China Muddles Through Land Reform                

China Muddles Through Land Reform              

(Image Credit: Flickr – faungg )

— China’s new pilot land reform may hold the key of breaking the unsustainable socioeconomic model.

On September 29th the Chinese Communist Party’s reform leading group held its fifth meeting to discuss the long overdue topic of rural land reform. Chaired by President and General Secretary Xi Jinping, the leading group announced a pilot project in rural asset reform. Chen Xiaohua, the vice minister of agriculture told China’s state-run Xinhua news agency that it would speed up the registration and confirmation of land plots and launch a pilot project that would enable farmers to become “shareholders” of their newly-registered collectively-owned land. The reform hopes to unlock the wealth of China’s farmers and promote consolidation of China’s fragmented agricultural industry, while sidestepping any hint of privatization of collectively owned land. The reform, along with China’s recently passed budget amendment, could be the missing pieces to Li Keqiang’s urbanization plan released in March.

Rural Land Usage Rights History

In China, land is divided into two broad categories: “urban land” and “rural land.” Urban land is owned by the state while rural land is owned “collectively.” Neither urban nor rural land can be “owned” by individuals or business as this runs directly counter to one of the cornerstones of Communist ideology. Nonetheless, as China has opened up and reformed its economy after 1979, the need to establish clear and consistent property usage rights emerged. Rights to urban land usage was largely clarified in 1998 when the government established the right to “rent” land from the state for a period of up to 70 years. Rural land rights, on the contrary, have proved to be more troublesome as it is difficult to delineate land rights for land that is “collectively” owned. Despite obvious difficulties, rural land rights have steadily improved in the past three decades.

In 1979 China began rolling out the Household Responsibility System by breaking up the communes into roughly equal-sized family plots. Households obtained a lease of up to five years for personal use, though the leases were extended to 15 years (1984) and 30 years (1993). The Household Responsibility System was the single most important force driving poverty reduction during the 1980s. Central Document No. 1 of 1984 (Notice on Rural Work for the Year 1984) clarified the separation of individual land-use rights from collective ownership and allowed for voluntary intra-village transfer of land rights. Central Document No. 16 of 1996 (Notice on Further Stabilizing and Improving the Rural Land Contracting Relationship) further strengthened land rights by explicitly forbidding large land “readjustments” and required a two-thirds majority vote of the village assembly for small adjustments. The Rural Land Contracting Law of 2002 allowed households to lease their land to non-village households while the Property Law of 2007 clarified that rural land is owned by all members of the collective and not by the collective entity and, in a first, regarded the issue of rural land rights to be a “property right” as opposed to a “contractual right” as previous laws had defined it. The 30 year limit on land leases was extended indefinitely by the Decision on Several Important Issues of Rural Reform , released during the Third Plenum in 2008. The decision also differentiated “public use” from “commercial use” land when converting agricultural land into urban construction land. In other words, land to be converted for commercial use could no long be expropriated through eminent domain.

Why China Needs Land Reform

The challenges of Hukou reform, land reform, and budget reform are closely intertwined. Fiscal and budgetary reforms in the mid-1990s stripped local governments of important sources of tax revenue. In the years that followed, local governments took on an ever greater share of China’s total spending, creating ever larger budget deficits. Deprived of tax revenue and forbidden from selling bonds, local governments turned to land sales to balance their budgets. In fact, in 2010 the sale of expropriated land accounted for some 70% of total local government revenue. Naturally, there was extreme resistance to attempts at improving land rights by local governments who could not fund themselves in the absence of easily expropriated land. Additionally, already tight budgets made Hukou reform impossible as cities could not afford to take on the addition burden of providing social services to migrant workers. The result is an economy based on an unsustainable model where land is expropriated from peasant farmers to encourage construction while providing relatively little compensation to the farmers who depended on this land for their livelihood. This model has exacerbated inequality, driven social tensions, and distorted the economy towards fixed-asset investment while depriving migrants of an urban Hukou that would provide social welfare that might encourage domestic consumption. Furthermore, without the ability to easily sell plots of land, China’s farmers have been unable to consolidate small agricultural plots. Without consolidation, China’s agriculture industry is unable to achieve economies of scale and mechanization that could improve efficiency and output.

The Third Plenum laid out the blueprint for China’s economic reform in the coming years. This blueprint has called for China to restructure its economy towards domestic consumption and away from heavy industry and fixed-asset investment. To boost domestic consumption, China must pursue urbanization and fully integrate its migrants into cities. China’s New Type Urbanization Plan may have opened the door to Hukou reform, providing a pathway for millions of migrant workers to finally join the cities that they live in, but as some have noted, in the absence of land reform many migrants simply are afraid to give up their rural status in fear of losing their land. China’s new pilot land reform may hold the key to providing migrants fair compensation for the their land when they relocate to the cities. Land reform, if carried out in a prudent and timely manner, will go a long way toward putting China’s growth on a more sustainable path.

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