There is an long-neglected and under-researched issue in deciphering China’s economic miracle, which is how the land have been supplied during the process of China’s high-speed economic growth. William Petty (1662) said that labour is the father of wealth and land is the mother of it. Comparing with the agricultural age, the industrialized economies require much less land, and hence the countries with less land such as Switzerland, Netherlands and the like become wealthy ones. However, industrialization still need land, for that growth of industrial societies are achieved by the investment on land. Manufacturing firms of large scale request much larger land and space. Infrastructure such as airports, power plants, highway, railways, ports and harbors and the like depend on the huge amount of land. The wisdom of the main stream economics is that the investment requires a system of clear property rights (Coase, 1995). Therefore, during the process of economic takeoff, whether a backward country is able to efficiently provide firms of all type with land is the prerequisite necessary condition. Not only does the clearly well-defined property right of real estate and the recording system help entrepreneurs get financed by the collateral of his/her own real estate, but also it assists creditors and law enforcing organization to identify where the debtor is; 70% of the entrepreneurs start up their businesses by using their own real estates to get financed (Soto, 2000). China is a huge populous country and there is shortage of her cultivable land and the land for industrial purpose. Besides, there is no well-defined property right of land and real estate in term of the West. However, China has been able to efficiently provide her high-speed economic growth with enough land. How has this been achieved since the economic reform started in the late 1970s?
Under the planned economy during the pre-reform period, nearly all the economic activities were organized by the state, nearly all the land and capital goods were owned by the state or rural collectives. The land in rural China are owned by the rural collectives while the land in urban China are owned by the state. The owners of rural land are the administrative villages. After the economic reform, the rural collectively-owned land were returned to the rural households on long-term lease, which brought about rapid rise of productivity. The output of grain increased from 300 million tons in 1978 to 450 million tons of 1990 (NSB, 1991, pp.346), the rural poverty rate fell from 75% of 1980 to 29% of 1990 (Ravallion and Chen, 2007). At the early 1980s, the rural residents were given the right of setting up their own account business, therefore rural township and village enterprises (both collectively owned and privately owned) grew explosively. By 1995, the employment of township and village enterprises reached 129 millions, its gross industrial product accounted 56% of the whole country’s (NBS, 1996). Later on, the government guaranteed that the contract of land leasing by rural households would remain unchanged within 30 years. The latest development is that the contract of land leasing of rural households can be rented out (or laterally, the land leased by rural households can be rented out to other people) after the Third Plenary Session of the Eighteenth Party Central Committee. There is also an issue of house site in the rural collectively-owned land. Right now the regulation is that the houses and their sites on the rural collectively-owned land can only be sold to the villagers of the same village.
China’s urban land are owned by the state, in each of the Chinese cities, the local municipal government is the sole supplier of the industrial and commercial land, and the land for real estate developers. After the economic reform, industrial and commercial firms have to pay the government fees for usage of the state-owned land in urban China. After 1987, the government transform the fees levied on the state-owned land into a kind of local tax for the purpose of construction of municipal infrastructure and its maintenance. By the law, local municipal governments have the right of expropriate the rural collectively-owned land by paying the owner of land (relevant villages) certain amount of fees, then provide those land to industrial and commercial firms. The time limit of land for the commercial purpose is 50 years. The 2007 Property Law of China decrees that the time limit for residential buildings owned by private citizens is 70 years. However, considering that the time limit for the residential housing directly affects the ultimate interest of hundreds of millions of families, once the current 70 years’ time limit expires, it will be renewed automatically and without charge. The businessmen could use their residential housing as collateral to get commercial loans if they need to.
Since the economic reform, the Chinese government have always been sticking to the principle of “development is of overriding importance” laid out by Deng Xiao Ping. Literally, the top policy target of the Chinese government is to pursue economic growth. The promotion of government officials depends on whether they have significantly contributed to local economic growth (Zhou, 2007). To realize economic growth, apart from the State-Owned Enterprises (SOEs hereafter), the Chinese government also have been encouraging FDI and domestic non-SOEs to emerge and grow. To this end, the land requested by non-SOE business investment are supplied by various local governments. To achieve economic growth, local governments normally would provide great convenience for commercial land demand, sometimes supply land to FDI without charge. In addition, to attract and facilitate investment, many local governments set up industrial parks or economic development zones. By the above-mentioned means, China solved the problem of efficient land supply to firms, at the same time substantially reduced the high transaction cost of land caused by the unclear property right problem. This is what Francis Fukuyama called “good enough property rights”（Fukuyama, 2012）.
Apart from providing industrial firms with land, the local governments in China also auction off land to the first price bidders among the real estate developers since the middle of 1990s when the urban residential housing were allowed to be commercialized. The developers would sell the residential housing that they built to general public at market prices. Due to that the incomes from the state-owned-land are classified as the budget revenue of the local governments, so the local governments have strong incentive to auction off land for real estate developing. From 2001 to 2010, the proportion of land revenue to total budget of local governments rose from 16.6% to 76% (Xiang, 2014, pp. 139-141). Under this kind of urban land arrangement, hundreds of millions of urban households have been able to own the property rights of the residential housing. The Chinese urban land arrangement for real estate developing has always been disputed, such as the high land price for real estate developing has push the housing price sky-high, the rural households whose land were expropriated by the state had not been compensated enough, urban demolition of owner-occupied house and rural land expropriation caused many disputes even violences which to certain extend led to social disability, etc. The problem is that if the super cities like Beijing, Shanghai and Guangzhou reduce their the price of land for commercial housing, can it definitely lead to the fall of housing price in these cities?
Housing price is decided by supply and demand jointly. Regarding the demand side, there are enormous amount of investment buyers alongside with the buyer who buy the houses to live. This is because there are serious shortages of investment channels, and urban residential housing are regarded as the sole investment target by those hundreds of millions of middle class families who grown up during last 40 years or so. Due to that there would not be any substantial increase of financial investment opportunities in the near future, residential housing is still the prime target of individual investment. In the long term, the urbanization process will last for considerable long time (at least 30 years). With the relaxation of household registration system, there would be more rural resident moving into cities, hence the demand for residential housing would be strong in cities. Because of strong market demand, housing price would not fall even if the local government reduce or waive the fee of land for residential housing. Under such circumstance, letting local governments get more income from land is better than giving more profit to real estate developers, for that local governments at least could use these income on education, health care, municipal infrastructure. Another disputed issue is that the residents whose land were expropriated were not compensated well. Those rural residents who lost land must be compensated well, such as giving them urban residential status. However, is it right and reasonable that giving all income from land auction to those who lost land? Is it justifiable that those who are lucky to live nearby the cities become super rich overnight?
In rural China, giving the right of using land to households and letting themselves decide what to plant and how to distribute their own labor time between farming and non-farming are purely Pareto improvement. This is because hundreds of millions of rural people got better off and nearly none get worse off. In urban China, local governments earned enormously by auctioning off land for residential housing developers, which in turn made hundreds of millions of households got the property rights of residential housing, this is also Pareto improvement.
China’s unique land ownership arrangement is the key necessary condition upon which the Chinese economy took off and realized high-speed growth. To achieve economic growth, the local governments provided the domestic and foreign firms with land by the means of economic development zones, industrial parks, and auctioned off the land for real estate developers, and expropriated rural collectively owned land into the state-owned ones upon which enormous infrastructure have been constructed.
About the author: Qingjie XIA(夏庆杰), Professor in Economics at School of Economics and Director of Centre for Human and Economic Development Studies (CHEDS), Peking University, Beijing, China
NBS (National Statistical Bureau) (1991), the1991 China Statistical Yearbook.
NBS (National Statistical Bureau) (1996), the1996 China Statistical Yearbook.
Naughton，B. (2007). Chinese Economy. Cambridge: MIT Press．
Coase, R. H. (1995). Essays on Economics and Economists. University of Chicago Press.
Fukuyama, F. (2012). The Origins of Political Orders: from Prehuman Times toFrench Revolution. New York: Farrar, Straus and Giroux Press.
Petty, W. (1662, 2011). A Treatise of Taxes and Contributions. EEBO Editions, ProQuest.
Ravallion, M. and S. Chen (2007). China’s (uneven) progress against poverty. Journal of Development Economics, 82(1): 1-42.
Soto, H. D. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books, A Member of the Perseus Book Group.