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Land is a very scarce resource in a populous country like China. Controls over the use of land bring with it a lot of power - and money. That's why land reforms that involve redistribution of benefits and costs among many interest groups are inherently such a monumental task.
Difficult as they maybe, things are about to change, albeit in a 'baby' step. All farmland in China is classified as land for 'agricultural-use'. Farmers have the right to use the land, to enjoy the fruits of their labour, and to transfer the land to another individual - but only for use in agriculture. Collectives, as opposed to individual farm households, have ownership rights of agricultural-use land. With the rapid rates of industrialization and urbanization in China, the demand for land, a scarce resource, has skyrocketed. Demand is particularly acute in coastal provinces, such as Zhejiang, Jiangsu, and Guangdong; and in the vicinity of all major cities.
Aside from agricultural-use land, there are two other types of land in China: industrial-use and commercial-use land. Interestingly, their prices vary enormously - in Wenzhou, Zhejiang province, famous for its vibrant private economy, they can range from 27,000 yuan/mu for agricultural land, 200,000 yuan/mu for industrial to 2 million yuan/mu for commercial land; with a 75 times difference between commercial and agricultural land. Why do the prices vary so greatly? And who has control over them? Under the existing legislation, the Land Management Law (tudiguanlifa), collectively owned land has to be converted to government ownership before it can be sold to private entities for industrial or commercial use. This means that local governments are the only buyers of agricultural land, and the only sellers of industrial and commercial land. The monopsony (the only buyer, as opposed to monopoly - the only seller) power they enjoy make land transactions an immensely lucrative business.
Being the only buyer, local governments have the power to determine the prices at which they buy from the collectives. The law says that agricultural residents have to be compensated for no more than 30 times of the annual agricultural production value, which is minuscule compared to its commercial value. In reality, farmers often get far less than the official prices because money gets siphoned off along the way. After buying the land at such low rates, local governments then sell it off to private developers at market prices, which are at least 40-50 times of the buying prices - often due to competition from many would-be buyers.
Aside from the unfair compensation farmers are getting, there are many other problems with the current system. The windfall gains from land sales now account for the bulk of local governments' revenue, and help fund much of the infrastructure development - industrial parks, highways, bridges - in rural China. That means when the number of land sales decline, the economy slows down. Of course, the central government is well aware of this - it put a brake on land approvals last year in order to prevent the economy from overheating. Further, since land is a scarce resource, and its distribution is not determined by the market but by local governments, land titles work much like import quotas did in the infamous import-substituting era - they create 'rents' for bureaucrats and well-connected enterprises. The 'rent-seeking' behaviour gives rise to opportunities for lobbying, corruption and all sorts of under-the-table deals for local government officials to reward their cronies with much coveted land titles.
Starting from 1 October 2005, a new regulation in Guangdong province provides farmers with the legal right to sell their user-rights directly to private enterprises for non-agricultural uses without going through local governments. This will undoubtedly reduce the wheeling-and-dealing going on with land transactions, and will provide farmers with a fairer share of the pie. Nonetheless, the actual implementation of this new provincial regulation is fraught with problems, one of which is the ownership rights associated with agricultural land that still rests with the collectives. The Guarantee Law stipulates that collectively owned land cannot be used as collateral for bank loans, which is a major inconvenience for private enterprises that intend to borrow from banks. As a result, buyers may still prefer to buy land from the government, instead of from farmers.
WATCHPOINT: It will be interesting to watch developments in Guangdong, the site of the pilot land reforms, particularly in relation to how the reforms redistribute benefits and costs among the various interest groups. This will have an important bearing on the ways in which the reforms may be rolled out in other parts of the country.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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