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China’s Slow-motion Land Reform

Monday, February 1, 2010

Ever since china embarked on economic reforms some 30 years ago, the country’s agricultural development has always lagged behind overall economic growth. The income gap between farmers and urban residents has also consistently expanded, making rural areas one of the unstable factors in China’s political and economic life. The root cause, as scholars and analysts point out, is the fact that the land rights have never been clearly delineated and protected in rural areas. The farmers do not own their land. Moreover, the country’s dual structure of governance of dividing urban and rural household registration only deepened and perpetuated the income gap. Beijing’s leadership has tried to institute various land reforms at its annual decision-making meetings over the past 30 years but made little progress. At long last, the party plenum of October 2008 recognized the importance of reforming land rights if agricultural productivity was to be improved.

From private to collective ownership

At the founding of the People’s Republic of China in 1949, the People’s Political Consultative Committee, then the supreme legislative organ, declared the “land to the tiller” principle in its “Joint Guidelines,” which served as China’s interim constitution.

Under this principle, hundreds of millions of Chinese farmers were assigned plots of land and dwellings, according to household size. Each household’s members were to enjoy full property rights over their land and house, the rights to farm, live on their land, buy and sell, transfer, and give away the property. No one could infringe on these rights. In 1952, the government had issued an official document — “Certificate of Land and House Ownership” — to each household. Some rural households have kept these yellowish certificates even until this day, although they were long ago useless.

Sadly, this honeymoon was short-lived. Starting from around 1953, the Communist Party began a collectivization campaign in villages across the country. At that time, China desperately needed funds for its industrialization. Agricultural output remained the biggest source of investment throughout the decade. According to historical data, agricultural surplus accounted for 30 percent of total farm output. The central government tried to raise the agricultural tax but immediately encountered strong resistance from farmers. Given this situation, collective land ownership and state control of agricultural surplus seemed to be a logical option for the policymakers.

The process of collectivization has been gradual. At first, farmers were forced to join agricultural production cooperatives while still keeping their ownership of land. But as collective farming spread, farmers gave their land-use rights to these cooperatives. In 1956, the People’s Congress in Beijing officially reclaimed all land rights from the farmers and turned them over to the “collectives.” Farmers, now stripped of their land, became “members of the cooperatives.”

The next step was to transform these cooperatives into people’s communes, which were established in 1958. The communes, in turn divided into production brigades and teams, had exercised governmental, political, and economic functions. Farmers were assigned to a certain production team to do daily fieldwork. At year-end, they received “work points” according to the hours they worked. Some of the work points were paid in the form of grain, while a small part could be paid in cash. Farmers also contributed their private animals and personal belongings, including kitchenware, to the commune. They stopped cooking at home and dined at the commune’s public canteens. Some people’s communes even declared they had entered the era of the “communist society.” Obviously, this farming system was beset by inefficiencies and waste, and could never motivate farmers to work harder and increase agricultural output.

The de-privatization finally came to the countryside at enormous costs. From 1949 to 1952, when farmers received new land rights, the output of grain rose by 50 percent, while farmers’ purchasing power doubled. But after rural collectivization, agricultural production constantly declined, and farmers lived in poverty. To make matters worse, in 1959, famine began spreading, and tens of millions of rural people died. This crisis was one of the great human tragedies of the 20th century.

The household responsibility system (hrs)

Many chinese farmers openly blamed the government for these disasters. From the very beginning of collectivization, farmers used every possible means to resist the authorities’ collectivization policies. In 1956, when farmers’ land rights were formally revoked, famers in eight provinces — Liaoning, Anhui, Zhejiang, Jianxi, Sichuan, Shanxi, Henan, and Hebei — spontaneously withdrew from their cooperatives and took their draft animals with them.

Some creative farmers found another way to challenge state policies within the existing regime. They invented the “household-contracted responsibility system” (hrs) in the cooperative. As early as the second half of 1956, the authorities of Yongjia County, Zhejiang Province, realized that the collective system lacked incentives for farmers. They decided to subcontract collective land to individual households, expecting to encourage farmers to work harder. Under this system, collective land was allotted by contract to individual households. Each, in principle, assumed a certain amount of responsibility as authorized by their contracts. In the beginning, this responsibility was tied to output: Farmers promised to give a certain percentage of their gains back to the state and collectives based on a calculation of how much output a piece of land could produce on average. This promise was made in exchange for management rights for a particular piece of land. This contract allowed farmers to keep additional gains for themselves and enabled them to earn more than ever before. Meanwhile, land ownership remained as it was, and it still belonged to the “collective.” Farmers only had use rights over their allocated land under certain contractual terms.

The hrs soon spread to most rural areas of the country. Some 70 percent of the cooperatives in Gansu and Ninxia Provinces, and 85 percent of Anhui Province, adopted the hrs in 1961. Although the hrs was popular and boosted production and living standards, approval from the central government to adopt this system came to farmers only in late 1978. The supreme leader, Mao Zedong, and his conservative followers in the ruling circle shared a deep prejudice against the practice and denounced it, even labeling it as a “capitalist principle” and those local officials who promoted it as “capitalist roaders.” Many officials were demoted and even persecuted. Yet in some areas, the hrs continued even through the harsh years of the Cultural Revolution.

In 1978, after the fall of the Gang of Four and the passing of Mao, 17 farmers of Xiaogang Village, Anhui Province, led by their village head, applied their signatures and fingerprints to a household-contracting document. They later were credited as champions of the country’s new land reform. But there was no smooth sailing for this reform. Conservatives in the top leadership made every effort not to implement the hrs. In 1982, when Deng Xiaoping took power, the hrs had been applied to almost every part of rural China.

The hrs experience showed that farmers’ rights to collective land could also include contract agreements between the farmer and the collectives. The Chinese economist Zhou Qiren called it the “delineation of rights with Chinese characteristics.”  In reality, this arrangement still only permitted limited rights to use the land, not the rights of ownership.

Since the hrs was legitimated, the system has improved and been upgraded from time to time. The authorities knew that uncertainties regarding terms of contract would increase its enforcement costs. The directives of the party’s Central Committee in the 1980s specified a 15-year term of land lease. Later, it was extended to 30 years. The responsibility of the contract was initially tied to output, and then to the value of the land. The People’s Congress passed a Law of Land Contract in Rural Areas in 2002, which specified that the entire rights of use, revenue, and transfer of farmland were to be contracted to farmers’ households for the “long term.” Although the collective still is the legal owner of farmland, its function is limited to contracting land to farmers. As the farmers enjoy the privilege of renewing the contract upon expiration, the “long term” actually means they can use the land for a lifetime.

Transfer trade

In the late 20th and early 21st centuries, China’s rapid economic growth produced an explosive expansion of urban areas and their rising demand for land. Meanwhile, more farmers migrated to the cities and left idle huge amounts of collective land, which could not be transferred and traded. Obviously, the outdated, rigid land system was no longer coping with the challenges of the country’s modernization programs.

The country now has a unique dual-track land ownership system and another system separating land ownership from land-use rights. Technically the government owns all the land. Nonetheless, individuals and businesses can acquire land-use rights if certain preconditions are met. Land in an urban area is owned by the state and can be publicly traded on the market sponsored by government organs. Land in rural and suburban areas is owned by collectives and can only be used for nonfarming purposes after it is requisitioned by the state. According to the law, collectives cannot trade the land or use it as collateral. In fact, it becomes “dead capital.”

Many farmers began inventing new ways to use their land rights within the limits of the existing law.

Again, many farmers began inventing new ways to use their land rights within the limits of the existing law. At the initial stage, the “transfer and trading of land” (tudi liuzhuan) took the form of subcontracting and leasing. As some farmers migrated to urban areas and found jobs there, they began subcontracting or leasing their land-use rights to other farmers, usually from neighboring provinces that had dense populations and little land. Then the new system further evolved to join shareholding cooperatives or agribusinesses. As early as 1992, farmers in rural Nanhai of Guangdong Province created their new version of the cooperative. By pooling their contracted land, farmers priced each piece of land and took certain land shares to use in collectively planned and managed businesses. It was a higher stage of tudi liuzhuan system. Despite a lot of criticism, the practice soon spread across the country. The transfer and trading of land-use rights helped increase the supply of much-needed land for China to become the ever-growing “world’s factory.”

At the turn of the new century, the transfer and trading of land-use rights took new forms. Some farmers established their shareholding businesses or new collective farms with their land as equity stakes; others rented the land left by migrant farm workers and combined pieces of land into a farm. These processes led to the creation of larger, more efficient farms that could increase output and boost lagging incomes in the Chinese countryside. In those cooperatives or rural businesses, farmers hold shares, and annual distribution is much higher than the income farmers received from farming.

The following are some examples: In Xinyang County, Henan Province, a village transferred all of its land into a shareholding company to develop ecological farming. In Chongqing, in a village called Qiling, 300 farmers pooled and priced their contracted land for producing a new type of orange provided by a fruit company. The farmers became shareholders of the company, which remained responsible for its losses and profits. Other forms of transfer and trading included land trust, swaps, setting up land-credit cooperatives, etc. Many local governments allowed and promoted the transfer and trading of land to achieve an economy of scale and higher efficiency of land use, agricultural industrialization, and urbanization, provided that ownership and use of the land (for farming only) remains unchanged. The parties involved in transfer and trading conclude written contracts specifying the land size, location, use, term, price, and responsibilities. In some places profit is distributed between businesses and farmers on a 51-49 ratio. In other areas the contracts allowed farmers who transferred their land to be employed by the nearby agribusinesses as workers receiving regular wages.

Although the transfer and trading of land has spread spontaneously in many rural areas, the Beijing government to date has yet to officially endorse this practice. The reason lies partly in the fact that it involves a number of institutional ambiguities. Legally, the rural land belongs to the “collective,” which contracts it to farmers to manage. If farmers can transfer their rights of management to a third party, it would mean that the farmers’ rights of contract are not only a creditor’s rights, but a kind of property rights (the “real rights”). It would contradict the current law of land ownership. Another reason might be the concern and suspicion among some officials and scholars who still assume that transfer and trading may lead to irrational concentration of rural land, thus increasing the number of landless farmers in addition to those who lost land due to requisition. But other scholars maintain that transfer and trading should be legalized and farmers be granted “Certificates of Land Use Right.”

An incomplete land reform

The chinese communist Party held its decision-making plenum session in mid-October 2008 for reviewing a draft of a sweeping land reform policy. A month before the meeting, President Hu Jintao paid a visit to Xiaogang village in Anhui Province, the forerunner of the hrs 30 years ago. This visit was then widely interpreted as a signal that President Hu was backing the land reform policy. Scholars and government advisers expected that the plenum would discuss and approve two major changes: allowing farmers to unrestricted transfer and trade of land-use rights and extending those contracts from 30 years to 70 years. But that was not the case. The communiqué issued after the meeting did not mention any significant land policy reform.

Although the transfer and trading of land has been tried in many provinces, its legal status remains ambiguous. After the 16th Party Congress in 2004 pointed to “implementing transfer and trading of land on voluntary, paid principle and according to law,” the provincial authorities designed corresponding local laws to regulate rural land markets. But still there was no nationwide unified law. People expected the party’s 3rd Plenum in October 2008 to resolve this problem. It didn’t happen. Even the phrase “strengthening the market for transfer and trading of contracted land” that had appeared in previous party document was replaced by “ exploring the transfer and trading of contracted land” (my italics). Obviously, the new tone was more circumspect and cautious. The transfer and trade of land seems to have not been officially endorsed and encouraged.

Moreover, farmers have been anxious to see what awaits leaseholders as their 30-year contract periods begin to expire. How long will they be extended? Many had hoped the answer would be forever — or at least for 70 years. To their disappointment, the plenum turned down the initial drafter’s proposal for lifetime tenure of rural land and used these words: “Household contracting will remain unchanged for a long time.” But what does “a long time” mean? Meanwhile collective ownership of rural land is to be maintained.

Another issue concerns the use of land as collateral for loans. What farmers need most is the right to use their property as collateral for obtaining bank loans, a right in any market economy. Undoubtedly, a property right without any right to mortgage is incomplete. But this right was not included in the plenum’s final document. As one contributor to the document explained, some high officials and economists opposed the idea. They cited Japan as an example, noting that only 1 percent of Japan’s rural land served as collateral. He added that a host of technical difficulties are still to be tackled. Under current laws, a rural homeowner does not have any property ownership certificate, which is a requirement for any collateral loan.

Many reform-minded officials and scholars, however, were frustrated that the plenum disapproved the farmers’ “eternal use of the land.” Some sources reported that there was a heated debate at the meeting. The urban vested-interest groups, especially the powerful developers, as well as some ministries of the central government, opposed any changes in existing land rights for fear they would lose the privilege of acquiring rural land at a low cost. Also, some conservative ideologues warned that weakening the existing system of collective ownership could deprive farmers of their security to have a piece of land and possibly lead to millions of landless farmers. Thus, the Communist Party remains weighed down by past political taboos.

The party’s decision-making meeting in fact conducted only an incomplete land reform. It pledged to help establish markets where farmers could subcontract, lease, and exchange or swap land-use rights, or join shareholding entities. Although these practices have existed in many sub-county areas, formalizing these practices would certainly reduce China’s transaction costs and mark a significant step forward for land reform.

A call to return land to farmers

China’s economic reforms have produced extraordinary economic growth over the past three decades. Farmers, however, have not enjoyed the fruits of that growth as urban dwellers have. Since 2004, the central government has, for every year, put rural development at the top of its agenda. But China’s rural and urban income ratio widened from 1:2.6 by the end of 1999 to 1:3.3 in 2007, and the average per capita income gap grew from $780 to $1,411.

Government studies indicate that more than 40 million farmers have been displaced from their land.

Scholars and analysts argue that the reason for incomplete land reform (including the transfer and trading of land) lies in the weak delineation of land rights. Institutional economics has long maintained that given the vagueness of property rights (“rights failure”), political power plays a primary role in allocation of resources. In the case of rural land, even farmers’ right of contract management is not guaranteed. In the name of the “collective,” the village and township government enjoys full rights on land that overwhelms farmers’ right of contract management. These authorities can easily dispose of rural land in the name of “public interest,” or requisition land through new laws and directives. The huge amount of returns from requisitioned land (used by either industrial or residential construction) reverts to the authorities or developers. Farmers have lost land and its expected added value. Especially unfair is having authorities requisition publicly owned land and transfer it to private developers for their personal gains. These transactions obviously constitute infringement of farmers’ rights to use land.

In recent years, it has become increasingly common that local officials — usually at the village level — requisition land for sale to urban manufacturers or property developers. This process is rife with corruption and violence. Usually, the village or township chiefs first press farmers into selling their land to the local government at absurdly low prices, which cannot cover the farmers’ relocation cost and daily living expenses. The enraged farmers naturally refuse to sell. The authorities then call armed police, use bulldozers to level the land, destroy crops, and finally seize the land. Farmers resist, protest, and confront the police. Bloody conflicts erupt after police beat up and detain protesters. Some farmers seek redress by petitioning higher levels of government, but often in vain.

Government studies indicate that more than 40 million farmers have been displaced from their land, and the number is increasing by more than two million a year. On the other hand, private sources put the landless figure at 80 million.

A feeling of despair has forced Chinese farmers to take unilateral, bold action to reclaim their land rights. According to news reports, in December of 2007, some 40,000 landless farmers of 72 villages in Fujin, Heilongjiang Province, issued a declaration publicly claiming ownership of 247,000 acres of collective lands including those expropriated in villages. They decided that all lands were to be divided equally to every family within the boundary of each village, who would then enjoy all rights including use, inheritance, disposition, and consent and bargaining with authorities and developers in case of land lease and sale. Later, in January 2008, 70,000 farmers from 76 villages of two counties in Shaanxi Province followed suit, declaring their ownership over 24,700 acres of land, which they are currently contracting. The land shall be used and owned by the farmers for generations. They also claimed their rights to the other 24,700 acres of land which had been expropriated by the local officials at all levels. They would organize all the farmers to equally divide the land among themselves, based on per capita farming area, to bring an end to unwarranted land seizures.

At the same time, according to law, urban land, although state-owned, is readily traded, with far longer leases.

In other cases, farmers have challenged the policy of forbidding the use of land as loan collateral. As official news media reported in April 2009, 151 households in a village of Faku county, Liaoning Province, secured a loan of 300,000 yuan ($44,110) from a local rural credit union by using their 60 hectares of land as collateral. The government has given tacit approval to this experiment. In the meantime, the authorities in three cities of Hunan Province, including the capital, Changsha, initiated the same experiment in suburban rural areas. As analysts commented, this groundbreaking step, while enhancing farmers’ land-use rights, may open the door for bank loans to flow into the country’s cash-strapped rural areas and reinvigorate the rural economy.

As Ronald Coase once put it, “The delineation of right is an essential prelude to market transaction.” Chinese economists have agreed that without returning land rights to farmers, a market economy cannot be properly established in China. People also wonder why farmers are not granted land rights if the government already recognizes the legitimacy of private ownership of capital, labor, and human capital. Farmers stripped of their land have no right of equal transaction in the local, fragmented land market. So far there is no national, unified land market. Land prices are not determined by supply and demand, but by government intervention that ignores the rights of millions of farmers. At the same time, according to law, urban land, although state-owned, is readily traded, with far longer leases. Rural land can be transferred only when the government has requisitioned it, which opens the door for the authorities to pursue rent-seeking, significantly increasing transaction costs in rural production.

Chinese academics have long argued that a freer and better-regulated rural property market is essential if farmers are to enjoy more of the fruits of economic growth. They say it would encourage the consolidation of tiny, inefficient plots of land leased to farmers by collectives and allow farmers to cash in on their land’s market value, enabling them to use that capital to go into businesses in the cities. Academics also think that a proper land market would protect farmers from indiscriminate land grabs by local officials who often take collective ownership to mean no more that their personal control.

Another unresolved issue is the legal status of farmers’ homesteads. In recent years, more and more farmers have built houses on their homestead and sold them to urban dwellers, especially during a housing price boom. Oddly enough, according to law, the homestead is owned by the collective and cannot be leased or sold, but farmers can enjoy full right of ownership over the house built on it. But without ownership certificates issued by the Ministry of Construction, farmers can only trade with buyers on a private basis. As economist Li Yining has pointed out, as long as farmers do not own and trade the country’s rural homestead, it is a dead asset. Scholars have also strongly suggested that farmers’ homesteads and houses should be regarded as capital and have free access to the land market.

The root cause of the land right problem, as many scholars agree, is the structure of state governance.

More and more scholars call for directly introducing rural land into the market, with “same land, same price, and same rights.” At least collectively owned land should be treated as equal to state-owned land, enjoying the right to transfer, lease, and mortgage. Simply put, what the government needs to do is to return all land to its original owners — farmers. That step would inject vitality into rural development and help boost domestic consumption. More than 700 million Chinese are still designated as rural inhabitants, yet their spending power is minimal. Even those migrants to the cities are still largely excluded from urban social-security provisions as well as the subsidized education and the housing that the city-dweller enjoys. If farmers were granted land and housing they could own and dispose of, they would participate in market competition, or liberate themselves from the land and the surplus labor force. Also, if the 20 trillion yuan ($2.9 trillion) rural homestead and 1,800 million mu (296 million acres) of arable land of China flowed into the market, it would release enormous wealth, jump-start the rural economy, and stimulate the world’s biggest domestic market. It is one way to offset the possibility of a recession (Chinese exports are expected to slow because of the current global financial crisis) and to help the world economy.

The root cause of the land right problem, as many scholars agree, is the structure of state governance. The entire rural land system is designed not for free disposition of land by farmers, or for achieving maximum income from land. Instead, the government and urban inhabitants have shared most of the added value of land. Since the 1950s, a dual urban-rural household registration structure, the collective land ownership, and tight state control have led to deep separation between the countryside and cities.

This structure also inhibited the process of China’s urbanization. Currently, urbanization in China, around 45 percent, is lower than that of most African and Latin American countries, which is around 50 percent. The reason, as Professor Wen Guanzhong, a rural reform expert, has explained, is that fewer people in China can afford to buy housing in urban areas. In other countries, the funding of urbanization comes from property taxes, given that the land and houses are privately owned. In contrast, there is no property tax in China. The land on which the houses are built is state-owned. This encouraged the purchase of farmland by the local governments at low prices and the sale of it to developers, thus inflating housing prices. Under a privatized and marketized land system, the suppliers of land are not limited to government alone, but also include millions of farmers. Therefore, Wen argues, allowing farmers to trade their collectively owned land on the market would diversify the supply of land in cities and lower housing prices. Meanwhile, it could prevent waste and abuse during the process of land redevelopment.

A market or a tweak?

China again stands at a crossroads: Should the country return land to farmers and establish a land primary market, or just fix the existing system by limited reform? Most farmers and experts advocate distributing land ownership to each farmer equally and granting farmers the same equal political and economic rights that urban inhabitants have been enjoying.

There has been some progress in China’s property rights reform. The central government approved reform of forest land rights in June 2008, allowing the country’s 2.5 billion mu collectively owned forest land to be contracted to farmers for 70 years, and it can be transferred, traded, collateralized. The experiment with this reform started as early as 2004 in Shanxi Province, and then spread to other provinces. It is probably the most important step, as Premier Wen Jiabao has said, in China’s rural reforms since the hrs system was implemented. The new decree officially returned all rights — ownership, rights of contract, and management of forest land — to farmers. Having received a long-term, reliable means of production, the farmers in forest areas were able to develop and expand the forest economy, including the wood and timber industry, bamboo and flowers, biofuel, forest tourism, etc. Farmers were allowed to put up their use-right of forestland and ownership of forest as collateral to get loans from banks. Thus, it has promoted a capital market and business activities in these areas. Farmers’ living standards significantly improved. According to news reports, the cash income of farmers from forestry in Jiangxi Province has tripled since the reform. Many scholars contend that the successful reforms in forest land should serve as an example for all rural land reforms.

The encouraging element in the decision of the last party plenum was the  admission that “The urban-rural dualist structure is a great contradiction,” along with the pledge to “break this structure by integrating urban-rural socio-economic development.” The government will also implement the rectification and registration necessary to issue titles for rural land use rights. People now ponder what China’s legislature should do next. Perhaps it should revise the related laws such as the Land Administration Law and the Property Law and remove the many restrictions imposed on peoples’ rights to their rural land.