Land Reform Efforts in China

Despite reform efforts in recent years, land seizures in China have become a growing source of social unrest.by Zhu Keliang and Roy ProstermanGrievances arising from compulsory land expropriations conducted by government authorities, also known as eminent domain in the United States, are the main cause of mass protests and violent conflicts in China today, according to researchers from the China Academy of Social Sciences. While the pace of industrialization and urbanization accelerates in China, Chinese officials estimate that approximately 2 million rural residents lose their land each year. On paper, government authorities in China may expropriate land and other properties without the consent of property holders for the purpose of “public interest.” Though the expropriated parties are entitled to compensation, they often do not receive market rates.

A highly-publicized mass protest against local authorities’ land expropriations in Wukan, Guangdong in late 2011 helped highlight this phenomenon. But the Wukan experience is not an isolated incident. The Wall Street Journal reported that in 2010, there were 187,000 cases of “mass incidents” involving group protest and violent confrontation with government authorities. Approximately two-thirds of these incidents were related to land grievances, mostly in rural areas.

There are strong incentives for local government authorities to continue their current practice of land expropriations. Local governments sell expropriated land to property developers, and the resulting profits and real estate development are a major source of local government revenue and GDP growth. In recent years, revenue from selling expropriated land has constituted 27 percent of the total local government budget each year. In many big cities, the proportion has reached 40-50 percent. According to the Chinese media, the total government revenue from the reported sales of expropriated land in the 120 largest cities in China reached roughly $300 billion in 2010. In addition, Caixin magazine reported that in 2010 local governments used land sales revenue to repay up to 40 percent of local government debt.

Because land is often expropriated cheaply from farmers, local government authorities frequently offer “free” or low-cost land as an incentive to attract investment projects. In 2009, a major automobile manufacturer, BYD Co. Ltd., agreed to invest ¥5 billion ($733 million) to build a factory with an annual production capacity of 400,000 new cars in Xi’an, Shaanxi, largely because the local government promised the company 750 acres of land. According to media reports, the local government did not follow proper regulations in the expropriation process, which triggered a series of protests by land-losing farmers. The PRC Ministry of Land and Resources later stepped in and ordered the suspension of the project. Despite this incident, such incentives are considered by government and businesses as a common and legitimate practice across China to attract big investment projects. This not only serves as additional grounds for local governments to expropriate farmers’ land but also creates unfair competitive advantages among firms that have close relationships with local governments.

The following article explains how the law and practice work in China concerning compulsory land expropriations. Unless otherwise specified, all the data cited below comes from a nationwide survey conducted by Landesa, China Renmin University, and Michigan State University in the summer of 2011. The survey consisted of independent interviews of approximately 1,800 farmers in 17 agricultural provinces.

THE POLICY DILEMMA

Chinese policymakers are facing a dilemma. The central government agrees that strong and secure land property rights for farmers are key to achieving social stability and sustainable growth in the agricultural sector, but local authorities are attracted to the easy revenue generated by land sales and real estate development. The government realizes that this practice is resulting in a looming property bubble, jeopardizing the Chinese economy, and leading to social unrest.

The PRC government has recently taken actions to address the problem, such as tightening the real estate market to curb local authorities’ desire and ability to expropriate farmers’ land. In 2011, Chinese news sources showed that the revenue from land sales dropped by 13 percent due to the central government’s tightening of the real estate market.

The central government is also in the process of amending its land expropriation law to improve both the legal regime and the government practice. Outside of Beijing, a few local authorities in Hainan and Guangdong are experimenting with new ways of carrying out land expropriation schemes so that the process can become more fair and equitable for the farmers. For example, in one pilot county in Hainan, affected farmers are allowed to organize themselves as a company to negotiate and distribute cash compensation. The company also receives a share of the developed land that can be permanently used for commercial or other for-profit purposes, which allows affected farmers to receive ongoing dividends to ensure their long-term livelihood.

However, there is great uncertainty as to how far the reforms can go. The recent economic slowdown in China has already opened up the discussion about whether the real estate market tightening measures should be loosened. Local authorities’ strong desire to promote GDP growth, improve infrastructure, and maintain social services does not necessarily coincide with the central leadership’s efforts to avoid economic missteps and assert effective political control over local jurisdictions. Consequently, news sources have reported significant hurdles and opposition to the revision of the land expropriation law, dampening the high hopes for some fundamental improvement to the law.

WHOSE LAND IS IT ANYWAY?

In China, the law provides that all farmland is owned by collectives (village communities), and collective land ownership is defined as jointly owned by all members (farmers) of a village collective. However, there is no effective system in place for farmers to exercise their ownership rights or to determine market prices of land. Instead, a few village officials, who are politically accountable to their superiors at higher levels of government, usually exercise the ownership rights on behalf of the village collective. In essence, the local officials treat the concept of collective ownership of farmland as state or national ownership, which leaves farmers with little say in situations such as land expropriations.

Instead of real ownership rights, Chinese farmers possess “use rights.” China’s modern land reform began with the dissolution of Soviet-style collective farms and the physical allocation of farmland to individual households for individual farming. Under the law, each farm household enjoys use rights to the allocated land, including the right to possess and farm the land freely, and to lease or assign the land on the market. The use rights last for a term of 30 years, many of which started in the late 1990s. About 77 percent of China’s 200 million farm households currently have received some form of written documentation confirming their 30-year use rights.

However, their 30-year rights are not guaranteed in practice. Such rights are susceptible to many threats from local authorities and officials, restraining farmers’ ability to make investments in land to increase production and income. The greatest threat to the security of farmers’ land rights is compulsory land expropriations, which have caused widespread grievances and public outcry.

THREE CHALLENGES

Like many other countries, China’s constitution and other laws allow gov-ernment to expropriate land for “public interest,” but in practice many land expropriations in China are for private or other for-profit interests. The definition of “public interest” in China is still unclear. The 2011 Landesa survey shows that the most common reasons for land takings include road construction, development zones, factories, urban housing, or future urban or commercial development (see Figure 1). Other than road construction, almost all remaining land projects serve private commercial interests in China. The “others” category includes some schools or irrigation projects, but also represents cases where the public is not fully informed about how the land will be used (and it is often used for commercial purposes). Based on reports of land sales in the media, it is reasonable to assume that a majority of the land expropriations generate hundreds of billions of dollars every year for local authorities.

Many land-losing farmers say compensation is grossly inadequate, according to Landesa’s surveys. The law calls for “reasonable compensation” that should ensure the long-term livelihood of affected people. In reality, this objective has been seldom achieved. Although there are reports of farmers living on the fringes of Beijing or Shanghai who became overnight millionaires due to the compensation paid in land expropriations, such stories are a rarity.

The 2011 Landesa survey shows that the average amount of compensation paid to land-losing farmers is $17,800 per acre. For projects serving for-profit purposes, this is hardly the “fair market value,” which is typically defined as what a knowledgeable, willing, and unpressured buyer would pay to a knowledgeable, willing, and unpressured seller in the market. In addition, there is still no final authority in China that determines land valuation for farmers, even though entities such as the Asian Development Bank have tried to calculate compensation and valuation for expropriated land. For a small number of cases where affected farmers knew the actual prices at which local governments sold the land, the survey shows that local authorities sold the land for a mean price of $740,000 per acre, more than 40 times higher than the average compensation paid to farmers. Taking the median price local authorities are reported to have received, which reduces the influence of high outlying prices, the price is $190,000 per acre, still more than 10 times what the land-losing farmers received. The government authorities retain the difference as their revenue.

Compensation is the biggest complaint among affected farmers. When asked about their satisfaction with compensation for expropriated land, more than 50 percent of respondents said they were very dissatisfied or dissatisfied (see Figure 2). Compared to past surveys, respondents hold about the same level of dissatisfaction with compensation.

Overall, the total number of dissatisfied farmers is more than twice the number of those who were satisfied with their compensation. Notably, 17 percent reported that they were “very dissatisfied,” nearly six times greater than the proportion of “very satisfied.” This translates to roughly 670,000 people who are “very dissatisfied” every year due to land expropriations.

A third source of dissatisfaction concerns the lack of procedural fairness and transparency. Nearly half of those who were dissatisfied cited a due process issue alongside their economic loss, saying compensation was decided without any input from the farmers. Government authorities commonly make unilateral decisions on the issue of compensation and resettlement, and the Chinese court system often declines cases filed by land-losing farmers who wish to challenge the government’s decisions.

IMPLICATIONS OF ONGOING REFORMS

Some regulatory reforms show promising improvements in laws on compulsory land seizures. A State Council regulation in January 2011 concerning the compulsory expropriation of urban properties allows government seizures of urban land rights and real estate only for truly “public interest projects,” essentially eliminating the possibility of exercising public power to serve private, for-profit projects. This regulation also requires a court order before evictions can occur, a significant improvement to prevent procedural abuses by local governments. According to Premier Wen Jiabao’s public announcement in early 2012, the amendment of the land expropriation law will be completed before the central leadership transition takes place in March 2013.

But China’s land expropriation law still does not clearly and narrowly define “public interest,” which would stop the government from taking household-held land use rights for commercial purposes. The current law also does not set compensation standards to allow farmers to capture more of the value generated from changing the land to non-agricultural use. The current process also lacks transparency and public participation, which prevents farmers from having a meaningful say in the process.

Granting reliable, continuing rights on the same parcels of land to farmers could help increase domestic consumption in China, one of the government’s major policy goals. It could also help narrow the large urban-rural gap in per capita income, which is now roughly 3 to 1 in favor of city dwellers. If the rural population is granted land rights, they will be able to invest in the land that is their main asset, grow their wealth, and join their urban cousins as consumers of a wide range of goods and services.

Securing and protecting land property rights has significant implications for the business sector. Local governments in China often lure investors with free or cheap land; but in reality, there is no such thing as “free land.” Corporate social responsibility calls for prudent considerations to ensure the affected people are treated fairly. It is also in the best interest of investors and businesses to carry out due diligence assessments as to whether the land is obtained legally and properly. Otherwise they risk having large numbers of angry farmers protesting in front of their new factories or office buildings. The reputational risk for business firms is substantial, and it must be treated with care and caution.

[author] Zhu Keliang ([email protected]) is an attorney with the Landesa Rural Development Institute. Roy Prosterman is the founder of Landesa and a professor emeritus at the University of Washington law school. [/author]