China’s land property rights problem

Xintong Hou

Introduction

Land is the most basic asset of and the best social welfare guaranty for farmers. As a

result, implementing secure land rights will not only encourage farmers to make more

mid- to long-term investments, but has also been shown to stimulate the rural land-

transfer market which further promotes agricultural efficiency and overall economic

growth. However, there is a difference between secure investor property rights and

loosely defined individual land property rights in China. Although has once been

considered as a major driver of China’s rapid economic growth, it is now gradually

veer those being deprived of land into violence and social unrest, which may

undermine China’s social stability and long-term sustainable growth. In this article, I

want to discuss the unique history of Chinese reform about land property rights, the

problem with the current vague land property rights and the possible solutions based

on the main ideas from three books: The Rise of the Western World; One Economics,

Many Recipes and The White Man’s Burden.

1 Some facts based on literature review

In The Rise of the Western World, North argues that secure property rights are a

necessary condition for economic development. However, China’s remarkable

economic growth in recent decades was achieved with poorly-defined property rights

and a relatively weak legal system. How, then, has China achieved such economic

growth? Rodrik in his book One Economics, Many Recipes answers this question. He

underline that economic growth should be context-specific. In other words, social

arrangements can be equally important as the state institutions and that small

institutional changes specific to the context can make a big difference to growth. And

as a matter of fact, in developing and transition countries, a lack of well-defined

formal property rights and legal system is the norm rather than the exception. As a

result, rather than to force them to follow exactly the Washington Consensus asks,

more policy space should be given to these countries. The reason could also be found

in Easterly’s book The White Man’s Burden. The same as Rodrik, Easterly also

emphasize on local knowledge and gradualism. Based on the failure of foreign aid, he

believes that economic development could only be indigenous and bottom up rather

than imposed by outsiders since accountability and feedback—the two drivers of

economic growth—are not attainable by foreigners.

The gradual improvement of property rights for private sectors in China illustrates the

above points. In the 1980s and 1990s, the town village enterprise (TVEs) achieved a

rapid growth. Although the TVEs did not have clearly defined property rights, the

sector has achieved remarkable growth. Many articles have talked about this puzzle.

Li (1996) develops a model of how ambiguous property rights can lead to growth.

Due to the lack of formal protections on the property rights, the uncertainty related to

doing business is very high. As a result, the transaction cost to write a complete

contract is often prohibitive. In this context, the ambiguous property rights

arrangement, which often involves local officials as shareholders of TVEs, may be a

better option because it can help secure protections from the local government and

reduce impediments to reform at the local level. In a word, high transaction costs

provide a context which ambiguous property rights can be more efficient under

certain conditions than well-defined property rights. Che and Qian (1998), using

township and village enterprises (TVEs) as an example, further test the idea that in the

absence of an impartial third party to enforce contracts, entrepreneurs may receive

better protection by teaming with local government than by operating as pure private

enterprises which have to rely on the ill-functioning formal legal system.

This situation changed after 1994 tax reform. The reason, according to Wu (2003), is

that when local expropriation activities are restricted in an improved fiscal system,

local governments, who have enormous stakes in local economic growth under

China’s de facto federal system, make efforts in protecting private property rights.

Provided that local governments credibly make the commitment, the central

government officially grants and enforces private property rights for its own interests

in securing fiscal revenues.

Different from the gradual improvement of property rights for private sectors, there is

a severe lag for the development of individual land property rights in China. Some

scholars (Zhang, 2006) have argued that on the one hand, local governments provide

strong protection for business investment, in particular in regions with a large FDI

presence. On the other hand, local governments take advantage of the loopholes in the

law to seize land from farmers without sufficient compensation. The divergence in

degrees of protections of property rights between investors and individuals is an

important contributing factor to China’s rapid economic growth.

However, just as Rodrik and Easterly both argues, although gradualism for

development, such as getting rid of binding constraints for development at first and

taking informal rules and norms into consideration are important, fully adopting

formal institutions, which including well-established property rights is the ultimate

determinants of maintaining sustainable growth. In this case, then, gradually

improving individual land property rights is a necessary step for the further

development of China. Before talking about the problems caused by lacking of land

property rights, I will introduce the history of land reform at first.

2. Historical background

After coming into power in 1949, the Communist Party’s initial land reform gave

farmers full, private ownership of their small farms through a Land Reform Law and

other accompanying regulations. Through this law Land, titles or certificates of arable

lands were issued to farmers. This“land to the tiller” campaign lifted hundreds of

millions of poor Chinese out of destitution and hunger. Annual crop production

increased 70 percent from 113.2 million tons to 192.7 million tons between 1949 and

1956. Similarly, total farm income rose 85 percent during the same period. However,

in the mid-1950s, China followed in the footsteps of the former Soviet Union and

started the collectivization of all farming. Private ownership of land became illegal. In

1958 the situation was further exacerbated, with a move to giant “communes” and the

termination of the“private lots” that had allowed farmers to hold up to five percent of

the land privately, outside the collective-farming system. This movement finally led to

the Great Famine from 1958 and 1962, causing 15 to 30 million deaths. Finally,

modest reforms, beginning in 1962, ratcheted back the production unit from the

communes to village teams and restored private plots. Production then began a long,

slow recovery.

In the late 1970s, after Deng Xiaoping came into power, several regions of China

began to experiment with tearing down the collective farms and giving individual

farmers limited freedom to farm. Technically, the collectives retained ownership of

the land and allocated or “contracted out” land parcels to individual households for

private farming for a period of time. The land allocation was mostly in equal per

capita shares based on family size. The contracting households, in return, were

obligated to fulfill their “responsibilities” in harvest quotas or taxes to the collectives

every year. This scheme was called the “Household Responsibility System” or the

HRS. After its initial success, the experiment spread rapidly and became the

fundamental system of rural land tenure throughout China. The HRS was an

enormously successful reform, lifting the living standards of hundreds of millions of

rural people and was the driving force behind the single greatest poverty-reduction

achievement worldwide in the past three decades.

Despite the achievements of the HRS, several looming questions were left unresolved

and still remain. As a response, the Chinese government adopted a series of policies

and laws to address these issues. The most important four of them are the 1993 policy

directive issued by central government that extended farmers’ land-use rights to a

continuous and fixed term of 30 years; the 1998 revised Land Management Law that

embodied the 30-year policy in formal law for the first time; the 2002 Rural Land

Contracting Law which was devoted entirely to the relationship between collectives’

land-ownership rights and farmers’ land-use rights; and the 2007 Property Law, the

first comprehensive civil property code in modern Chinese history, in which

characterizes farmers ‘rural land-use rights as property rights or rights in rem.

3. The problems of the current land property rights

Firstly, a large amount of rural land is taken or expropriated by governments for

purely private or commercial purposes. According to a 17-province,

1,962-farmer/respondent survey conducted in China in 2005by the Seattle-based

Rural Development Institute, Renmin University (Beijing), and Michigan State

University, incidents of land takings have increased more than 15 times during the

past 10 years and appear to be accelerating. As I see it, this problem emerges because

China’s special situation. On the one hand, the rule of law is not firmly established in

China, and the government relies heavily on policy or administrative initiatives to

push its agenda. On the other hand, there is a completing relationship for economic

interests between center government and local governments especially after tax

revenue system reform in 1994. After that reform, power over taxation was

centralized and local governments lost most of their freedom to collect and keep local

taxes. The direct result of that was the existence of fiscal shortages of local

governments and thus forcing them to seek extra-budgetary revenue. In fact, extra-

budgetary revenue makes up more than 60 percent of local governmental expenditures

and the biggest source of extra-budgetary revenue is the sale or lease of land (often

rural land). Aside from its role as a primary source of local governments’ patronage

and wealth, it also became a resource for local development by attracting investment

and boosting real estate. Under these circumstances, without strong supporting

institutions and accompanying reforms, the financial incentives behind these land

takings are too strong for local governments to resist.. While the farmers’ rights exist

on paper, in practice the decision-making processes are far from transparent,

participatory, or fair.

Secondly, a lack of due process prevents farmers from voicing their opinions. Under

the current legal regime, farmers often do not receive due process, owing to

insufficient compensation and a lack of procedural transparency. The 2005 survey

indicates that approximately 30 percent of affected farmers were not notified of land

takings in advance. On the amount of compensation, only one out of every five

farmers was consulted. Less than 1 percent of all surveyed farmers were able to file

formal lawsuits to resolve these grievances. To make matters even worse,

dispossessed farmers seldom have access to independent courts for an unbiased ruling

and sometimes resort to violent confrontations.

Thirdly, compensation for farmers’ lost land is often grossly inadequate. The 1998

LML sets up a specific formula to determine the amount of two primary types of

compensation: one for loss of land and the other for resettlement. The law explicitly

provides that the compensation for loss of land should be 6 to 10 times the average

annual yield of the land, and the resettlement subsidy should be between 4 to 6 times

the average annual yields (Article 47 of the LML). However, since this formula does

not take market value into account, it does not allow farmers to profit from the

appreciation of land value due to development projects. Besides, the compensation is

not paid to the farmers but to the collective. The collective then decides how much

will go into the hands of farmers. Since the farmers usually know little about their

legal rights, as many studies reveal, land-losing farmers typically receive only 10–20

percent of the real market value of the expropriated land.

Fourthly, despite mortgage is universally accepted as a means for urban residents to

obtain credit, the land rights in China cannot be freely transferred in the market

because of uncertainties, lack of documentation, or legal restraints, and thus become

“dead capital”. In China, the market for theoretically transferable agricultural land is

very constrained for the last two decades. The rural land-transfer market in China’s

countryside is still at a very early stage. Roughly a third of rural households have been

parties to a land transfer. Scrutinized more closely, nearly half of these transactions

cannot be construed as market transactions because they were at will, oral transfers

among relatives of the same village without any rent paid (Zhu Keliang, 2006).

Another problem with land transferring is due to ideological reason. In China, the

term “landlord” is so sensitive and carries so much political baggage that a serious

assessment of mortgaging land is political infeasible. Chinese laws ban mortgaging

arable land based on the consumption that farmers may engage in unwise deals, using

their land as collateral, and eventually losing the land to banks or rich people. The

controversy surrounding rural land mortgage was reflected in the drafting of the 2007

Property Law. One of the earlier drafts of the Property Law actually allowed

mortgages, but the clause was eventually scratched off.

Finally, since the 30 years began in the late 1990s (1997–99 in particular), majority of

farmers’ rights to their land are set to expire by the late 2020s. A telling provision in

the new Property Law is that the term for urban land-use rights—currently 70 years—

will be automatically renewed. However, in the case of rural land, when the present

30-year contract term expires, the law states that “farmers should continue extending

the contract according to relevant law” (Article 126 of the Property Law). The

question of the length and the manner of the extension is actually stated very vague.

While the best scenario would be automatic and repeated renewal by operation of law,

which would entail the least amount of disturbance and uncertainty, the ideological

preference, again, may become the obstacle for the government to grant full, private

land property rights.

To sum up, the problems with the current land property rights in China lie in

insecurity, uncertainty and non-transparency, and thus prevent farmers from making

more mid- to long-term investments as well as stimulating the rural land-transfer

market which would further promotes agricultural efficiency and overall economic

growth. In other words, although vague land property rights (HRS) was once an

effective expediency based on the specific context of China, keeping fixed on it will

undermine China’s further development and stability.

4. Political feasible solutions

As aforementioned, as the government considers collective ownership of rural land

one of the fundamental features of a “socialist” country, so it is unlikely that truly

private ownership of land will come about in the foreseeable future. So the political

feasibility would be the top priority of current solutions and recommendations.

My solutions are focused on improving the uncertainty and non-transparency of the

rights for land as well as perfecting the implementation of the existed laws.

Firstly, the issuance of documentation to all rural families should be pushed harder

since valid contracts or certificates will provide stronger protection for farmers’ rights

and interests as well as encouraging them to make mid- to long-term investment. To

make local governments to implement this process, the central government should

clearly signal that the achievement of this goal will be one of the key issues on which

the adequacy of officials’ performance will be judged. In other words, the local

officials should be held accountable for the implementation of issuing valid land

contrasts and certificates.

Secondly, it is essential to improve compensation standards and procedural fairness in

land taking. Because of farmers usually have a relatively low education and skill

level, it is extremely difficult for them to quickly transform into urban workers after

their land is appropriated. Therefore, the compensation standard should be set ensure

long-term livelihood. Equally important, the law needs to make sure that the

compensation actually goes to the land-losing farmers. In this way, the feedback

mechanism should be improved. Moreover, affected farmers should have the right to

participate in and influence the decision-making processes which should bring all the

parties—government, commercial developers, collectives, and farmers together to

enhance the procedural fairness and transparency. Also, farmers should be given easy

accessibility to public hearings and legal remedies.

Finally, the progress on implementation of local governments should be monitored.

Just as an old saying of China “the power of an official in charge is more effective

than the power of a county magistrate” indicates, the final success of the policies

depends on the implementation of local governments. As a result, the central

government should conduct continuing assessments through for example farmer

interviews telephone surveys. Besides, steps such as random selection of counties,

villages and direct farmer interviews without the presence of local officials should be

taken to ensure the accuracy of the findings.

5. Conclusion

China’s successful transition away from collective farming to “Household

Responsibility System” proves the arguments of Rodrik and Easterly by showing the

potential impact of improved land-tenure security on agricultural production.

However, the informal expediency of development should finally be institutionalized

to formal property rights to ensure sustainable and stable economic development as

shown by the more and more serious problems with the current informal and

incomplete land property rights. This requires further significant legal and policy

reforms as well as concrete implementation at the local level of the already existing

body of law.

Reference

1. Douglass C. North & Robert Paul Thomas. The Rise of the Western World: A New

Economic History. Cambridge University Press. 1973.

2. Dani Rodrik. One Economics Many Recipes: Globalization, Institutions, and

Economic Growth. Princeton University Press. 2007.

3. William Easterly. The White Man’s Burden: Why the West’s Efforts to Aid the

Rest Have Done So Much Ill and So Little Good. Penguin Group (USA) Inc. 2006.

4. Wenbo Wu. The Origin of Property Rights In China: A Game between Central

and Local Governments. The Chinese Economist Society Beijing Conference,

2003.

5. Yan Qin and Yunbo Zhou. Transformation of Property Rights in China.

International Review of Business Research Papers, Vol. 4 No.2 March 2008

Pp.243-248.

6. Zhu Keliang and Roy Prosterman. Securing Land Rights for Chinese Farmers: A

Leap Forward for Stability and Growth. CATO Institute. October 15, 2007, no. 3

7. Xiaobo Zhang. Asymmetric Property Rights in China’s Economic Growth.

International Food Policy Research Institute (IFPRI). January 6-8, 2006.