Dual Land Market and Rapid China’s Urbanization: Problems and Solutions

doi:10.4236/chnstd.2012.11001

Paper Menu >>

Journal Menu >>

Chinese Studies

2012. Vol.1, No.1, 1-4

Published Online May 2012 in SciRes (http://www.SciRP.org/journal/chnstd) http://dx.doi.org/10.4236/chnstd.2012.11001

Dual Land Market and Rapid China’s Urbanization:

Problems and Solutions

Huachun Wang1*, Chunxue Zhao2, Maerhaba Xiaokaiti1, Yue Zhou1, Rui Zhao1

1Academy of Governme n t, Beijing Normal University, Beijing, China

2Research Institute for Fiscal Science, Ministry of Finance, Beijing, China

Email: *[email protected]

Received March 15th, 20 12 ; revised April 29th, 2012; accepted May 15th, 2012

The dual land market has greatly encouraged the economy and urban development and created far-reach-

ing effects on excessive land expropriation and land finance. Using an analytical framework of dual mar-

ket structure model, this paper investigates the relationship between local land finance and China’s rapid

urbanization. Low-cost land expropriation is the main reason why extensive urbanization goes so fast in

recent China. Granting farmers the complete land rights, implementing property tax to consolidate local

tax bases, unifying the dual land market are helpful to achieve both social equity and land use efficiency

in Chinese rapid urbanization process.

Keywords: Dual Land Market; Land Expropriation; Land Finance; Urbanization; China

Introduction

A new land development process was introduced in China

upon the adoption of economic reforms since the early 1980’s.

Land use rights could be transferred as a transaction of owner-

ship. China has been undergoing a rapid urbanization since then,

the urbanization rate rose from 37.66 to 51.27 percent between

2001 and 2011 (NBS, 2012). Rapid urbanization has resulted in

much arable land being used for non-agricultural purposes

through land expropriation. Land distribution and its impact

have been given less attention compared with the rapid gross

domestic product (GDP) growth. Through the investigation of

the formation of dual land market in the rapid urbanization, it

can be observed that the formation of the dual land market is a

complicated process involving conflicts of interests.

The legal frame work for land expropriation is defined by the

Land Administration Law (LAL) enforced in 1998. The state

may expropriate land for public interest. However, public in-

terest has not been clearly defined. In fact, both the land for

urban infrastructural and the land for commercial purpose are

satisfied by land expropriation. Neither the rural collectives nor

farmers can negotiate with the urban land users about the prices

or other requirements (Qu, Heerink, & Wang, 1995).

The compensation for arable land constitutes three compo-

nents according to the LAL. The compensation for land is six to

ten times the derived land productivity, which is the monetary

value of the annual average agricultural output value over the

past three years. The compensation for resettlement is four to

six times the derived land productivity. The last item is the

compensation for accessory assets in land. The maximum

compensation for land expropriation cannot exceed 30 times the

derived land productivity.

However, when the land is leased out for commercial pur-

pose, the price will be much higher. The fair market value of

the land and the negative impacts of land expropriations have

not been considered. The dispossessed farmers are largely ex-

cluded from sharing the land value appreciation resulting from

land development projects (Wang & Scott, 2008). There are

currently over 40 million dispossessed farmers and 70 percent

of them are related to rural land expropriation in urbanization

(UIE, 2007a). Low compensation provoked dispossessed farm-

ers into violent clashes with local authorities (Zhu & Proster-

man, 2007). Land-related issues have recently become the top

cause of rural grievance, local social unrest and political insta-

bility (Carl, 2006; UIE, 2007b).

What is the relationship between land expropriation and ur-

ban expansion? Why the central government cannot curb local

land expropriation? What further measures should be taken?

This paper aims to address these questions. Based on an ana-

lytical framework of dual market structure theory, this paper

focuses on the formation and operating framework of the dual

land market, reveals its influence on the behaviours of local

land finance and excessive land expropriation. The paper is

organized as the following. After a brief introduction of the

formation of dual land market in part two, part three describes

the public land leasing strategies adopted by local governments

in China. Part four rationalizes local land finance in a wider

context of economic and political institutions in China. Part

five examines the central government’s response to local land

expropriation. Policy implications are discussed regarding fu-

ture reform of the land market.

The Formation of the Dual Land Market and the

Dynamics of Land Transactions

As one of the pillars of Chinese public ownership, land is

state-owned or collectively-owned, which emphasises that the

government should monopolise the supply of land (Ho & Spoor,

2006). Rural land can only be expropriated by the local gov-

ernment to ensure that all urban land belongs to the state. A

dual land market emerged with the coexistence of market-ori-

*Corresponding author.

H. C. WANG ET AL.

ented and non-market-oriented leased land under the public

ownership and the monopoly land expropriation system. The

dual land system differs not only in terms of the cost of obtain-

ing land use rights but also in terms of property rights and the

freedom of land transaction. To understand the dynamics of

land transactions in China, it is important to understand the

formation and dynamics of the dual land market (as Figure 1).

Dual land market works as the following. Local governments

can lease the land through negotiation, tender or auction after

land expropriation. As a typical administrative allocation me-

thod, negotiation between the land user and the government

about leasing terms is the least transparent approach. Both ten-

der and auction, which are market-oriented mechanisms, take

place through public bidding. The highest bidder might be se-

lected, but other factors, such as the land developers’ reputation

and the purpose the land is to be used might be taken into ac-

count.

As of Figure 1, local government plays an important role in

the formation and dynamics of the dual land market. State-

owned units can apply for a land expropriation permit from the

local government. They can then expropriate rural land by pay-

ing a standard compensation fee to the farmers. The local gov-

ernment can expropriate land directly from farmers and then

allocate it to state units for public purposes. The government

would also negotiate with the occupiers for public purpose and

compensate them for their loss (Lin & Ho 2005; Yao, 2002).

The use right of state-owned land can be exchanged in the

market, but rural land can not. The local government monopo-

lises land supply, it can expropriate rural land at a low price and

sell it at a market price. Huge profits generate from the great

difference between land expropriation compensation fees and

land leasing prices (Tan, Xie, & Lu, 2005).

Since the early 2000s, the revenue from residential and

commercial land leased out by tender or auction has been in-

creasing, while that of industrial land leased out by negotiation

almost stable. Table 1 presents the national total area of leased

land in 2007. As shown in Table 1, the proportion of land

manufacturing accounted for 57.7 percent, while the residential

and commercial land was the second and third. However, land

revenue from the residential land is the highest while the reve-

nue from the manufacturing purposes is the least. These figures

show that land development activities have been rapidly grow-

ing as local governments have become increasingly involved in

industrial development and urban expansion (Chai & Wu,

2009).

Table 1 also presents the structure of land sites leased out by

negotiation, auction or tender. The national total number of

land sites leased out by negotiation accounts the large share, but

the revenue of land sites leased out by auction or by tender

share more. Leasing out industrial land at low prices implies

that local governments are incurring net losses.

Figure 1.

The formation of dual land market in China.

Table 1.

Land leasing in 2007 in China.

Total land sites leased outSettled amount Net reven u e

Land leas ing t ypes Land usage types Mu PercentageMillion yuanPercentageMillion yuan Percentage

Land lea si n g price

(Milloin/ha)

Total 3524408.9 100% 1221672.1 100% 454141.6 100% 34.7

Manufacture 2034428.4 57.7% 211020.3 17.3% 6335.4 14.0% 10.4

Commercial 404619.5 11.5% 234950.5 19.2% 83327.2 18.4% 58.1

Residential 998628.3 28.3% 753088.4 61.6% 300116.5 66.1% 75.4

Total land leasing out

Others 86732.7 2.5% 22612.9 1.9% 7340.5 1.5% 26.1

Total 1764941.4 100% 214186.2 100% 75067.1 100% 12.1

Manufacture 1505055 85.3% 146975.2 68.6% 45253.1 60.3% 9.8

Commercial 73003.7 4.1% 23469.6 11.0% 11473.3 15.3% 32.2

Residential 119098.4 6.8% 29765.7 13.9% 13854.5 18.4% 25.0

Negotiation

Others 67784.4 3.8% 13975.7 6.5% 4486.3 6.0% 20.6

Total 1759467.3 100% 1007485.9 100% 379074.5 100% 57.3

Manufacture 529373.3 30.1% 64045.1 6.4% 18104.3 4.8% 12.1

Commercial 331615.7 18.8% 211481.0 21.0% 71853.9 19.0% 63.8

Residential 879530.1 50.0% 723322.7 71.7% 286262.0 75.4% 82.2

Tender or auction

Others 18948.3 1.1% 8637.2 0.9% 2854.3 0.8% 45.6

ote: Mu, a unit of ar ea in China (Per Mu = 0.0667 hectares); Source: China statistical yearbook of land and resources (2008).

H. C. WANG ET AL.

Local government monopolies land supply in China. In order

to extract more land revenue, many local governments set up

Land Reserve Centers to limit land supply for commercial and

residential purposes by auction or tender for a higher price.

Local governments prefer maximize current-period land reve-

nue by under-supplying residential and commercial land. Al-

though land sites leased out by tender or auction is less, the

revenue obtained constitutes a majority of local extra-budgetary

revenue (Table 1). Between 2000 and 2010, the average leasing

price of industrial land almost stable while the prices for com-

mercial and residential land rose several times (NBS 2011).

Economic efficiency was not a factor in site determination

under land leasing by negotiation. That was why low and flat

land-use density buildings could be seen in the downtown area

in China (as Table 2). Table 2 reveals a land-use pattern

unlikely to be observed in western countries where industrial

use accounted for only four to ten percent of built-up areas. The

share of industrial use in China was more than twice as high as

that in industrialized countries. Industrial land use accounted

for 20 - 30 percent of the urban land in China. Residential land

use accounted for less than 50 percent of all urbanized land.

From three to five percent of industrial land in cities was vacant

and 40 percent was used inefficiently (Yang & Ralph, 2007).

The reason why local governments sacrifice the extra-budge-

tary revenue by negotiation with manufactures is mai nly rela ted

with the current political system. According to the public fi-

nances reform implemented in 1994, all of the revenue from

land leasing belongs to local governments’ extra-budgets, so

they should lease the land out by tender or auction for residen-

tial or commercial usage in order to generate more extra-budge-

tary revenue. Leasing land to manufacture sector may lead to a

gain in local budgetary revenue through value-added tax, but

the gain is limited after 75 percent of them turn over to the

central government.

Current Political System Drives Local

Government Excessive Land Expropriation

Under the current Chinese political system, local officials are

mainly evaluated by economic indicators, which mainly include

GDP growth, employment, and the fiscal revenue. Therefore,

local officials like to lease land for manufacturing purposes at

low prices because the manufacturing sector can generate local

GDP and employment. Then, they would have a potential

chance for political promotion (Chan, 2003). Land revenue

accounts for a large part of local fiscal income. Sales of land

use rights increased from 231.3 billion yuan in 2001 to 1423.6

billion yuan in 2009 (Table 3). Major cities, such as Hangzhou

and Shanghai, collected about 100 billion yuan recent years

(NBS, 2010).

Excessive land expropriation partly contributed to social in-

justice and economic inefficiency. The industrial investment

with low land incentive leads to serious waste of rural arable

land, for example, there were 6015 industrial parks set up by

various levels of local government across the country in 2006

(Zhai & Xiang, 2007). A survey of 16 cities in 2005 showed

that about 50 percent of the new land was under development

(Xinhua News, 2006).

So far, most of the policies taken by the central government

have not addressed the roots of land-related issues in the dual

land market. For example, the state requires local governments

to raise the compensation to maintain the farmers’ living stan-

dards. However, the local governments have no incentive to do

so. When the land leased at low prices, the central government

require local governments to lease by auction or tender, but the

local officials evade such regulations.

Prospects of the Dual Land Market

Market mechanisms need to be introduced into land expro-

priation. Land property rights to the farmers need to be estab-

lished. Granting farmers to negotiate with land users about

compensation fee would improve their welfare and contain the

manufacturing investment by cheap land. It is crucial to distin-

guish public purpose from commercial purpose. The state

should not be responsible for land expropriation for commercial

purpose; instead, it should be decided by negotiation between

the farmers and potential land users (Ding, 2003). All land for

commerce, tourism, recreation, finance, services and commercial

housing must be supplied by tender and auction. Government

Table 2.

Land use in major Chinese cities in the 1991. Unit: %.

Residential Industrial Infrastruc tur e Green space Special uses

Shanghaia 49.6 30.5 7.3 - 12.6

Beijinga 39.1 20.1 5.5 - 35.3

Tianjin 26.1 35.0 29.6 4.3 4.3

Guangzhoua 35.9 37.0 17.1 - 9.9

Shenyang 29.6 28.0 23.8 6.9 11.8

Chongqing 34.0 33.4 27.0 3.1 5.4

Wuhan 26.8 30.4 25.0 7.0 8.8

Zhenzhou 25.5 28.3 37.8 7.9 0.6

Xi’an 44.5 29.3 25.9 0.1 0.2

Harbin 38.0 26.3 26.6 6.6 1.8

Note: Infrastructure includes public services a nd transport a tion, etc. Source: Nanj ing University of Geography and Lake Study, 1999. a Shanghai, Beijing, and Guangzhou

id not survey public services and infrastructure. d

H. C. WANG ET AL.

Table 3.

The revenue from land leasing and its position in the local fiscal reve-

nue.

Year Local fiscal revenue

(billion) Land revenu e/local fisc al

revenue (%)

2001 780.3 -

2002 851.5 34.8

2003 980.5 37.8

2004 1244.1 47.4

2005 1509.2 36.5

2006 1828.1 42.0

2007 2356.5 50.9

2008 2864.5 33.5

2009 3285.1 48.8

2010 3538.3 76.6

Source: China statistical yearbook of land and resources (2002-2011).

should encourage fair land transaction within market channels

(Zhu, 1999).

The collective should have a bundle of complete land prop-

erty rights, and the farmers would be allowed to rent and trans-

fer the rural land (Zhang, 2000). Land privatisation is helpful to

unify the dual land market. Thus, local governments focus on

regulating land use through effective urban and land use plan-

ning (Yi, 2009).

Conclusion

The root of land-related issues in urban expansion lies in the

dual land market and low-cost land expropriation, unifying the

dual land market and allowing farmers to negotiate with poten-

tial land users is an ideal choice. That would help dispossessed

farmers to benefit from the land appreciation in urbanization

process.

Local extra-budgetary revenue reduction would be offset by

property tax. A property tax on existing residential and com-

mercial real estate can be introduced to consolidate local tax

bases. With the introduction of property taxes, the negative

impacts of marketizing land expropriation on local fiscal reve-

nue would be offset.

Acknowledgements

Thank the critical comments given Prof. Jianping Xie,

Southwest University of Chongqing, and Dr. Xinchuan Wang,

Economic Daily of China.

REFERENCES

National Bureau Statistics of China (NBS) (2012). China Statistical

Yearbook of Land Reso urc e. Beijing: China Statistical Press.

Qu, F. T., Heerink, N., & Wang, W. M. (1995). Land administration re-

form in China: Its impact on land allocation and economic develop-

ment. Land Use Policy, 3, 193-203.

doi:10.1016/0264-8377(95)00003-V

Wang, Y., & Scott, S. (2008). Illegal farmland conversion in China’s

urban periphery: Local regime and national transitions. Urban Ge-

ography, 4, 327-347. doi:10.2747/0272-3638.29.4.327

Unirule Institute of Economics (UIE) (2007a). Protection of land prop-

erty rights in China’s urbanization. Unirule Institute of Economics

working paper. Beijing: Unirule Institute of Eco nomics.

Zhu, K., & Prosterman, R. (2007). Securing land rights for Chinese

farmers: A leap forward for stability and growth. Development Policy

Analysis, 4, 1-19.

Carl, M. (2006). Xinfang: An alternative to formal chinese legal institu-

tions. Stanford Journal of International Law, 1, 103-179.

doi:10.1017/S0305741008000039

Unirule Institute of Economics (UIE) (2007b). Protection of land prop-

erty rights in China’s urbanization. Beijing: Unirule Institute of Eco-

nomics.

Ho, P., & Spoor, M. (2006). Whose land? The political economy of

cadastral development in transitional states. Land Use Policy, 4, 580-

603. doi:10.1016/j.landusepol.2005.05.007

Lin, C. S., & Ho, P. S. (2005). The state, land system, and land devel-

opment processes in contemporary China. Annals of the Association

of American Geographers, 2, 411-436.

doi:10.1111/j.1467-8306.2005.00467.x

Yao, Y. (2002). Rural land system: An analysis framework. Journal of

China Social Science, 1 , 54-65.

Tan, M., Li, X., Xie H., & Lu, C. (2005). Urban land expansion and

arable land loss in China: A case study of Beijing-Tianjin-Hebei re-

gion. Land Use P olicy, 3, 187-196.

doi:10.1016/j.landusepol.2004.03.003

Chai, J. M., & Wu, J. B. (2009). Rural construction land and rural land

reform. Land and Resource, 11, 10-22.

National Bureau Statistics of China (NBS) (2011). China Statistical

Yearbook of Land Reso urc e. Beijing: China Statistical Press.

Yang, J. W., & Ralph, G. (2007). Assessing the transportation conse-

quences of land use transformation in urban China. Habitat Interna-

tional, 3-4, 345-353. doi.org/10.1016/j.habitatint.2007.05.001

Chan, N. (2003). Land expropriation compensation in China-problems

& answers. International Real Estate Review, 1, 136-152.

National Bureau Statistics of China (NBS) (2010). China Statistical

Yearbook of Land Resource. Ministry of Land Resources of China.

Beijing: China Statistical Press.

Zhai, N., & Xiang, G. Q. (2007). An analysis of China’s current land

expropriation system and policy implications. China Administration,

6, 9-12.

Xinhua News (2006) Land supply tightened to curb economic over-

heating. URL (last checked Septembe r 2006).

http://english.cri.cn/2946/

Ding, C. R. (2003). Land policy reform in China: Assessment and pro-

spects. Land Use Policy, 2, 109-120.

doi:10.1016/S0264-8377(02)00073-X

Zhu, J. (1999). Local growth coalition: The context and implications of

China’s gradualist urban land reforms. International Journal of Urban

and Regional Research, 3, 534-548. doi:10.1111/1468-2427.00211

Zhang, T. (2000). Land market forces and government’s role in sprawl.

Cities, 2, 123-135. doi:10.1016/S0264-2751(00)00007-X

Yi, X. R. (2009). The theoretical basis and effects of the “New Deal”

on real estate. Jiangsu Social Science, 7 , 39-46.