Need for land reforms in China

[Barun Mitra]

Chinese land reform: A world to turn upside down
The Economist, 2 Nov 2013
http://www.economist.com/news/briefing/21588873-economic-issues-facing-novembers-plenum-chinese-communist-party-none-looms-larger

Of the economic issues facing November’s plenum of the Chinese
Communist Party, none looms larger than land reform in the countryside

MORTGAGING a village home is a sensitive issue in China. A nervous
local official has warned residents of Gumian, a small farming
community set amid hills and paddies in Guangdong province, that they
risk leaking state secrets if they talk to a foreign reporter about
the new borrowing scheme that lets them make use of the value of their
houses. They talk anyway; they are excited by what is going on.

Urban land in China is owned by the state, and in the 1990s the state
allowed a flourishing property market to develop in the cities. That
went on to become a colossal engine of economic growth. But rural
land, though no longer farmed collectively, as it was in Mao’s
disastrous “people’s communes”, has stayed under collective ownership
overseen by local party bosses. Farmers are not allowed to buy or sell
the land they work or the homes they live in. That hobbles the rural
economy, and the opportunities of the farmers who have migrated to the
cities but live as second-class citizens there.

Hence the importance of experiments like those in Gumian. Cautious and
piecemeal, they have been going on for years. Some are ripe for
scaling up. Handled correctly, such an expansion could become a
centrepiece of Xi Jinping’s rule.

On October 7th Mr Xi said the government was drawing up a “master
plan” for not just more reform, but a “profound revolution”. Such talk
is part of the preparations for a plenum of the Communist Party’s
Central Committee which will begin on November 9th. It is the third
such meeting since Mr Xi came to power; because the first two plenums
of a party chief’s term are given over largely to housekeeping
matters, including party and government appointments, third plenums
are the ones to watch.

And Mr Xi is marking this one out as particularly important. In
private conversations with Western leaders he has been comparing the
event to the third plenum that, in 1978, saw Deng Xiaoping’s emergence
as China’s new strongman after the death of Mao two years earlier, and
set the stage for the demise of the people’s communes. Indeed
“profound revolution” is a deliberate echo of a phrase of Deng’s.

Air cover for ground manoeuvres

Mr Xi wants to be seen as a new strongman of similar calibre, one
unafraid to take on big targets—as with his sweeping campaign against
corruption—and willing to tear down the huge remaining barriers to
China’s reincarnation as a market economy. How much of this is
braggadocio remains to be seen. But there is some evidence that the
semi-paralysed market for rural land—one of the biggest of those
remaining barriers—is becoming a priority. In August a
state-controlled newspaper said that experiments in the trading of
rural construction-land were about to be launched around the country.
The report, which was later played down by the party, caused quite a
stir. Caixin, a Beijing magazine, said the excitement was a sign that
the “pent-up force [of land reform] was waiting to explode”.

Although it will surely be discussed, land reform will not be the
focus of the plenum: officials have indicated that, unusually, the
party meeting is going to cover the whole spectrum of reform-related
issues, rather than dwell on a single area. But the details of what is
discussed are not the key to understanding the plenum. What matters is
unpicking the carefully crafted and coded pronouncements that ensue,
designed—as Stephen Green of Standard Chartered, a British bank, puts
it—to provide “air cover” for policies that will be unveiled later.
After all, the 1978 plenum said that it was endorsing Mao’s communes;
but the nods and winks of the leaders gathered there encouraged
reforms to spread across the country anyway.

The policies for which this plenum will provide cover are going to
reflect the party’s belief that China needs to change the way it is
developing. The growth model driven by investment which yielded so
much in past decades offers diminishing returns; it needs to be
replaced by one fuelled in large part by productivity improvements and
consumer spending. This analysis will be used to support a series of
economic measures, from liberalising interest rates to boosting
innovation and loosening the grip of competition-stifling state-owned
enterprises (SOEs) on vital areas of the economy (see article). It
also underscores the urgency of creating a rural property market, a
reform that will change not just rural life, but city life, too.

On the face of it, all seems well enough with China’s urbanisation. In
January last year the government announced that the urban population
had reached 51% (up from less than 18% in 1978), exceeding the rural
one for the first time. But this is misleading. About 270m (nearly
40%) of those included in the urban population are resident in urban
areas, but still retain their official “household registration”, or
hukou, in the countryside (see map). This shuts many people out of
property markets; unable to sell in the country, they cannot buy in
the city. It means they are not entitled to the full welfare benefits
of urban hukou holders. In Beijing, and some other big cities, many
are not allowed to buy houses or cars, supposedly to limit demand.
Officials admit that there is something very wrong with this and say
it is now time for a “new type of urbanisation”.

Feeling the stones

Dismantling hukou restrictions should allow farmers living in the city
to trade in their rural property for a more secure foothold on the
urban ladder. It could also provide a big chunk of the boost in
consumption that Mr Xi and his colleagues want to engineer. Migrants
from the countryside save far more of their income than do holders of
urban hukou. They are thus a huge potential source of spending. But
for this potential to be realised, they need a way to sell up in the
countryside.

Though now much criticised by Chinese economic reformers, Hu Jintao,
Mr Xi’s predecessor, paved the way for some level of rural land
reform. A plenum in 2008, also the third in a cycle, upheld the Maoist
notion of collective ownership of rural land—but at the same time
called for the “gradual” establishment of a “unified urban and rural
market” for construction land, which includes land used for rural
housing and factories. And the plenum declared that individual
farmers’ rights to farmland, hitherto restrained by
investment-inhibiting 30-year leases, could be extended indefinitely.
Lawmakers have been arguing ever since over revisions to the
all-important Land Administration Law that would put reforms into
place. But bickering in the capital has not put a stop to tinkering in
the provinces.

The past five years have seen widespread experiments with rural land
rights, such as the dabbling with mortgage loans in Gumian. Caution
has been the watchword, even in Guangdong, a province that has been
used for economic experimentation since Deng’s day. (Xi Zhongxun, Mr
Xi’s father, was a senior official there in the crucial years after
1978.) The mortgages in Gumian, for example, are only available to pay
for the construction of houses in the same village: no heading off to
the city with a sackload of cash. Liu Hongzhi, who oversees the
scheme, quotes a famous phrase often attributed to Deng, though in
fact coined by a colleague: “We are crossing the river by feeling the
stones.

Dozens of Gumian’s households have taken advantage of the loans to
help them build five- or six-storey houses (pictured). The need for
the buildings, and their scale, are due to the bullet-train track
recently laid down straight through the village. Compensation from the
railway for the land taken and housing demolished in the process paid
for much of the building; the hope that a new station will make
renting out rooms a nice little earner accounts for the size of the
houses.

At a communal feast which accompanied the completion of one the
houses, villagers undeterred by the state-secrets-obsessed official
explained that they had borrowed less than a tenth of their houses’
cost. But borrowing the extra bit made a lot of sense if it got them
extra rooms, as the terms—a fixed interest rate of 6%, with repayment
due in five years—were deemed easy. Mr Liu thinks it highly unlikely
that anyone will default: “It’s impossible not to be able to return
the money,” he says. This is probably just as well. What would be done
if someone actually did default is still not entirely clear.

Chongqing, a south-western region of some 30m people, began a similar
scheme allowing farmers to mortgage their homes in 2010 when run by Bo
Xilai, the party chief recently sentenced to life in prison for
corruption and abuse of power. Since then the southern provinces of
Guizhou and Yunnan have also launched similar experiments. Cui Zhiyuan
of Tsinghua University, a former adviser to the Chongqing government,
says the mortgage loans are small and farmers “extremely cautious”
borrowers. The ideological resolve of party officials has yet to be
tested by foreclosures.

Remarkably, in a country that embraces so many other aspects of
capitalism, ideology still matters in the countryside. The notion of
collective ownership of rural land is enshrined in the constitution
and officials are loth even to hint that it might be changed. Some of
them see it as a badge of the “socialism with Chinese characteristics”
that the party says it upholds.

Local governments worry that clearer property rights for farmers would
make it far more difficult to appropriate land for building
infrastructure, factories and urban housing. Selling requisitioned
land to developers is a critical source of local-government revenue,
and land serves as collateral for local governments’ borrowing
(another big headache for Mr Xi: their debt has been spiralling).
Ideology aside, these governments resist any notion of changing a
system that has done them so well.

For all such concerns, though, the reforms launched by Mr Hu have
persisted and spread. Chongqing and Chengdu, the capital of the
neighbouring province of Sichuan, have been trailblazers. Soon after
Mr Hu’s third plenum in 2008 they launched land-trading schemes that
aimed to unlock the value of rural land and speed up urbanisation.
These let developers bid for land certificates, or dipiao, created by
the conversion of rural construction-land into farmland. They could
then use the dipiao to build on an equivalent area of rural land in a
place approved for urban development. The result, in theory, would be
no net loss of farmland, and an opportunity for farmers in areas
developers do not care for to cash in on the insatiable demand for
urban land. Of the dipiao selling price, 85% goes to the farmers
themselves: an unusual recognition, as Mr Cui points out, that farmers
should share the development value of their land. Chinese media say
the city of Guangzhou, in Guangdong, is planning to launch dipiao
trading, too.

In August the Chinese press reported that Guangdong had circulated
draft regulations that would allow villagers in the province to buy
houses from residents of other villages in the same township, and take
over the rights to the land underneath. If the rules are adopted,
China would have taken at least a baby step towards creating a market
for rural housing. In the coastal province of Zhejiang, the city of
Wenzhou (another hotbed of economic reform) has gone further. In
October it set up a “Rural Property Rights Service Centre”, a clearing
house that in theory allows urban residents to buy houses from
villagers within the same county. In practice, say the Chinese media,
potential buyers still worry that, without a revised Land
Administration Law, such rule bending is too risky.

In other places, though, plenty of people are taking risks. Near
suburbs, many farmers build houses on their land that they sell to
city dwellers who hope the law will never be enforced. By some
estimates one in five homes used by Beijing urbanites is technically
on village land, and in Shenzhen in Guangdong the proportion may be
nearly half. It is a vast legal mess, although many farmers in
peri-urban areas have benefited. And it does nothing for those leaving
villages far from the cities, where half-ruined, derelict houses are
becoming an increasingly common sight.

This earth divided

Mr Xi has yet to show signs of tackling the land law directly. But
soon after taking over as party chief he took an important step
towards easing further experiments and reform. A policy document on
rural issues adopted in December 2012 and made public a month later
said that by the end of 2017 farmers should be given certificates
showing exactly where their fields lie, and that similar certificates
for their housing land should be handed out “as soon as possible”. It
is going to be a laborious task, with much squabbling and much
recourse to satellite-aided surveying. But without demarcations, a
well-ordered land market cannot take shape. And local media now
frequently report the handing over of housing deeds to happy farmers
who have never held such things before. Some of Gumian’s villagers,
flush with railway cash, say that they wanted the deeds that came with
the mortgages far more than they needed the money itself.

That desire reflects one of the key attractions of land reform—and one
of the reasons that Mr Xi may find it difficult. Providing farmers
with deeds, and rights to dispose of them, will weaken the often
tyrannical grip on their lives that control over land gives to
grassroots party organisations. Those living in the countryside will
begin to enjoy the relative freedom from party interference in their
daily lives that city dwellers began to experience in the late 1990s,
when the housing controlled by tens of thousands of SOEs was handed
over to their occupants. “Farmers cannot be said to enjoy human rights
unless they enjoy property rights,” says Sun Dawu, the founder of a
large agribusiness in the northern province of Hebei.

Political change is not something Mr Xi would necessarily wish to
hasten, or to be seen hastening. In the build-up to the plenum he has
been covering his reformist economic tracks by paying startlingly
anachronistic homage to Mao and mounting an unusually harsh crackdown
on dissent and wayward online discourse. Officials have been made to
watch a documentary about the collapse of the Soviet Union as a
warning against Gorbachev-like fantasies. If he thinks an urgent need
for the economic benefits of land outweighs the concerns about the
empowerment of peasants at the expense of apparatchiks, he may still
be cautious about being quite that explicit. But he does not
necessarily need to be any clearer, as long as the message is
understood.

Around the time that the 1978 plenum was talking of its support for
people’s communes, a group of impoverished farmers in Anhui province
secretly decided to divide up their village farmland into privately
managed plots. Eventually, in 1981, the party gave its explicit
blessing to the “household responsibility system”, as it called this
once sacrilegious approach to farming. By then nearly half of villages
were practising it. The following year work officially began on
dismantling the communes. Far-reaching reform had ensued from the
plenum, but from the bottom up. The same could happen again.

[Barun Mitra]

According to the WSJ,

The Third Plenum document provides real, if modest, gains for
individual rights in China. It promises to relax the despised
one-child, one-family policy, which gives the state the unchallenged
right to barge into the bedrooms of Chinese households. Farmers are to
gain more freedom to sell or mortgage their land and move to cities,
easing their bondage to the village "collective," which nominally owns
all rural land in China on behalf of the state.

http://online.wsj.com/news/articles/SB10001424052702304337404579210032460595174