Liu Shouying: The Relationship Between China’s Land Allocation and Economic Growth

·         China’s unique land allocation system fuels its economic growth.

China has a dual system of land ownership, with rural land owned collectively by villagers and urban land owned by the state. The power of eminent domain exercised by municipal or county governments makes it possible to convert rural land into urban land at a low cost. This also gives the government an exclusive monopoly over the entry, transfer, and recovery of land in the market. Land price is determined by the monopoly of the seller in conjunction with the competition of multiple prospective buyers. In 2008, the government set up financing platforms to facilitate land mortgages, forming a land finance model.

Under the pure market system, demand for land is determined by economic growth. In China, the government motivates economic growth through land allocation by distributing land quotas to the coastal areas—and more recently to central and western regions—to boost economic development. In China, land not only guarantees food security and the ability to cultivate, but also promises to support economic growth. In general, the supply of land for food security is very tight, while the supply for economic activities is loose. Expanding land for infrastructure also meets the demand for infrastructure investments.

Compared with developed countries and other developing countries, China has designated 40% of its land for industrial use. Long-term low costs of industrial land have fueled China’s manufacturing industry. Meanwhile, local governments control the supply of residential and commercial land at about 25% to ensure they will receive the income from land transactions. Low-cost land expropriation has given rise to low-cost urbanization.

Both industrialization and urbanization are deeply reliant on land supply regulations and land capitalization (land transaction fees and land financing). The system of land allocation serves as one of the drivers of China’s economic growth. 

·         The land-dependent growth model began to wane in 2008.

In 2008, China's GDP growth declined and entered a “new normal,” which served as a tipping point for the growth model supported by a loose land supply. The demand for industrial land began to drop, and with the intensive use of industrial land, and an increasing output per unit of industrial land, the proportion of industrial land was reduced to 25%. Meanwhile, due to the soaring cost of expropriation and demolition, net land revenue fell, and the cost of land for urbanization shot up.

Additionally, land capitalization also began to experience difficulties as the area and amount of land mortgages in various regions experienced constant increases. From 2010 to 2015, the proportion of land revenue in local governments’ total debt reached 40%. Moreover, the actual leverage ratio of land mortgages was 1.5-2, which posed high debt risks to the government. These factors led the land-dependent growth model to begin waning.

·         Land reform should complement high-quality development.

From comparative historical studies, we know that a decrease in the frequency and extent of economic contractions is a testament to economic success. China’s high-quality development must shift from high-growth to high-performance, and reduce its contraction rate during the economic slowdown. The function of land should be changed from the driver of growth to a leading force in the market.

China is in the process of transitioning from a rural country to the integration of its urban and rural areas. In order for the Chinese economy to become highly efficient, urban and rural spaces must be integrated. On the one hand, we should revitalize agriculture to serve urban development and rethink the function of villages and the evolution of rural systems to achieve modernization. On the other hand, we must increase the flow of production factors between urban and rural areas. In this way, cities’ demand for urban villages will increase, the division of labor between cities, towns, and villages will become more distinct, and urban and rural areas will coexist in harmony.

The process of integrating urban and rural areas will require a number of land system reforms. Cities should revitalize their existing stocks of land instead of merely increasing the supply, adjust land-use structures, and reduce the proportion of industrial land. Meanwhile, rural areas require reforms to the collective construction land system, farmland system, and homestead land system to support the industrial development of agriculture, the merging and upgrading of various agricultural factors, and the establishment of increasingly complex economic activities.