Chinese land reform: A world to turn upside down

Chinese land reform: A world to turn upside down

Of the economic issues facing November’s plenum of the Chinese Communist Party, none looms larger than land reform in the countryside

Nov 2nd 2013 | BEIJING AND GUMIAN VILLAGE, GUANGDONG PROVINCE |From the print edition

MORTGAGING a village home is a sensitive issue in China. A nervous local official has warned residents of Gumian, a small farming community set amid hills and paddies in Guangdong province, that they risk leaking state secrets if they talk to a foreign reporter about the new borrowing scheme that lets them make use of the value of their houses. They talk anyway; they are excited by what is going on.Urban land in China is owned by the state, and in the 1990s the state allowed a flourishing property market to develop in the cities. That went on to become a colossal engine of economic growth. But rural land, though no longer farmed collectively, as it was in Mao’s disastrous “people’s communes”, has stayed under collective ownership overseen by local party bosses. Farmers are not allowed to buy or sell the land they work or the homes they live in. That hobbles the rural economy, and the opportunities of the farmers who have migrated to the cities but live as second-class citizens there.

Hence the importance of experiments like those in Gumian. Cautious and piecemeal, they have been going on for years. Some are ripe for scaling up. Handled correctly, such an expansion could become a centrepiece of Xi Jinping’s rule.

On October 7th Mr Xi said the government was drawing up a “master plan” for not just more reform, but a “profound revolution”. Such talk is part of the preparations for a plenum of the Communist Party’s Central Committee which will begin on November 9th. It is the third such meeting since Mr Xi came to power; because the first two plenums of a party chief’s term are given over largely to housekeeping matters, including party and government appointments, third plenums are the ones to watch.

And Mr Xi is marking this one out as particularly important. In private conversations with Western leaders he has been comparing the event to the third plenum that, in 1978, saw Deng Xiaoping’s emergence as China’s new strongman after the death of Mao two years earlier, and set the stage for the demise of the people’s communes. Indeed “profound revolution” is a deliberate echo of a phrase of Deng’s.

Air cover for ground manoeuvres

Mr Xi wants to be seen as a new strongman of similar calibre, one unafraid to take on big targets—as with his sweeping campaign against corruption—and willing to tear down the huge remaining barriers to China’s reincarnation as a market economy. How much of this is braggadocio remains to be seen. But there is some evidence that the semi-paralysed market for rural land—one of the biggest of those remaining barriers—is becoming a priority. In August a state-controlled newspaper said that experiments in the trading of rural construction-land were about to be launched around the country. The report, which was later played down by the party, caused quite a stir. Caixin, a Beijing magazine, said the excitement was a sign that the “pent-up force [of land reform] was waiting to explode”.

Although it will surely be discussed, land reform will not be the focus of the plenum: officials have indicated that, unusually, the party meeting is going to cover the whole spectrum of reform-related issues, rather than dwell on a single area. But the details of what is discussed are not the key to understanding the plenum. What matters is unpicking the carefully crafted and coded pronouncements that ensue, designed—as Stephen Green of Standard Chartered, a British bank, puts it—to provide “air cover” for policies that will be unveiled later. After all, the 1978 plenum said that it was endorsing Mao’s communes; but the nods and winks of the leaders gathered there encouraged reforms to spread across the country anyway.

The policies for which this plenum will provide cover are going to reflect the party’s belief that China needs to change the way it is developing. The growth model driven by investment which yielded so much in past decades offers diminishing returns; it needs to be replaced by one fuelled in large part by productivity improvements and consumer spending. This analysis will be used to support a series of economic measures, from liberalising interest rates to boosting innovation and loosening the grip of competition-stifling state-owned enterprises (SOEs) on vital areas of the economy (see article). It also underscores the urgency of creating a rural property market, a reform that will change not just rural life, but city life, too.


On the face of it, all seems well enough with China’s urbanisation. In January last year the government announced that the urban population had reached 51% (up from less than 18% in 1978), exceeding the rural one for the first time. But this is misleading. About 270m (nearly 40%) of those included in the urban population are resident in urban areas, but still retain their official “household registration”, orhukou, in the countryside (see map). This shuts many people out of property markets; unable to sell in the country, they cannot buy in the city. It means they are not entitled to the full welfare benefits of urban hukou holders. In Beijing, and some other big cities, many are not allowed to buy houses or cars, supposedly to limit demand. Officials admit that there is something very wrong with this and say it is now time for a “new type of urbanisation”.

Feeling the stones

Dismantling hukou restrictions should allow farmers living in the city to trade in their rural property for a more secure foothold on the urban ladder. It could also provide a big chunk of the boost in consumption that Mr Xi and his colleagues want to engineer. Migrants from the countryside save far more of their income than do holders of urban hukou. They are thus a huge potential source of spending. But for this potential to be realised, they need a way to sell up in the countryside.

Though now much criticised by Chinese economic reformers, Hu Jintao, Mr Xi’s predecessor, paved the way for some level of rural land reform. A plenum in 2008, also the third in a cycle, upheld the Maoist notion of collective ownership of rural land—but at the same time called for the “gradual” establishment of a “unified urban and rural market” for construction land, which includes land used for rural housing and factories. And the plenum declared that individual farmers’ rights to farmland, hitherto restrained by investment-inhibiting 30-year leases, could be extended indefinitely. Lawmakers have been arguing ever since over revisions to the all-important Land Administration Law that would put reforms into place. But bickering in the capital has not put a stop to tinkering in the provinces.

The past five years have seen widespread experiments with rural land rights, such as the dabbling with mortgage loans in Gumian. Caution has been the watchword, even in Guangdong, a province that has been used for economic experimentation since Deng’s day. (Xi Zhongxun, Mr Xi’s father, was a senior official there in the crucial years after 1978.) The mortgages in Gumian, for example, are only available to pay for the construction of houses in the same village: no heading off to the city with a sackload of cash. Liu Hongzhi, who oversees the scheme, quotes a famous phrase often attributed to Deng, though in fact coined by a colleague: “We are crossing the river by feeling the stones.”

Gumian’s new houses

Dozens of Gumian’s households have taken advantage of the loans to help them build five- or six-storey houses (pictured). The need for the buildings, and their scale, are due to the bullet-train track recently laid down straight through the village. Compensation from the railway for the land taken and housing demolished in the process paid for much of the building; the hope that a new station will make renting out rooms a nice little earner accounts for the size of the houses.

At a communal feast which accompanied the completion of one the houses, villagers undeterred by the state-secrets-obsessed official explained that they had borrowed less than a tenth of their houses’ cost. But borrowing the extra bit made a lot of sense if it got them extra rooms, as the terms—a fixed interest rate of 6%, with repayment due in five years—were deemed easy. Mr Liu thinks it highly unlikely that anyone will default: “It’s impossible not to be able to return the money,” he says. This is probably just as well. What would be done if someone actually did default is still not entirely clear.

Chongqing, a south-western region of some 30m people, began a similar scheme allowing farmers to mortgage their homes in 2010 when run by Bo Xilai, the party chief recently sentenced to life in prison for corruption and abuse of power. Since then the southern provinces of Guizhou and Yunnan have also launched similar experiments. Cui Zhiyuan of Tsinghua University, a former adviser to the Chongqing government, says the mortgage loans are small and farmers “extremely cautious” borrowers. The ideological resolve of party officials has yet to be tested by foreclosures.

Remarkably, in a country that embraces so many other aspects of capitalism, ideology still matters in the countryside. The notion of collective ownership of rural land is enshrined in the constitution and officials are loth even to hint that it might be changed. Some of them see it as a badge of the “socialism with Chinese characteristics” that the party says it upholds.

Local governments worry that clearer property rights for farmers would make it far more difficult to appropriate land for building infrastructure, factories and urban housing. Selling requisitioned land to developers is a critical source of local-government revenue, and land serves as collateral for local governments’ borrowing (another big headache for Mr Xi: their debt has been spiralling). Ideology aside, these governments resist any notion of changing a system that has done them so well.

For all such concerns, though, the reforms launched by Mr Hu have persisted and spread. Chongqing and Chengdu, the capital of the neighbouring province of Sichuan, have been trailblazers. Soon after Mr Hu’s third plenum in 2008 they launched land-trading schemes that aimed to unlock the value of rural land and speed up urbanisation. These let developers bid for land certificates, or dipiao, created by the conversion of rural construction-land into farmland. They could then use the dipiao to build on an equivalent area of rural land in a place approved for urban development. The result, in theory, would be no net loss of farmland, and an opportunity for farmers in areas developers do not care for to cash in on the insatiable demand for urban land. Of the dipiao selling price, 85% goes to the farmers themselves: an unusual recognition, as Mr Cui points out, that farmers should share the development value of their land. Chinese media say the city of Guangzhou, in Guangdong, is planning to launch dipiao trading, too.

In August the Chinese press reported that Guangdong had circulated draft regulations that would allow villagers in the province to buy houses from residents of other villages in the same township, and take over the rights to the land underneath. If the rules are adopted, China would have taken at least a baby step towards creating a market for rural housing. In the coastal province of Zhejiang, the city of Wenzhou (another hotbed of economic reform) has gone further. In October it set up a “Rural Property Rights Service Centre”, a clearing house that in theory allows urban residents to buy houses from villagers within the same county. In practice, say the Chinese media, potential buyers still worry that, without a revised Land Administration Law, such rule bending is too risky.

In other places, though, plenty of people are taking risks. Near suburbs, many farmers build houses on their land that they sell to city dwellers who hope the law will never be enforced. By some estimates one in five homes used by Beijing urbanites is technically on village land, and in Shenzhen in Guangdong the proportion may be nearly half. It is a vast legal mess, although many farmers in peri-urban areas have benefited. And it does nothing for those leaving villages far from the cities, where half-ruined, derelict houses are becoming an increasingly common sight.

This earth divided

Mr Xi has yet to show signs of tackling the land law directly. But soon after taking over as party chief he took an important step towards easing further experiments and reform. A policy document on rural issues adopted in December 2012 and made public a month later said that by the end of 2017 farmers should be given certificates showing exactly where their fields lie, and that similar certificates for their housing land should be handed out “as soon as possible”. It is going to be a laborious task, with much squabbling and much recourse to satellite-aided surveying. But without demarcations, a well-ordered land market cannot take shape. And local media now frequently report the handing over of housing deeds to happy farmers who have never held such things before. Some of Gumian’s villagers, flush with railway cash, say that they wanted the deeds that came with the mortgages far more than they needed the money itself.

That desire reflects one of the key attractions of land reform—and one of the reasons that Mr Xi may find it difficult. Providing farmers with deeds, and rights to dispose of them, will weaken the often tyrannical grip on their lives that control over land gives to grassroots party organisations. Those living in the countryside will begin to enjoy the relative freedom from party interference in their daily lives that city dwellers began to experience in the late 1990s, when the housing controlled by tens of thousands of SOEs was handed over to their occupants. “Farmers cannot be said to enjoy human rights unless they enjoy property rights,” says Sun Dawu, the founder of a large agribusiness in the northern province of Hebei.

Political change is not something Mr Xi would necessarily wish to hasten, or to be seen hastening. In the build-up to the plenum he has been covering his reformist economic tracks by paying startlingly anachronistic homage to Mao and mounting an unusually harsh crackdown on dissent and wayward online discourse. Officials have been made to watch a documentary about the collapse of the Soviet Union as a warning against Gorbachev-like fantasies. If he thinks an urgent need for the economic benefits of land outweighs the concerns about the empowerment of peasants at the expense of apparatchiks, he may still be cautious about being quite that explicit. But he does not necessarily need to be any clearer, as long as the message is understood.

Around the time that the 1978 plenum was talking of its support for people’s communes, a group of impoverished farmers in Anhui province secretly decided to divide up their village farmland into privately managed plots. Eventually, in 1981, the party gave its explicit blessing to the “household responsibility system”, as it called this once sacrilegious approach to farming. By then nearly half of villages were practising it. The following year work officially began on dismantling the communes. Far-reaching reform had ensued from the plenum, but from the bottom up. The same could happen again.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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