China & Land Reform

Property rights may be taking a beating in the U.S. lately, but they are prospering in China. The Li & Fung Research Centre reports on the recent rural land reforms:

On 12 October, the 3rd Plenary Session of the 17th Central Committee of the Chinese Communist Party was concluded. A long-term goal of doubling farmers’ income by 2020 from the 2008 level was set. A “rural land reform” plan was announced, which is viewed as one of the most important and ambitious government policies in recent years.

According to the “rural land reform” plan:

1. Farmers are allowed to transfer, sub-contract, lease, exchange, or to offer/transfer through a shareholding system the use rights of their farmland
2. Government will establish markets for the lease of contracted farmland and the transfer of farmland-use rights.

Before the reform, farmers can only lease farmland for long-term use, typically 30 years. While individual farmer only leases small plots of farmland, the agricultural production in China is mostly in small scale. After the reform, farmers can choose how to exercise their farmland-use rights and hence, economic efficiency can be boosted.

The reform is expected to encourage farmland consolidation. With larger farmland, farmers will have more incentive to make investments and raise the mechanization level of the agricultural production. Meanwhile, the process of urbanization would be accelerated as farmers can be compensated for leaving rural areas and moving into cities.

The “rural land reform” is one of the major policies to develop both rural and urban economies, and is consistent with the government strategy to stimulate domestic demand – which has become particularly important amidst the global economic slowdown. We expect more capital will be attracted to the countryside for developing a modern agricultural industry. Besides, rural residents’ wealth will increase, as they are entitled to the income from their land-use rights. In addition, it is expected that a lot of rural residents will leave the rural areas and migrate to cities. This will greatly stimulate the demand for housing (and related products and services) in the urban areas.

The bf sentence is important. One of the major corruptions in China is that local Party officials have been able to cream off the value of changes in land use. By making the farmers the de facto owners, the government is not only increasing economic efficiency and removing a major cause of rural unrest, it is removing a source of income from the local officials and increasing the control of the central government over the Party itself.

For the present circumstances of China, this is a good thing.