Urban Land Policy Reform in China

Photograph Caption: H. James Brown, president of the Lincoln Institute, with Lu Xinshe, vice-minister of China’s Ministry of Land and Resources, signed an agreement in September 2002 at Lincoln House. Observing the occasion are (left to right) Yang Yixin, deputy director general of the Ministry, Chengri Ding, and Wang Guanghua, director general of the Ministry’s Information Center.

Driving around a bustling Chinese city, one can almost feel the pace of change. Just a few decades ago, China was a sleeping giant whose prominence in world affairs seemed forever relegated to its ancient past. Today China boasts one of the world’s fastest growing economies and some of the most vibrant cities, and it is among the most active and interesting real estate markets.

From 1978 to 1997, gross domestic product in China grew at a remarkable 17 percent annual rate. Over the last several years, while most Western nations languished in recession, the economy of China grew at a steady 7 to 8 percent. China’s population continues to grow as well. In November 2000, China’s population was approximately 1.3 billion; by the year 2050 it is expected to reach 1.6 billion. Following familiar international patterns, the combination of population growth and economic expansion is manifest most prominently in Chinese cities. From 1957 to 1995, China’s urban population grew from 106 to 347 million. In 1982 there were 182 Chinese cities; by 1996 there were 666.

While urbanization has led to significant improvements in the welfare of the Chinese people, it has also placed enormous pressure on China’s land resources. China is the world’s third largest country in land area (after Russia and Canada). But, with more than 21 percent of the world’s population living on about 7 percent of the world’s cultivated land, China’s farmland resources are relatively scarce. Between 1978 and 1995 China’s cultivated land fell from 99.4 million to 94.9 million hectares while its population rose from 962 million to 1.2 billion. Simply because of its scale, the widening gap between China’s growing population and a shrinking supply of farmland has implications not only for China’s ability to feed itself, but also for global food security.

To manage its land base and rapid urban expansion, the Chinese government in the early 1980s launched sweeping reforms of the structure of institutions that govern land and housing allocation. While maintaining the fundamental features of a socialist society (state or collective ownership of land), China has moved toward a system in which market forces shape the process of urbanization and individuals have greater choice over where to work and live. Among the most influential of these changes are the establishment of land use rights, the commercialization of housing, and a restructuring of the urban development process.

Land Use Rights

Before the People’s Republic of China (PRC) was founded in 1949, land could be privately owned and legally transferred through mutual agreement, and property taxes were a key source of local public finance. Soon after the Communist Revolution, however, property use rights were radically transformed. In rural areas the Communist Party confiscated all privately held land and turned it over to the poor. Later, peasants joined communes (“production co-operations”) by donating their assets, including their land. Today, nearly all land in rural areas remains owned by farmer collectives. In urban areas, the Communist Party took a more gradual approach. While confiscating property owned by foreign capitalists and anti-revolutionaries, it allowed private ownership and land transactions to continue. Over the next two decades, however, through land confiscation, strict controls on rent and major investments in public housing, state dominance in urban land and housing markets grew. By the end of the Cultural Revolution in 1976, nearly all land was owned by collectives or by the state. Private property rights virtually disappeared and land transactions were banned.

Modern land reforms began in the mid-1980s. Following a successful experiment in Shenzhen (a Special Economic Development Zone on the border with Hong Kong), in which state-owned land was leased to foreign corporations, the Constitution was amended in 1988 so that “land use can be transacted according to the law.” In 1990, China officially adopted land leasing as the basis for assigning land use rights to urban land users.

In the current property rights regime, use rights for specified periods (e.g., 40 to 70 years) can be obtained from the state through the up-front payment of land use fees. The fees are determined by the location, type and density of the proposed development. This separation of land ownership and use rights allows the trading of land use rights while maintaining state ownership of land. For the Chinese government, this separation offered three advantages: first, market mechanisms could help guide the allocation of land resources; second, land use fees would provide local government with a new source of revenues; and third, by retaining state ownership, social and political conflict would be minimized.

In the short period following its adoption, the new system of land use rights has had profound symbolic and measurable impacts. By embracing the concept of property rights, the system provided Chinese residents and firms with greater economic freedom and signaled to the world that China welcomes foreign investment on Chinese soil. By establishing legal rights of use, China has promoted the development of land markets, enhanced the fiscal capacity of local governments, and accelerated the advancement of market socialism. The system also created a fast-growing real estate market that is now transforming China’s urban landscape.

Despite its advantages, the system created many new challenges. First, state-owned enterprises can still acquire land through administrative channels, causing price distortions and large losses of local government revenues. Second, government officials are tempted to lease as much land as possible for their own short-term gain. Since revenues from the sale of land use rights account for 25 to 75 percent of some local government budgets, future losses of revenue are inevitable as land becomes increasingly scarce. Third, there is great uncertainty about what happens when existing leases expire. Most leases stipulate, for example, that without payments for renewal, rights of use return to the state. However, it will be extremely difficult to collect such payments when hundreds or thousands of tenants share rights previously purchased by a single developer. Finally, the government lacks the ability to capture its share of rents as they increase over time. As capital investments and location premiums rise, these losses could be substantial.

Whether land use rights and the markets they create will soon dominate the process of urban development or alter the structure of Chinese cities also remains uncertain. There is evidence that land use fees vary spatially in Chinese cities, much like prices and rents in Western cities. But it may be several decades before skylines and capital-land ratios in Chinese cities mirror those in the West. Further, fees remain set by administrative rather than competitive processes. Thus, the extent to which they will improve the allocation of land resources remains to be seen.

The Commercialization of Housing

The socialization of housing was an important element of the communist transformation. But because the communist party took a more gradual approach in urban areas, private ownership remained the dominant form of housing tenure in Chinese cities through the mid-1950s. Over the next two decades little private housing was constructed because the state owned all the land, imposed strict ceilings on rents, and generally discouraged speculative building. By the end of the Cultural Revolution in 1976, privately owned housing had virtually disappeared.

In the absence of private housing markets, shelter became part of the social wage provided by the state. Housing was not provided directly by the government but through the work unit or danwei, a state-owned enterprise that serves as a vehicle for structuring economic activity and social organization. The main defining feature of a danwei is its multi-functionality as a place of employment, residence, education and commerce. A danwei worker acquires housing “according to his work,” a fundamental socialist allocation principle. In this system the allocation of housing is determined by social status and length of employment, not prices and incomes.

Danwei housing was an integral element of a centrally planned economy in which financial resources were planned by entire sectors (industrial, educational, health care, and others). Housing was merely one element of these larger development projects and was constructed only if the project needed workers and those workers needed housing. Investments in housing and other services such as schools (if the project was large), canteens and daily-use grocery stores were made in conjunction with the overall project; entire communities were thus built all at once enabling workers to live close to their work. The distinctive role of the danwei has had a profound impact on the morphology of Chinese cities and has complicated housing policy reforms ever since.

While serving to promote socialist ideology and minimizing popular unrest, the danwei system had serious limitations. The combination of negligible rents and excessive housing demand placed heavy financial and production burdens on the state. Housing allocations were based on criteria such as occupation, administrative rank, job performance, loyalty and political connections. Gross inequities were common. Finally, inadequate revenue generation from rents diminished the quality of housing management and maintenance and discouraged the construction of private rental housing or owner-occupied housing by private developers.

When Deng XiaoPing came into power in 1978, he attacked the state-controlled public housing system and introduced market forces into the housing policy arena. Subsequently, the government initiated a reform program with privatization as a major component. The privatization of the state-controlled housing sector included several elements: (1) increases in rents to market levels; (2) sales of public housing to private individuals; (3) encouragement of private and foreign investments in housing; (4) less construction of new public housing; (5) encouragement and protection of private home ownership; (6) construction of commercial housing by profit-making developers; and (7) promotion of self-build housing in cities.

The dismantling of the danwei housing system and the commodification of housing, though far from complete, has produced rapid growth in the housing industry and a substantial expansion of the housing stock. By 1992, the government share of investments in housing had fallen to 10 percent—less than the share of investment from foreign sources. In the wake of an extended housing boom, per capita living space rose from 4.2 square meters in 1978 to 7.9 in 1995.

Growing pains persist, however. Many Chinese still live in housing deemed inadequate by Western standards, and critical financial institutions remain underdeveloped. Housing for the wealthy is overabundant while housing for the poor remains scarce. Further, as space per Chinese resident rises, maintaining jobs-housing balance becomes increasingly difficult. The replacement of danwei housing with a Western-style housing market gives Chinese residents greater freedom of location, but it may lead to the deconstruction of communities in which work, leisure and commerce are closely integrated. Rising automobile ownership also may create Western-style gridlock. Furthermore, the rapid rise of commercial housing undermines the longstanding tradition in which access to affordable housing is an integral part of the social contract. As a result, the commercialization of housing, far more than a mere change in ownership structure, represents a fundamental change in the core institutions of Chinese society.

Restructuring Urban Development

Unlike many other rapidly developing nations, China is still relatively nonurbanized. In 2000, approximately 36 percent of China’s population lived in urban areas, and no single metropolitan area dominated the urban hierarchy. Among the many reasons for this pattern is the government’s regulation of rural-urban migration through a household registration system, or hukou. Every Chinese resident has a hukou designation as an urban or rural resident. Hukou is an important indicator of social status, and urban (chengshi) status is necessary for access to urban welfare benefits, such as schools, health care or subsidized agricultural goods. Without urban hukou status it is very difficult to live in cities. By limiting access to the benefits of urbanization, the hukou system ostensibly served as the world’s most influential urban growth management instrument.

As land and housing markets have emerged, the hukou system has weakened. Rural peasants now account for a significant portion of the urban population. As a result, China has been forced to manage urban growth, like other nations, through the conversion of land from rural to urban uses. Today, this can occur in one of two ways: (1) work units and municipalities develop land acquired from rural collectives through an administrative process; and (2) municipalities acquire land from rural collectives and lease it to developers. While providing local governments with new sources of revenues and introducing market rationality, this dual land market has introduced other complexities in the urban development process. Black markets have been created, for example, by the difference in price between land obtained virtually free through an administrative process and land leased to the private sector upon payment of fees. Work units have undertaken developments incompatible with municipal plans. And, urban sprawl has arisen in the special development zones that have proliferated in the rush to attract foreign investment.

To address these problems, the 1999 New Land Administration Law (which amended the 1988 Land Administration Law) was adopted to protect farmland, manage urban growth, promote market development, and encourage citizen involvement in the legislative process. Besides strengthening property rights, the law mandates no net loss of cultivated land. It stipulates that “overall plans and annual plans for land utilization take measures to ensure that the total amount of cultivated land within their administrative areas remains unreduced.” This means that land development cannot take place on farmland unless the same amount of agricultural land is reclaimed elsewhere. As reclaimable land is depleted, urban land supplies will diminish, the cost of land reclamation will rise and ultimately that cost will be passed on to consumers. Since its implementation, the law has drawn widespread criticism for stressing farmland protection over urban development. Due to rising incomes and larger populations, the demand for urban land will continue to increase. Given the fixed amount of land, development costs will certainly rise and gradually slow the pace of urban development.

Challenges and Opportunities

For those interested in land and housing policy, China is difficult to ignore. Through perhaps the most sweeping and nonviolent land and housing reforms the world has ever seen, China is moving from a system tightly controlled by the state to one strongly influenced by market forces. The pace at which this transformation is taking place offers rare challenges and opportunities. For land policy researchers, China offers opportunities to explore questions central to international urban policy debates: (1) how do market forces shape the internal structure of cities? (2) can markets provide safe and affordable housing for all segments of the population? and (3) are markets the primary cause of urban sprawl? For academics and practitioners involved in education and training, China offers the challenge of sharing the lessons of Western experience without encouraging the Chinese to make the same mistakes. In the process, both researchers and trainers have the opportunity to improve the process of development in the world’s most rapidly urbanizing nation.

Chengri Ding is assistant professor in the Department of Landscape Architecture and Urban Planning at Texas A&M University in College Station, Texas. He also serves as special assistant to the president of the Lincoln Institute for the China Program.

Gerrit Knaap is professor and director of the National Center for Smart Growth at the University of Maryland. The authors are editing a Lincoln Institute book on land and housing markets in China, including papers presented at the First World Planning Schools Congress held in Shanghai in July 2001.