Effects of Land Acquisition on China’s Economic Future

Chengri Ding, Enero 1, 2004

In the past quarter century, the People’s Republic of China has achieved remarkable progress in economic growth, social advancement, and political and administrative reforms. These achievements are largely attributed to the commitment of the Chinese government to improve its people’s welfare through adherence to a free market economy. The interrelated forces of economic growth and policy reform are stimulating rapid and fundamental transformation, especially in Chinese cities, where infrastructure projects, urban renewal, housing development and reform of state-owned enterprises are taking place at an unprecedented pace and scale.

The catalyst for this surge in urban development has been the widespread adoption of the Land Use Rights System (LURs) in which land ownership and use rights have been separated. Its impacts are two-fold. First, it promotes the development of markets for land use rights in which land prices and market mechanisms begin to affect land use and land allocation decisions. Second and more important, it creates an institutional capacity for local governments to raise much-needed revenues to finance urban redevelopment and economic reforms. This revenue-raising ability is rooted in the land ownership structure and power of Chinese government, since the state owns virtually all land in cities and towns. Users are required to pay upfront leasing fees for 40- to 70-year periods, depending on the type of use.

Along with its fiscal impacts, the LURs has created several problems that have drawn increasing attention. First, revenues from leasing state-owned land are not sustainable from a long-term perspective; leasing of existing urban land has been the primary revenue source for financing urban projects, and sooner or later cities will run out of urbanized land available for leasing. For example, Hanzhou City will collect 6 billion RMB (US$732 million) in 2003 from the sales of land use rights, most of them on existing urban land, but land sale revenues have already reached their peak and have started to decline.

Second, Chinese governments lack instruments to capture their share of the increases in land value that are driven up by the combined forces of urbanization, public investment in infrastructure and private efforts. Based on the proposition that one should be rewarded only for one’s own effort, government should capture the increased land value resulting from public investment, rather than having it accrue to the private landowner.

Third, laws do not specify concrete measures for implementing lease renewals. It will be more difficult to collect leasing fees in the renewal period since local governments will have to deal with thousands of households compared to a small number of developers in the first round of leases. Finally, some local government officials have been politically motivated to create an oversupply of land and overheated real estate activity, thus diminishing the central government’s efforts to institutionalize land management and urban planning.

Compulsory Land Acquisition

The other major source of land revenues for local governments is the leasing of former farmland. Both the Chinese Constitution and the 1999 Land Administration Law (LAL) specify that the state, in the public interest, may lawfully requisition land owned by collectives, thus setting the stage for compulsory land acquisition. The local government is thereby able to acquire land cheaply from farmers and sell it to developers at much higher prices. This is a complicated process because it requires first acquiring the land, then converting it to state ownership, resettling the displaced farmers and providing urban infrastructure before finally leasing the land to developers. The law requires that peasants’ lives should not be adversely affected by land acquisition. However, this requirement is difficult to implement, in part because measures of life changes for peasants are multifaceted; financial compensation is only one of the considerations.

Since there is no market data for farmland prices, the government pays collectives and peasants a compensation package that includes three components: compensation for the land itself; resettlement subsidies; and compensation for improvements to the land and for crops growing on the requisitioned land. The law stipulates that compensation for cultivated land shall be six to ten times the average annual output value of the acquired land for the three years preceding the requisition.

The amount of the resettlement subsidies depends on the number of people living on the land, but each person’s subsidy shall not exceed six to ten times that of the annual yield from the occupied land. Recognizing diversity of local conditions in terms of socioeconomic development status, productivity, and per capita income, the local government is permitted to raise the sum of the resettlement subsidies and land compensation up to 30 times the previous three years’ average output value on the acquired land.

Emerging Issues

Several significant issues are emerging from this land acquisition process. The first relates to the ill-defined concept of property rights and development rights: who is entitled or empowered to acquire land from peasants for urban development? Currently any entity can acquire land from peasants as long as it can justify public interest or purpose. This public interest requirement was easy to fulfill in the 1990s, since there were many state-owned enterprises that provided services and/or goods to the public. They could acquire land to launch profitable commercial, housing, entertainment and industrial development projects. Individual developers also can acquire land if they have strong political connections. However, these profit-making and political motivations for land acquisition are responsible for increasing corruption in real estate and housing developments and creating chaotic and uncoordinated urban development patterns. Recent economic reforms and privatization have begun to diminish the roles of state-owned enterprises, so it is time to reexamine the concept and definition of public interest and public projects.

The interactions of multiple players in land acquisition (including individuals, corporations and governments) create several problems in land management and planning: (1) it becomes extremely difficult, if not impossible, to coordinate land development so that infrastructure and transportation facilities are used efficiently; (2) it voids many urban planning efforts; and (3) it is blamed for “villages in the city” (cheng zhong chun), a phenomenon in which villages and farmland are surrounded by developed land, making the city unattractive, disrupting the continuity of economic, social and cultural functions, and significantly increasing transportation costs.

The second issue is who is entitled to compensation and at what level. The village collective is the basic socioeconomic organization in rural areas, and its largest asset is the land collectively owned by the members. Even though laws recognize that both the collective and its members should be entitled to sharing compensation, there are no specific policy guidelines or regulations on how to divide the shares in different situations. The collective’s share is supposed to enhance its capacity in farmland productivity and social welfare, thus benefiting all its members. However, the role of the collective is diminishing, in part because its membership is decreasing as some farmers leave to become urban residents following acquisition of communal land, and in part because of socioeconomic changes due to advancing urbanization. The revenue sharing scheme reflects this transformation.

To make matters worse, different levels of governments take a cut out of the monetary compensation that is supposed to go to the farmers. For example, the Chinese government built a pipeline that transfers natural gas from the western to the eastern part of the country. This was a national project, so compensation to peasants was paid by the state, but the amount of compensation varied from province to province. The state gave 20,000 RMB (US$2,500) per mu (one mu=666.67 square meters) to peasants in Henan province for their land. Given the fiscal structures between governments, these funds were allocated downward to lower levels of government (from state to province to city to county to township, respectively). At each transfer point, a portion of funds was retained for that level of government to finance their own public goods and services. The peasants received only 5,000 RMB in the end.

The situation here is similar to the concept of value capture in which governments are entitled to retain a portion of land value increases in exchange for their efforts in urban development and infrastructure provision. In a case like Henan it is legitimate to ask if the state’s compensation reflected the true market value of the land. If it did, then local governments should be entitled to their shares. Alternatively, if the state captures the entire land value increase, then the state should reimburse at least the costs of infrastructure provisions supplied by the local government.

The third issue is the equity of compensation, which involves both the level of compensation as well as variations in payments in different situations. Since there are no market data that can truly reflect the price of farmland, compensation hardly reflects market conditions and it varies dramatically from case to case, mainly depending on who plans to develop the land. For instance, profitable projects such as commercial housing and business developments can afford to pay higher prices for land than public transportation and infrastructure projects such as highways, railroads, airports and canals. If these different types of projects, private and public, occur in one village at different times or in neighboring villages at the same time, peasants who are less well compensated feel unequally treated by the government. Many complaints have something to do with this inconsistency in compensation. Such inequity contributes to rising tensions and distrust between peasants and the government and adversely affects subsequent planning and implementation of land management policies.

Finally, it is becoming increasingly difficult and costly to resettle peasants. The LAL requires that the quality of life of farmers shall not be adversely affected by compulsory land acquisition, but does not specify concrete measures to achieve this goal. As a result, many peasants end up living under worse conditions several years after their land was taken than they did before. This situation is not difficult to imagine. Farming does not make peasants rich, but it generates sufficient income to support a minimum level of livelihood and security. Without appropriate training and skills in managing their lump sum payment and without appropriate investment channels (if their compensation is sufficient to make any investment at all), it is common for peasants to end up with no land to farm, no income stream to support themselves, and no job skills to compete in the tight urban job markets.

Land Policy Challenges

China is facing many challenges in its efforts to supply land for new development as rapid urbanization continues. First, it is becoming more difficult for local governments to acquire land for true public works and transportation projects, since they cannot offer peasants as much compensation as developers of more profitable commercial projects.

A second challenge is to fairly compensate peasants when their farmland is acquired. As governments capture a greater proportion of the land value increases, the low level of compensation to peasants imposes a serious long-term threat to sustainable development in China. The number of people who live in poverty after land acquisition continues to rise. For instance, Zhijiang province alone has more than 2 million farmers who have lost their farmland. In 2002, more than 80 percent of legal cases filed by peasants against governments in the province were related to land acquisition.

This situation is a potential source of instability and is likely to escalate in the future as increasing urbanization puts even more pressure on the need for new land for development. According to the General National Land Use Comprehensive Plan, China needs 18.5 million mu of land for nonagricultural uses in the first decade of the twenty-first century, and 90 percent of that land will be acquired from farmers. It is estimated that 12 million farmers will lose their land through this type of acquisition. Without fair compensation or other efforts to assure their social security over the long term, these farmers will impose enormous socioeconomic problems on China for years to come.

The third challenge is associated with the rate of urbanization. According to the report of the 16th Communist Party Convention in 2003, the total population of China is estimated to be 1.6 billion to1.8 billion by 2020, with more than 55 percent living in cities, compared to the current population of 1.3 billion with 38 percent in urban areas. Migration from rural areas to cities is expected to be around 15 million annually, after taking into account the rate of natural urban population growth. Sustainable and affordable urban economic development is urgently needed to absorb these large numbers of rural immigrants.

A final dilemma is how to achieve a balance between farmland preservation and urban spatial expansion. Farmland preservation will inevitably increase land costs, which in turn will slow down urban development. At the same time, it is necessary to promote urban economic growth to provide sufficient job opportunities. This in turn leads to urban encroachment into rural areas to take advantage of less expensive land.

To address these challenges, Chinese officials need to ask some fundamental questions:

  • What are the impacts of urbanization and infrastructure provision on the value of farmland, and how do the values change over space and time?
  • Who is entitled to the value increases in land, and what is the peasants’ fair share?
  • What constitutional rights do peasants possess? Will the Chinese Constitution be amended soon? If so, what will be the impacts?
  • What are some other mechanisms of capturing land value? What are the merits and drawbacks of these mechanisms, and will they work in China? If so, how can the government make them work?

Land Acquisition Reform

It is hard to anticipate how Chinese officials will address these questions, but rapid urbanization and massive infrastructure provision will inevitably increase land values over the next two decades. Recognizing the enormous problems associated with land acquisition, several cities have adopted different approaches to protect farmers’ rights and interests so their lives will not be adversely affected. These approaches include:

  • Joint ventures (Shanghai). Collectives share stock in the land they transfer for projects. In return, they receive annual cash payments equivalent to average profits from farming.
  • Extra allowance for construction on land in villages (Shuzhou). Local governments strictly control the amount of nonagricultural construction on land owned by a collective. By providing an extra allowance for nonagricultural land, villages are able to pursue economic activities other than agriculture and are able to generate income simply by renting out their land for nonagricultural purposes.
  • Combination of cash resettlement and provision of social security funds (Zhuzhou and Jiaxing). The population in a village where land will be acquired is divided into three age groups: youth, adults and elders. The younger residents are paid a cash compensation. The cash compensation for adults is double the youth amount and half of it is earmarked for job training. Those two groups are compensated upfront in a lump sum payment. The local government establishes a social security fund for the elderly so they are paid on a monthly basis rather than in a lump sum fashion. The amount of their pay is equivalent to the minimum standard set by governments for urban laid-off workers.
  • Compensation based on location, not previous land use (Nanjing City). This example is closer to compensation based on farmland markets.

The Chinese government is taking other measures, such as attempting to make the land acquisition process more transparent so farmers know where and when their land will be acquired and how much they will be compensated for it. This transparency will also help to reduce corruption and improve land management. There is also an urgent need to establish legal channels for farmers to file appeals and protests against governments in compulsory land acquisition cases. The development of farmland markets may challenge land acquisition and also may have substantial impacts on fiscal policy and government financing.

All of these efforts will change both the way land will be taken from farmers and how the issues and challenges of land acquisition will be addressed. Although it is too early to predict how and to what extent these measures and reforms may affect urban and rural development, China is certain to be one of the most fascinating and dynamic places for continuing research and study of land policy reform and societal transformation.

Chengri Ding is associate professor in the Department of Urban Studies and Planning at the University of Maryland, in College Park. He specializes in urban economics, housing and land studies, GIS and spatial analysis. He is also special assistant to the president of the Lincoln Institute for the Program on the People’s Republic of China.

Note: RMB is the Chinese currency; US$1=8.20RMB.