Article: China's Land Policy

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On Tuesday, November 10, I was invited to discuss China's agricultural policy in a seminar arranged with some professors at Wuhan. About 40 graduate students showed up, most of whom spoke English although the discussion was mainly in Chinese.
There was great disappointment with how Chinese agriculture was being managed (or largely ignored) at the national level. Matters were being left largely to local mayors, and at best to the provincial level.
Most peasants want to escape from agriculture, although national policy stipulates that 1.8 billion acres in China must be used for farmland. There are about 900 million farmers in China, but young people are largely deserting the rural areas and moving to the cities to better their lot. In fact, some areas are being almost entirely deserted.
The result has been a rather narrow, short-term self-interest, mainly by peasants seeking to build quick houses on their land to get compensation if it is turned back into farmland and the houses are torn down by the government, or to get rezoning as residential sites. (I was told that one peasant got 10 million yuan for a house that was torn down -- a kind of urban/rural arbitrage evidently has developed between agriculture and construction.)
I was told that the earlier communal spirit had been replaced by individual maneuvering. At best, this gave localities an innovative spirit of "let a hundred flowers bloom." But more often, the result was short-term opportunism. Many peasants sublease their land rights to developers, foreign investors or other users.
This has been approved at the national level in keeping with the neoliberal leadership that has guided China over the past thirty years. China's regions have a "GDP race," which is won largely by attracting foreign investment, mainly into large projects such as the "100,000 pig" farms being developed most visibly by Taiwanese investors. There has been little discussion of how China as a nation benefits from the surplus. The key is simply to increase production to meet targets or exceed other localities.
Foreign investors in pig farming and other agricultural projects get a government subsidy, but not small farmers. The first two years are tax-free, and the next three years have lower-than-average tax (15% of profits). But few foreign investors declare a taxable profit, using transfer pricing or "expensing" their cash flow as interest payments to offshore financial vehicles. So as far as China's economy is concerned, the surplus is largely given away. The Wuhan area does not get taxes from Taiwanese meat-producing companies.
Animal husbandry is for the domestic market, where prices are in excess of those in foreign markets. The government is concerned mainly with GDP -- and jobs. It also wants to lower meat prices, by producing more. But on balance, it is sacrificing agriculture in favor of urban development and new construction.
The result is that although China's land is nominally owned by the state, its rental site value is left in private hands, after being collected "in advance" -- for 70 years from residential developers, 30 years for agriculture. Originally, these 30-year agricultural permits were to expire in 2012, but they have now been made permanent.
The "land rent" thus is a token groundrent in many cases, not the actual market rent or site value, which has soared as the economy has prospered. Rent is not to be taxed for ever, and the government does not tax agriculture at all -- not even when it is leased or rezoned, e.g. as when peasants give certificates of land use to factories or commercial developers. There is not tax on financial or capital gains on compensation payments to the peasants. And foreign investors tend to get favoritism, although public financial aid is for the landowner, not the renter or leasor!
Banks give mortgages against land valuation.
I was told that land prices do not increase much even when a new road is built. Localities are largely broke, so road building is left to the government, not to local politics (as when insiders get roads built near their own property, as in the United States).
In this state of affairs peasants are largely passive. The central government for its part doesn't think that peasants can settle matters well -- but it has pretty much ignored drawing up a detailed development plan or much professional oversight. And rural areas have largely been left behind as China has concentrated on the urban revolution before moving to modernize the countryside. The central government has little voice in land use, which has been privatized by the granting of land-use permits, which have become marketable. Local peasants decide what to farm -- and are free to lease their land with scant oversight.
Indeed, China seems to have privatized agriculture more than most other countries. Farmers pay no tax, and get 400 yuan per acre to plant, on average. They sell their crop at prices set by the government (even crops that are brought into the cities for sale). If price rise, the government lowers the subsidy paid to farmers so as to stabilize their income. There is little attempt to finance rising agricultural productivity by raising agricultural incomes through price supports of the sort that have led U.S. agricultural productivity to exceed even that of industry over the past 50 years. This is a major reason why peasants are so eager to sublet their land to non-agricultural users or large foreign investors.
Where the government has focused aid is for large investors, not small ones, e.g. in its 10,000 pigs policy. (Beef herding is smaller scale, I was told.) Buyers pay the land-use tax and other transfer costs reflecting land-use privileges.
Underutilized land is a problem. But there are no taxes on unused land, so little fiscal incentive to use it or bring it back into cultivation, as rights are not lost when land is used sub-optimally. I was told flatly that it is impossible for the government to start collecting the rising rent-of-location or windfall gains from landrent, or from rezoning of land.
No wonder local mayors end up dealing mainly with real estate -- and they are all-powerful when it comes to decision making as to land use. Furthermore, new mayors can simply change the plan. This has produced some degree of disorder, as there is no over-riding fiscal or planning authority. Land remains the economy's largest asset, but neoliberal leadership has largely un-taxed it. This threatens to undermine long-term Chinese development.