

Options for Moving ForwardOptions for Moving Forward

4. Enhance the role of land as a 4. Enhance the role of land as a sustainable foundation for local sustainable foundation for local government finances.government finances.

Explore market value-based property taxes as an Explore market value-based property taxes as an alternative and more sustainable source of local alternative and more sustainable source of local government finance. government finance.

Review and simplify the overly complex current Review and simplify the overly complex current system of property based fees and taxes; system of property based fees and taxes;

Re-assess the purpose and function of land Re-assess the purpose and function of land banking and better regulating its operations.banking and better regulating its operations.

Options for Moving ForwardOptions for Moving Forward

5. Strengthening overall legal framework 5. Strengthening overall legal framework and emphasizing rule of laws for land.and emphasizing rule of laws for land.

Explore market value-based property taxes as an Explore market value-based property taxes as an alternative and more sustainable source of local alternative and more sustainable source of local government finance. government finance.

Review and simplify the overly complex current Review and simplify the overly complex current system of property based fees and taxes; system of property based fees and taxes;

Re-assess the purpose and function of land Re-assess the purpose and function of land banking and better regulating its operations.banking and better regulating its operations.

Thanks! Thanks!

Li Guo and Jonathan Lindsay Li Guo and Jonathan Lindsay

The World BankThe World Bank

February 2008February 2008