China: Integrated Land Policy Reform in a Context of Rapid Urbanization Li Guo, Sr. Agricultural Economist and Jonathan Lindsay, Sr. Counsel The World Bank Prepared for SDN Week Land Conference February 14-15, 2008

Contents of the presentation… a) A brief introduction; a) A brief introduction; b) A fundamental feature of existing land policy; b) A fundamental feature of existing land policy; c) Consequences of the fundamental feature; and c) Consequences of the fundamental feature; and d) Options for moving forward; and d) Options for moving forward; and

Introduction Over the past 30 years, China has undergone a profound economic and social transformation… Indicators Indicators Growth Rate (%) GDP (RMB, Billion) of which: Agriculture of which: Agriculture28%13% Urbanization Population (million) Population (million) Percentage (%) Percentage (%)2743 Per Capita Income (RMB)

Introduction (continued) Land is a key factor in China’s quest for economic growth, urbanization, national food security, social harmony, and even the stability of the banking system. Chinese Government is actively reforming land policy in response to China’s economic and social changes….

Introduction (continued) * China’s Constitution: urban land is owned by the State, while the principal holders of rural land rights are collectives. However, within this framework increasingly strong private rights over land have begun to emerge. * China’s Constitution: urban land is owned by the State, while the principal holders of rural land rights are collectives. However, within this framework increasingly strong private rights over land have begun to emerge. * Land Administration Law: farmers have 30-year rights over land allocated to them by collectives; in urban area, marketable use rights up to 70 years;

Introduction (continued) * Law on Property (March 16, 2007): all types of property in China—state, collective, private—are entitled to the same level of legal protection. Land rights of individual farmers are in rem property rights, as opposed simply to contractual rights. China, however, continues to face significant challenges in effectively managing the diverse and competing roles of land in the economy.

A Fundamental Feature of Existing Land Policy The persisting and strict separation between the treatment of urban and rural land. Generally speaking, urban land enjoys a more complete set of rights than rural land does. Rural land and urban land are also administered by separate institutions. The Government basically enjoys unrestricted “eminent domain.” Rural land must be compulsorily acquired by the government before it can be used for urban construction. This is true whether the construction is for public, quasi-public, or even clearly private uses.

A Fundamental Feature of Existing Land Policy (Continued) These features are unusual by international standards – no other major market economy in the world maintains as absolute a split between urban and rural land rights, administration and markets as does China. In the case of China, given the increasing integration of urban and rural economies, the speed of urban growth and the accelerating mobility of people and capital markets, it is increasingly clear that these features have had some undesirable ramifications.

Consequences of the Fundamental Feature a) Weak land rights of farmers; b) Over-reliance of local governments on revenue from land transfers and land-related financing; and c) Inefficient forms of urban growth and difficulties in reducing the rate of farmland conversion.

First, Weak land rights of farmers: The extensive use of land requisition and the low levels of compensation are perceived to be unfair to farmers, and have often been a source of grievances. Over of complaints received by the Ministry of Land and Resources in recent years relate to disputes on land requisition and on low compensation. The extensive use of land requisition and the low levels of compensation are perceived to be unfair to farmers, and have often been a source of grievances. Over 65% of complaints received by the Ministry of Land and Resources in recent years relate to disputes on land requisition and on low compensation. The distribution of the compensation between collectives and farmers is often non-transparent. DRC field survey confirmed that a prevailing feature of land acquisitions in practice has been that farmers are largely uninformed about the process and their rights, and unaware of or unable to use mechanisms for seeking redress when grievances arise.

First, Weak land rights of farmers (Continued): There are also some issues related to the implementation of Rural Land Contracting Law -- - Illegal land readjustments continue to happen; - There are substantive limitations in farmers’ rights themselves (prohibition of using land as collateral, unclear and severely constricted rights over residential plots); - Farmers have limited knowledge about their rights.

Second, Over-reliance of local governments on revenue from land transfers and land- related financing: Studies show that land transfer fees account for some of total sub-provincial government revenues. In some regions, transfer fee revenues were even higher than the government’s budget revenues. Studies show that land transfer fees account for some 30-50% of total sub-provincial government revenues. In some regions, transfer fee revenues were even higher than the government’s budget revenues. In many cities, it is very common that over of funds for financing urban expansion comes from leasing of the state-owned land use rights or loans from the Bank by using land as collateral. Nationwide, the volume of lending backed by land is large and could create a serious exposure of the already fragile banking system to variations in land prices. In many cities, it is very common that over 90% of funds for financing urban expansion comes from leasing of the state-owned land use rights or loans from the Bank by using land as collateral. Nationwide, the volume of lending backed by land is large and could create a serious exposure of the already fragile banking system to variations in land prices.

Issues of land-related revenues: Unsustainability: A one-time revenue item (once for 40 to 70 years) and its source is not sustainable in the long-run; Corruption: Lack of transparency and accountability because they are usually kept “off- budget;” Financial risks: Some worrisome phenomena associated with “land banks”, which pose certain risks to the financial sector

Third, inefficient forms of urban growth and difficulties in reducing the rate of farmland conversion: The artificially low price of rural land encourages a land-intensive urban growth that leads to a huge waste of land resources. One survey conducted by the Government in 2003/04 showed that about of requisitioned land is left idle. One survey conducted by the Government in 2003/04 showed that about 43% of requisitioned land is left idle.

Third, inefficient forms of urban growth and difficulties in reducing the rate of farmland conversion: The need to protect farmland from inefficient urban growth is self-evident Only of all land in China is arable, whereas the government is strongly committed to food self-sufficiency. Only 14% of all land in China is arable, whereas the government is strongly committed to food self-sufficiency. Government estimates that no more than 0.3% farmland should be converted to urban land each year between now and The rate had already reached 1% by 2002.

Options for Moving Forward 1. Clarify, secure, and broaden the rights of rural and urban land users. Options for Moving Forward 1. Clarify, secure, and broaden the rights of rural and urban land users. Making collective construction land marketable Making collective construction land marketable Developing an effective registration system for all land rights Developing an effective registration system for all land rights Introducing the right to mortgage farmland Introducing the right to mortgage farmland Strengthen rights over rural residential land Strengthen rights over rural residential land Empowering farmers to better understand and use their rights. Empowering farmers to better understand and use their rights.

Options for Moving Forward 2. Ensure fair treatment and adequate compensation for those affected by compulsory acquisition. Improve methods for calculating compensation Improve methods for calculating compensation Take steps to ensure that compensation reaches the dispossessed farmers Take steps to ensure that compensation reaches the dispossessed farmers Experiment with alternative forms of compensation; Experiment with alternative forms of compensation; Developing limits on the purposes for which land can be compulsorily taken by government. Developing limits on the purposes for which land can be compulsorily taken by government.

Options for Moving Forward 3. Reduce the conversion of farm land and improve the efficiency of urban land use. Reduce current incentives for land use conversion, for example, examining the impact of subsidizing land for industrial use by setting artificially low prices; Reduce current incentives for land use conversion, for example, examining the impact of subsidizing land for industrial use by setting artificially low prices; Promote coordination and integration of urban and rural planning functions and objectives for more efficient land use strategies. Promote coordination and integration of urban and rural planning functions and objectives for more efficient land use strategies.

Options for Moving Forward 4. Enhance the role of land as a sustainable foundation for local government finances. Explore market value-based property taxes as an alternative and more sustainable source of local government finance. Explore market value-based property taxes as an alternative and more sustainable source of local government finance. Review and simplify the overly complex current system of property based fees and taxes; Review and simplify the overly complex current system of property based fees and taxes; Re-assess the purpose and function of land banking and better regulating its operations. Re-assess the purpose and function of land banking and better regulating its operations.

Options for Moving Forward 5. Strengthening overall legal framework and emphasizing rule of laws for land. Explore market value-based property taxes as an alternative and more sustainable source of local government finance. Explore market value-based property taxes as an alternative and more sustainable source of local government finance. Review and simplify the overly complex current system of property based fees and taxes; Review and simplify the overly complex current system of property based fees and taxes; Re-assess the purpose and function of land banking and better regulating its operations. Re-assess the purpose and function of land banking and better regulating its operations.

Thanks! Li Guo and Jonathan Lindsay The World Bank February 2008