07/01/2020 No. 157
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China's Attempts to Reform Rural Land Rights
By Jialin Zhang
August 1, 2009

Ever since China embarked on its economic reforms some 30 years ago, the country's agricultural development has always lagged behind overall economic growth. The income gap between farmers and urban residents also consistently increased, making rural areas one of the unstable factors in China's political and economic life. The root cause, as scholars and analysts point out, lies in that the land rights have never been clearly delineated and protected in rural areas. The farmers do not own their land. Moreover, the country's dual structure of governance of dividing urban and rural household registration only deepened and perpetuated the income gap. Beijing's leadership has tried to institute various land reforms at its annual decision-making meetings over the past 30 years, but made little progress. At long last, the party plenum of October 2008 recognized the importance of reforming land rights for improving agricultural productivity.


From Private to Collective Ownership


At the founding of the PRC in 1949, the People's Political Consultative Committee, then the supreme legislative organ, declared the "land to the tiller' principle in its "Joint Guidelines," which served as China's interim constitution.


Under this provision, hundreds of million of Chinese farmers were assigned plots of land and dwellings, according to the size of their household. They enjoyed full property rights over their land and house, the rights to farm, live on their land, buy and sell, transfer, and give away the property. No one was to infringe on these rights. The government issued an official document---"Certificate of Land and House Ownership"--- to each household in 1952. Some rural households have kept these yellowish certificates to this day, although they had been voided long ago.


Sadly, this honeymoon was short-lived. Starting from around 1953, the Communist Party launched a collectivization campaign in villages across the country. Farmers who had received their property only a few years before had to give up their land to "agricultural production cooperatives." In the beginning, farmers were forced to join "cooperatives" while still keeping their land rights. Then, as collective farming evolved, farmers gave their land use rights to these cooperatives. In 1956, the People's Congress in Beijing officially reclaimed all land rights from the farmers and turned them over to "collectives." Farmers, now stripped of their land, became "members of the collective."


The next step was to transform these cooperatives into people's communes, which were initiated in 1958. Farmers also gave their personal belongings, including kitchenware, to the commune. They stopped cooking at home, and dined at the commune's public canteens. Some people's communes even declared they had entered a "communist society."


But the de-privatization came at enormous costs. From 1949 to 1952, when farmers received new land rights, the output of grain rose by 50 percent, while farmers' purchasing power doubled. Since rural collectivization, however, agricultural production constantly declined, and farmers lived in poverty. In 1959, famine began spreading and tens of million of rural people died. It was one of the great human tragedies of the 20th century.


The Household-contracted Responsibility System (HRS)


Chinese farmers protested these disasters. From the very beginning of collectivization, they used every possible means to resist the authorities' collectivization policy. In 1956, when farmers' land rights were formally revoked, farmers in eight provinces, namely, Liaoning, Anhui, Zhejiang, Jianxi, Sichuan, Shanxi, Henan, and Hebei, spontaneously withdrew from the cooperatives and took their draft animals with them.


Some creative farmers found another way to challenge the policy within the existing regime, by inventing the "household-contracted responsibility system" (HRS) in the cooperative. Already in the second half of 1956, the authorities of Yongjia County, Zhejiang Province, knowing that the collective system lacked incentives for farmers, decided to subcontract collective land to individual households to encourage farmers to work harder. Under this system, collective land is allotted by a contract to individual households, each in principle assuming a certain amount of responsibility. In the beginning, this responsibility was tied to output: farmers promised to give a certain percentage of their gains back to the state and collectives, based on a calculation of how much a piece of land can produce on the average. This promise was made in exchange of management rights of a particular piece of land. Obviously, this was a contract that allowed farmers to keep additional gains for themselves and enabled them to earn more than ever before. Meanwhile, land ownership remained the same---it still belonged to the "collective;" farmers only had use rights over their allocated land under certain contractual terms.


The HRS soon spread to most rural areas of the country. Some 70 percent of the cooperatives in Gansu and Ninxia Provinces, and 85 percent of Anhui Province adopted the HRS in 1961. Although the HRS was popular and it boosted production and living standard, the farmers only received approval from the central government to adopt this system in late 1978. The supreme leader and his conservative followers in the ruling circle denounced this practice, labeling it as a "capitalist principle," and the local officials promoting it as "capitalist roaders." Many officials were demoted and even prosecuted. Nevertheless, the HRS did not disappear in some areas even during the harsh years of the Cultural Revolution.


In 1978, seventeen farmers of Xiaogang Village, Anhui Province, led by their village head, applied their signatures and fingerprints to a household-contracting document. They later were credited as champions of the country's new land reform. But there was no smooth sailing for this reform. Conservatives in the top leadership made every effort not to implement the HRS. In 1982, when Deng Xiaoping took power, the HRS had been applied to almost every corner of rural China.


The HRS experience showed that farmers' rights to collective land could also include contract agreements between farmer and collective. Chinese economist Zhou Qiren called it the "delineation of rights with Chinese characteristics." But it is only the right to use, not ownership.


Since the HRS was legitimized, the system was improved and upgraded from time to time. The authorities knew that uncertainties regarding the terms of the contract would increase its enforcement costs. The party's Central Committee's directives in the 1980s specified a 15-year term of land lease. It was extended to 30 years later. The responsibility of the contract was initially tied to output, while later it was tied to the value of the land.


The Transfer and Trading of Land (Tudi Liuzhuan)


In the late 20th and early 21st centuries, China's rapid economic growth produced an explosive expansion of urban areas and their rising demand for land. Meanwhile, more farmers migrated to the cities and left huge amounts of collective land idle. Obviously, the outdated, rigid land system could no longer meet the challenges of the country's modernization programs.


Again, many farmers began inventing new ways to use their land rights within the boundaries of the existing law. As early as in 1992, farmers in rural Nanhai of Guangdong Province created their new version of the cooperative. By pooling their contracted land, farmers priced each piece of land and took certain land shares to be used in a collectively planned and managed business. It was the first form of the so-called "transfer and trading of land" (tudi liuzhuan) system. Despite much criticism, the practice soon spread across the country. The transfer and trading of land use rights helped increase the supply of much-needed land for China to become the ever-growing "world's factory".


At the turn of the new century, the transfer and trading of land use rights took new forms. Some farmers established shareholding businesses or new collective farms with their land as stakes; others rented the land left by migrant farm workers and combined pieces of land into a farm. This has enabled the creation of larger, more efficient farms that could increase output and bolster lagging incomes in the Chinese countryside. According to the Law of Land Contract in Rural Areas passed by the People's Congress in 2002, the entire rights of use, revenue and transfer of farmland are contracted to farmers' households for the long term. Meanwhile the collective still is the legal owner of farmland.


These examples of multiple land ownership forms soon evolved from merely leasing and subcontracting to joining into shareholding cooperatives or agribusinesses. In Xinyang County, Henan Province, for example, a village transferred its entire land into a shareholding company to develop ecological farming. Other forms of transfer and trading included land trust, swaps, setting-up of land credit cooperative, etc.   Many local governments allowed and promoted the transfer and trading of land to achieve higher efficiency of land use; agricultural industrialization and urbanization, provided that the ownership and use of the land (for farming only) remains unchanged. The parties involved in transfer and trading should conclude a written contract specifying the size, location, use, term, price and responsibilities. In some places profit is being distributed between businesses and farmers on a 51:49 ratio.


An Incomplete Land Reform


Although the transfer and trading of land has been experimented in many provinces, its legal status still is ambiguous. After the 16th Party Congress in 2004 pointed to "implementing transfer and trading of land on voluntary, paid principle and according to law," the provincial authorities designed corresponding local laws to regulate rural land markets. But still there was no nationwide unified law. People expected the party's 3rd Plenum in October 2008 to resolve this problem. It didn't happen. Even the phrase of "strengthening the market for transfer and trading of contracted land" that had appeared in previous party documents was being replaced by "exploring the transfer and trading of contracted land." Obviously, the tone seems more circumspect and cautious.


Moreover, farmers have been anxiously waiting to see what the leaseholders can expect as the 30-year contract period is about to expire. How long will it be extended? Many had hoped the duration would be extended forever or at least for 70 years. To their disappointment, the plenum turned down the initial drafter's proposal on lifetime tenure for rural land, and used these words: "Household contracting will remain unchanged for a long time." But what does "a long time" mean? Meanwhile collective ownership of rural land is to be maintained.


Another issue concerns the use of land as collateral for loans. What farmers need most is the right to use their property as collateral for obtaining bank loans, a right in any market economy. Undoubtedly, a property right without any right to mortgage is incomplete. But this right was not included in the plenum's final document. As a contributor of the document explained, some high officials and economists opposed this idea, citing Japan as an example, by noting that only 1 percent of Japan's rural land served as collateral. He added that a host of technical difficulties are still to be tackled. Under current laws, a rural homeowner does not have a property ownership certificate, which is a required document for a collateral loan.


Many reform-minded officials and scholars, however, were frustrated that the plenum disapproved the farmers' "eternal use of the land," and one of the important components of land use rights—using land as collateral. Some sources cited that there was heated debate at the meeting. The urban vested interest groups and some ministries of the central government opposed any changes in existing land rights for fear they would lose the privilege of acquiring rural land at a low cost. Also, some conservative ideologues warned that weakening the existing system of collective ownership could deprive farmers of their security to have a piece of land and possibly lead to millions of landless farmers. Thus, the communist party remains weighed down by past political taboos.


The party's decision-making meeting in fact conducted only an incomplete land reform. It pledged to help establish markets where farmers could subcontract, lease, and exchange or swap land-use rights, or join shareholding entities. Although these practices have existed in many sub-county areas, formalizing these practices would certainly reduce China's transaction costs, and mark a significant step forward for improving China's land reform.


A Call to Return Land to Farmers


Every year since 2004, the central government has put rural development at the top of the agenda. But China's rural and urban income ratio widened from 1:2.6 by the end 1999 to 1:3.3 in 2007 and the average per capita income gap enlarged from US$780 to US$1,411.


Scholars and analysts argue that the reason for incomplete land reform (including the transfer and trading of land) lies in the weak delineation of land rights. According to current law, rural land is owned by the "collective," and contracted to the household. The contracted and managed land to farmers can be transferred and traded, but it cannot be sold or mortgaged. The farmers have no right to change their uses of contracted land and the homestead. And the definition of "collective" is still too vague. It can mean the village committee, mostly controlled by party appointees, or township government, or even county and provincial government. It is unrealistic for any fictitious, virtualized "collective" to exercise a land rights.


Institutional economics maintained that given the vague property rights ("rights failure"), political power plays a primary role in the allocation of resources. In the case of rural land, even the farmers' right of contract management is not guaranteed. In the name of "collective", the village and township government enjoys full rights on land that override the farmers' right of contract management. These authorities can easily dispose of the rural land in the name of "public interest," or requisition land through new laws and directives. The huge amount of returns of requisitioned land (used by either industrial or residential construction) reverts to the authorities or developers. Farmers have lost land and its expected added value. Especially unfair is having authorities requisition publicly owned land and transfer it to private developers for their personal gains. These transactions obviously constitute infringement of farmers' use rights to the land.


In recent years, it has become increasingly common that local officials---usually at the village level---requisition land for their sale to urban manufacturers or property developers. This process is rife with corruption. While local officials profit from these development projects, farmers are not given adequate compensation. These disgruntled farmers have increasingly demonstrated against illegal land grabs or corrupt local officials, and that has led to mass protests or even bloody conflicts across the country.


As Ronald Coase once put it, "The delineation of rights is an essential prelude to market transaction," Chinese economists have agreed that without returning land rights to farmers, a market economy cannot be properly established in China. People also wonder why farmers are not granted land rights if the government already recognized the legitimacy of private ownership of capital, labor and human capital. Farmers stripped of their land have no right of equal transaction in the local, fragmented land market. So far there is not even a national, unified land market. The land price is not determined by supply and demand, but by government intervention that ignores the rights of millions of farmers. According to law, urban land, though state-owned, is readily traded, with far longer leases. Rural land, in contrast, cannot be transacted on the market unless the government has requisitioned it. This practice opened the door for the authorities to pursue rent-seeking, which significantly increased transaction costs in rural production.


Chinese academics have long argued that a freer and better-regulated rural property market is essential if farmers are to enjoy more of the fruits of economic growth. They say it would encourage the consolidation of tiny, inefficient plots of land leased to farmers by collectives and allow farmers to cash in on their land's market value, enabling them to use that capital to go into businesses in the cities. Academics also think that a proper land market would protect farmers from indiscriminate land grabs by local officials who often take collective ownership to mean only their personal control.


Another unresolved issue is the legal status of farmers' homesteads. In recent years, more and more farmers have built houses on their homestead and sold them to urban dwellers, especially during a housing price boom. Oddly enough, according to law, the homestead is owned by the collective and cannot be leased or sold, but farmers can enjoy full right of ownership over the house built on it. But without ownership certificates issued by the Ministry of Construction, farmers can only trade with buyers on a private basis. As economist Li Yining has pointed out, as long as farmers do not own and trade the country's rural homestead, in total valued at US$ 2.9 trillion, it is a dead asset. But if it were allowed to be used as collateral, farmers could use the money to set up chicken farms or any other businesses. Scholars have also strongly suggested that farmers' homesteads and houses should be regarded as capital and have free access to the land market.


More and more scholars call for the "same land, same price, and same right." At least collectively owned land should be treated as equal to state-owned land, enjoying the right to transfer, lease and mortgage. Simply put, what the government needs to do is to return all land to its original owner---farmers. That step would inject vitality into rural development and help boost domestic consumption, a major driving force for economic growth while the current global financial crisis continues.


The root cause of this conundrum of the land rights problem, as many scholars argue, is the structure of state governance. The whole rural land system is designed not for free disposition of land by farmers, or for achieving maximum income from land. Instead, the government and urban inhabitants have shared most of the added value of land. Since the 1950s, a dualist urban-rural household registration structure, the collective land ownership, and tight state control have led to deep separation between the countryside and cities.


China again stands at the crossroads of choices for reform: Should the country return land to farmers and establish a land primary market, or just fix the existing system to adopt a limited reform? Most farmers and experts advocate distributing land ownership to each farmer equally, granting farmers the same equal political and economic rights that urban inhabitants have been enjoying.


The encouraging element in the decision of the last party plenum was the following: it admitted that "The urban-rural dualist structure is a great contradiction," and pledged to "break this structure by integrating urban-rural socio-economic development." It also will implement the rectification and registration necessary to issue titles for rural land use rights. People now ponder what China's legislature should do next: revise the related laws such as the Land Administration Law and the Property Law, and remove the many restrictions imposed on peoples' rights to their rural land.

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Jialin Zhang, a visiting fellow at the Hoover Institution, Stanford University, specializes in international economics, China's economic reforms, and U.S.-China relations. He received his degree at the Moscow Institute of International Relations in 1960 and served as a senior fellow of the Shanghai Institute for International Studies. He is the author of numerous articles, essays and books. His recent books are U.S.-China Trade Issues After the WTO and the PNTR Deal----A Chinese Perspective, Hoover Institution Press, 2000; The Debate on China's Exchange Rate----Should or Will it be Revalued? Hoover Institution Press, 2004.
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