The Party That Failed
An Insider Breaks With Beijing
Last March, at a press conference after China’s annual National People’s Congress, Premier Li Keqiang made a remarkable—and remarkably unheralded—announcement: full private ownership of land has been restored in China’s cities. Needless to say, he did not use those exact words. But the import of his statement was the same. Here’s how it happened and why it’s important, both economically and as a bellwether of political change.
When the Chinese Communist Party assumed control over mainland China in 1949, it did not follow Russia’s Bolsheviks in immediately abolishing the private ownership of land. In the countryside, a violent land reform movement brought a change in owners, but not in the ownership regime itself; full collectivization did not occur until the late 1950s. In the cities, both owners and the ownership regime, at least for residential property, were initially left untouched. Over the years, however, government policies chipped away at the rights of landowners until, by the end of the Mao Zedong era, private ownership existed in name only. With the promulgation of a new constitution in 1982, all urban land was declared state-owned. Since then, state ownership of urban land has been considered a pillar of Chinese socialism.
If the first 30 years of the People’s Republic saw the gradual erosion of private ownership and the growth of state ownership, the last 20 years have seen the opposite trend. By the late 1980s, the state was looking for ways to marketize land use and raise money, and so—in a process that began experimentally in 1988 and was formalized in law in 1994—it began selling long-term leases to urban land, known as land-use rights (LURs). LURs for residential use could last for up to 70 years; for commercial use, 40 years; and for all other uses, 50 years. Buyers, made a one-time payment up front, and the land would revert to the state at the end of the term. Beijing could thus accomplish its goals of marketization and fund-raising, while maintaining that nothing had changed about the land ownership regime: the state could say it still owned the land, and had sold merely the long-term rights to its use. In substance, these LURs were virtually identical to the long-term leases of capitalist economies. They were tradeable, subject to use restrictions akin to ordinary zoning regulations, and compensable if expropriated by the state.
Predictably, LUR holders soon began to lobby for more. They complained that the rules about what would happen at the end of the term were unclear, and questioned whether they would have to pay for a renewal. In fact, the rules were quite clear: payment for a 70-year LUR bought one 70 years of use—no more and no less. But holders wanted free renewals, and as the American writer Upton Sinclair famously said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” Eventually the political pressure became such that the 2007 Property Law declared that residential LUR renewals would be “automatic.”
But instead of solving the problem, this only muddied the waters. The property law did not define what “automatic” meant: most crucially, it did not state whether LUR-holders would have to pay a new fee. That issue is crucial because an automatic renewal without the need to pay any fee effectively abolishes the time limit on the LUR. And an unlimited LUR is identical to the full private ownership known as fee simple in the United States.
That is why the drafters of the 2007 law chose not to clarify the meaning of “automatic.” (Wang Liming, a key member of the drafting team, admitted that the term’s ambiguity was deliberate.) To specify that a fee was required would have angered LUR-holders. But to indicate that a fee was not required would have effectively restored the full private ownership of land in China’s cities—a possibility that party conservatives opposed.
The first batch of 70-year LURs granted in the early 1990s will expire in about 45 years. If the holders of those rights contemplate selling them ten years from now, they will have only a 35-year right to sell. How much will buyers pay for that? These calculations seem to have lent a new urgency to the demands of LUR-holders for a clear and favorable statement of their rights.
OWNERSHIP IN ALL BUT NAME
It is that statement that Chinese citizens heard from Li last March. In response to a reporter’s question about what would happen when the 70-year LURs expired, Li said:
There’s an old saying in China: Economic security brings peace of mind. . . . [T]he term can be renewed, there is no need to apply for renewal, there will be no pre-conditions, and there will be no effect on the ability to buy and sell. Of course, some people may say, “That’s what you say, but is there any legal guarantee?” Let me stress this here: the State Council has already tasked the relevant departments with urgently studying the laws relating to the protection of real estate and coming up with a proposal.
In other words, Beijing will permit perpetual free renewals, and the government is in the process of drafting legislation that will codify this right. Perpetual free renewals mean that people who paid for a 70-year LUR now find themselves with a perpetual LUR. What anywhere else would be called private land ownership seems set to return to China.
This is momentous. Land ownership has traditionally been a central concern of revolutionary communist regimes, from the Bolsheviks to the Khmer Rouge. Few if any such regimes, once having nationalized land, have privatized it again. Yet with no fanfare, the Chinese government has in effect announced the end of a land regime that has been formally in place since 1982 and informally in place for decades before that.
Few if any communist regimes, once having nationalized land, have privatized it again.
In political terms, this suggests that socialism as a limiting ideology—a set of powerful symbols determining political sacred cows and third rails—is dead in China. In 2005, when the 2007 property law was being drafted, an open letter from a single leftist professor denouncing it for failure to label public property as “sacred” was enough to stall its progress toward enactment for more than a year. In 2017, Li’s announcement did not raise a ripple: it seems that many Chinese citizens no longer care about the symbols or the substance of socialism, at least when it comes to property. This means that in policy terms, anything is possible; the only constraints are what the leadership can do and what it wants to do.
THE PATH FORWARD
The immediate economic effect of full private ownership will likely be to make land prices higher and more stable: higher because what used to be a right to 70 years’ use has now become a right to perpetual use, and more stable because the market no longer has to guess the government’s intentions about renewals. The effect should not, however, be large. If an asset’s future earnings are discounted at 5 percent annually, for example, the present value of a 70-year right to the asset is worth more than 97 percent of the value of the asset held in perpetuity.
Statistics on land values would also become more reliable. Current statistics measure market prices by area, failing to account for the fact that a square meter in one building may have a different life span, and thus a different market value, from an otherwise identical square meter next door. If all properties have a perpetual life span, then prices per unit area can be properly compared.
Instituting a property tax will also become much simpler. Chinese officials have for years been talking about implementing a value-based tax on residential property, but so far nothing has come of it. If China were to implement such a system today, it would face much more than the usual problems of assessing the value of real estate: assessments would also have to take account of the declining value of each LUR as its expiration date neared. Making LURs permanent will solve this problem by abolishing those expiration dates.
But the new policy will also bring complications. The most obvious question is what will happen to residential LURs of less than 70 years, and whether those who saved money by paying for shorter terms will also get perpetual free renewals. There is no obvious point at which the government should stop issuing such renewals. (In December, authorities in the town of Wenzhou decided not to grant free renewals to holders of 20-year LURs, instead giving them what were effectively squatters’ rights after their rights expired.) No matter what threshold is adopted, those just below it will feel unfairly treated.
More critical is the question of how local governments will continue to raise money. Local governments depend on LUR sales to fund their operations: such sales account for fully 27 percent (some sources suggest 35 percent) of their revenues. Some way must be found to make up for the loss of revenue that would result from the renewal of residential LURs without charge.
One answer to this problem is a residential property tax. Unlike many other countries, China does not levy a periodic tax on the value of residential real estate. Many Chinese policymakers think doing so would be a good idea, but so far their ideas have not gained enough traction to be enacted. To be sure, a property tax is not a perfect answer. The current system of LUR sales allows local governments in effect to collect 70 years’ worth of payments for land up front, and property taxes on existing LURs cannot possibly bring in so much money. Nevertheless, the abolition of renewal fees may be just what is needed to make this idea a reality.
Finally, it is worth considering what the new urban land ownership regime will mean for the rural land ownership regime. China now has two distinct land ownership systems; rural land is regulated under completely different principles from those that govern urban land. It is formally owned not by the state, but by sometimes ill-defined collectives. Farmers can have use rights of up to 30 years. For rural land to be transformed into fully marketable LURs, it must first be nationalized, with compensation based in theory on its agricultural value currently going to those who farmed it, even if that amount is well below the market value. That price differential has made rural land takings tempting to any official or developer who can get a piece of it, and the resulting social disruption has been roiling Chinese society for years.
If the urban land ownership regime can be simplified in this way, with perpetual ownership rights and a real estate tax, the precedent could clear the way for a similar simplification of the rural land ownership regime, or even a unification of the urban and rural systems. If done properly, such a reform could reduce the role of government officials as middlemen in land transactions, and thus reduce opportunities for rent-seeking and arbitraging of price differentials.
Whatever happens, it is clear that in one innocuous-sounding sentence, Li has set in motion a fundamental transformation of the relationship between Chinese property holders and the state.