BOFIT Weekly Review 2015/12
Critical land reform experiment begins in China
Officials this month announced a pilot experiment in land reform that permits the sale of collectively owned rural construction land. The change is intended to harmonise rural and urban practices on the sale of land. Owners of rural construction land earlier had no option but to sell land to the local government. The pilot programme allows rural residents in pilot counties to sell their land directly to also private buyers at market prices. The reform should help reduce income inequality between rural areas and cities and increase the mobility of rural residents.
The reform trial applies to a few counties on the outskirts of fast-growing cities. Although it affects only a tiny slice of China’s countryside (just 33 out of more than 3,000 counties), the implications are potentially huge as the move paves the way for liberalisation of a rural land sale and land ownership on a wide scale. The trend should eventually result in complete privatisation of rural construction land. Private land ownership would have a big impact on the Chinese economy by increasing the wealth of the rural population, as well as ease urban expansion and increase flexibility in the labour market. In this sense, the programme is part of the government’s stated goal of dismantling the hukou housing registration system in order to make it easier for rural residents to move to cities.
Sales of rural construction land have been an important source of revenue for local governments as they have sold the land bought from rural households to real estate developers. Thus, the biggest challenge to the reform is how local governments will deal with the economic impacts of the change. Local government revenues have already been diminishing as demand for construction land by the real estate developers has slowed. The central administration is planning to shift the revenue base of local governments to taxes and bond issues.
The government also launched a trial system of real estate registration in 15 large cities at the beginning of March. The goal is to roll out a nationwide property owner registration system over the next two years. When implemented, the registry will provide a basis for collection of property taxes that potentially would provide a new revenue stream for local governments.