Chinese Land Sales Income to be Redirected to Countryside

Chinese real estate creates riches out of thin air by seizing rural land on the urban fringe, re-classifying it as "state-owned," selling it, building on it, and reselling it, padding its value each time. This process has created countless millionaires and bolstered municipal finances. Now Chinese officials have belatedly decreed that a larger share of those riches should be returned to the countryside to support agriculture and rural infrastructure. 

A document issued in September 2020 decreed that the 50 percent of income from sales of requisitioned land should be earmarked for agricultural and rural use by the end of the 14th five-year plan in 2025. 

At a press conference on the document last year a rural policy team headed by former rural development czar Han Jun (now governor of Jilin Province) estimated that the average share had been 34 percent during 2013-18. Han's task force estimated that increasing the share by 1 percentage point would generate 60-70 billion yuan (roughly $10 billion) for rural revitalization every year. 

Source: Jiemian.com.

The 2019 "Number one document" on rural policy first called for raising the proportion of land sales used for rural development. The 2021 document included one sentence in a paragraph on financing rural development that called for an evaluation system for devoting income from land sales to agricultural and rural spending, but no specifics or numbers.

Last month a videoconference was held in Beijing to discuss how to reach the 50% objective set by the 2020 document. The brief report on the meeting did not reveal any specifics. 

Redirecting land sales income to the countryside turns out to be a lot more challenging than it sounds. 

First of all, the 50% objective is nowhere near half of the gross value of land sales--it's 50% of what's left after paying for the land and paying for demolition. 

Yicai, a Chinese business news outlet, said last week that gross income from sales of requisitioned land soared from 50 billion yuan in 1998--when China's housing was first marketized--to 8.4 trillion yuan in 2020, about 8.3% of China's GDP. The value of annual land sales happens to be a little more than "primary industry" GDP of 7.7 trillion yuan--a rough measure of agricultural net output. Yicai commented that local governments hit by impacts of the pandemic last year were under pressure to fill gaps between shrinking income and ballooning expenditure with funds from land sales.

 Yicai noted that there are considerable costs deducted from land sales. A securities research institute in Guangdong found that 52% of land sales income is used for compensation and demolition. They did not elaborate on who was compensated, but probably just a fraction went to villagers who collectively "owned" the land. Another 23% was used for "land consolidation", 12% for urban construction, and just 1% for rural infrastructure, leaving little for discretionary spending, the institute found. 

The rural revitalization task force reported last year that cumulative gross income from land sales was 28 trillion yuan between 2013 and 2018, but only 5.4 trillion yuan was left after deducting costs of compensation and demolition. The team estimated that 1.85 trillion yuan was used for rural spending--about a third of net land sales but only 6.6% of gross sales.

Moreover, Han Jun reported that some localities inflate costs and under-report their gross land sales income. His team designed a "digital accrual" scheme to outflank them. 

The Guangdong securities institute found that a few coastal provinces take in the largest amount of funds from land sales. Jiangsu and Zhejiang Provinces were the top two, reaping over 800 billion yuan each in 2019. Shandong and Guangdong Provinces took in 500-600 billion yuan each, and the next 10 provinces earned 150-300 billion yuan. Many of these provinces financed all of their local expenditures with land sales income. 

In contrast, provinces in China's western and northeastern regions earned relatively little from land sales. These provinces are accordingly in weaker financial condition and rely on transfers from the central government and tax refunds. 

Redistributing the land sales pot of gold involves a tug of war between multiple government ministries and different levels of government whose interests are not always aligned. Last month's videoconference included the Minister of Agriculture and Rural Affairs, a Vice Minister of Finance, deputy director of the national rural revitalization administration, and officials from the National Development and Reform Commission, State Tax Administration, and Jilin, Inner Mongolia, Anhui, and Guizhou Provinces participated.

A report on land management from Jiangsu Province's standing committee last week reveals the challenges of juggling priorities in land allocation. The report cited a contradiction between "twin bottlenecks" of economic development and protecting land resources, plus a jumble of industrial, agricultural, housing, energy-conservation, and environmental protection zoning plans and priorities. Cities and industrial parks need land to fulfill plans for housing developments, ecological protection, "industry chains" and "industry clusters", while officials are under orders to delineate "permanent basic farmland," prevent loss of farmland and to prevent farmland from being used for non-grain crops. The Jiangsu report calls for addressing lingering "historical" problems, including construction of villas and hotels inside greenhouses to comply with farmland development restrictions, disputes over land with Taiwan-invested companies, and registration of land belonging to religious organizations.