China: What Happened Last Year and What Might Happen This Year? The Fundamental Changes in China’s Land Law

In 2004, China’s land laws underwent a series of thorough and unabashed reforms initiated by the Chinese government. Although the land tenure system remains unchanged, it is still no exaggeration to say that the reforms mark the beginning of a new chapter in China’s land law evolution.

The reforms are aimed at tightening the market availability of land and at enhancing the transparency of land acquisitions. The reforms bear much significance for foreign investors in that resultant higher land prices will inevitably drive domestic developers to solicit foreign investment in order to finance their projects. Furthermore, by rendering the land acquisition process more transparent, the Chinese government seeks to provide a platform with more opportunities for fair competition.

In this article, we summarize the reforms undertaken by the Chinese government in 2004 and make some predictions as to the reforms that may be on the government’s agenda for 2005. Before embarking on this analysis, it is appropriate to begin with a brief introduction to the Chinese land tenure system.

Land Use Rights Independent of Land Ownership. The most distinctive feature of China’s land tenure system is that the land use right is independent of land ownership. In other words, the land is owned either by the State ("State land"), which is essentially urban areas, or by the village or township farmers’ collective economic organizations ("collective land"), which is essentially rural areas. This should be contrasted with land use rights, which can be purchased or acquired by individuals or enterprises.

Land Use Control. For the purpose of land use control, the land is then divided into agricultural land, construction land, and unused land. Both State land and collective land can be acquired and used for construction. However, they are subject to different government approval procedures.

As a general rule, if a plot of land is needed for construction, the land user is first required to use State land. This does not mean that collective land is not allowed to be used for construction. On the contrary, collective land can be used for construction. The difference lies in who uses the collective land. If the users are not members of the collective economic organization that owns the collective land, they should, subject to approval from the government agency, first requisition the collective land, i.e., convert the collective land to State land and then acquire the land use right from the government. However, if the land users are members, the land requisition procedure is not needed.

The more complicated scenario is when agricultural land is needed for construction. In addition to approval of the land requisition, the land users also need to receive approval of the conversion of the agricultural land to construction land.

Land Use Rights. Land use rights to State land can be acquired by grant, allocation, or lease.

Granted land use rights are the most common means of acquiring the State land in China. Basically, the government enters into the land grant contract with the land user under which the land user is required to pay the land premiums to the government in exchange for the land use right for a fixed term.

Allocated land use rights allow the land user to acquire the land use right without being required to pay any fees to the government (under certain circumstances the land user is required to pay nominal fees) and in the meantime, the term for land use right is not fixed. Before China reformed its economic system in the late 1970s, most land use rights were allocated to land users without charge. However, nowadays the land use right is only allocated for the projects involving public interest such as military facilities or government buildings.

Currently the government only leases the state land use rights to land users under very few circumstances.

China restructured its laws and regulations on land in a very comprehensive and fundamental way in 2004. We summarize below some of the major reforms.

Amendments to the Constitution and the Land Administration Law of the People’s Republic of China. According to the newest amendment to the PRC Constitution in March 2004, which was made by the National People’s Congress (the "NPC"), the State, based on public interest grounds, may take or acquire land and make compensation for it. In August 2004, the Standing Committee of the NPC ("the Standing Committee") revised the Land Administration Law of the PRC in accordance with the amendment to the Constitution.

According to the legislative statements to the amendment to the Constitution, the State has the power to permanently acquire the relevant land. This can be contrasted with land use rights, which are temporary in nature.

Chinese law fails to define public interest. In theory, land that is used for public purposes such as health, welfare, education, defense, etc. should be understood as being for public interest. However, in many cases, the public interest is abused, and much of the land acquired in this way is used for commercial purposes, e.g., the development of real estate, in the guise of public interest.

A Dual System of Initiating the Land Requisition Procedure was Established. Before 2004 the land requisition procedure was always initiated by the land users. Some local government agencies often approved land requisition beyond their jurisdiction in order to attract investment. As a result, the law regarding zoning and planning was broken, the farmers lost their land, and in some cases corruption took place.

From the year 2004, if collective land is requisitioned for the commercial purposes such as real estate development, business, tourism, or recreation, only the government agency in charge can initiate the land requisition procedure. However, if collective land is requisitioned and used for the public interest, or industrial purpose (such as building a factory) or infrastructure, the land user can still initiate the land requisition procedure.

The Power to Grant Approval of Land Requisition is Confirmed at the Provincial Level. On December 24, 2004, the State Council issued "the Decision of the State Council on Deepening the Reform and Tightening Land Administration" ("Decision"). This Decision has a far-reaching impact on the reform of the Chinese land system. For one thing, the Decision especially emphasizes that the power to approve land requisition and conversion of agricultural land to construction land must be made at the provincial level and not by local government.

According to the Decision, the power of approval of issues related to the land requisition and conversion should be strictly divided (among government at various levels) in accordance with law. The approval power of conversion of the agricultural land to construction land and land requisition is vested with the State Council and the people’s government at the provincial level. The people’s government at the provincial level is not permitted to delegate the approval power to the government at lower levels.

The Acquisition of the Collective Construction Land. Under the "Decision," collective construction land can be acquired on the condition that it is not against the zoning and planning.

Currently, the acquisition of collective construction land is conducted on a pilot basis. For instance, in Beijing, collective construction land can be acquired in two pilot towns. The land can be leased, used as the capital contribution, mortgaged, or even sold to the land users who are not the members of the collective economic organization. After the land is acquired, it is still collective land. In other words, the collective land is not converted to state land even if the land users are not the members of the collective economic organization. The collective economic organization has the final say in the land acquisition. The revenue from the acquisition for the first time goes to the collective economic organization, and the township government administers the revenue on behalf of the village economic organization. The revenue resulting from any subsequent transaction or from the transaction between land users goes to the vendor.

Land for Commercial Purposes Must be Granted by Bidding, Auction, or Quotation. Under current law, the land use right can be granted by agreement, biding, auction, or quotation. For many years, almost 97 percent of land use rights were granted by agreement. In 2002, the Ministry of Land and Resource issued the "Rule of Granting of State-owned Land by Biding, Auction or Quotation," under which the land use right must be granted by bidding, auction, or quotation under the following circumstances: (a) the land is used for the construction of condominiums; (b) the land is used for such commercial purposes as business, tourism, and recreation; (c) the land is used for purposes other than commercial ones, and there are two or more land users who apply for the land use right. Consequently, if the land is used for purposes other than the above three, it can be granted by agreement.

In 2003, the Ministry of Land and Resources issued the "Rule of Granting of State-owned Land by the Agreement." This regulation sets forth the principles on which land grant premiums were to be determined, and required that any agreements for land grants must be announced to the public in a proper way.

However, the 2003 regulation arguably undermines the 2002 regulation, insofar as according to Article 16, where a land user, who acquires a land use right by agreement, wants to convert the land use purpose (e.g., from industrial to commercial) the land user should apply for approval of change of planning. This article potentially enables the land user to circumvent the requirement of land granting by bidding, auction, or quotation for commercial land. For example, if a land user wants a specific plot of land, it can first apply for the land use right for the industrial purpose and then apply for the conversion of purpose from industrial one to commercial one. Although this arrangement is time consuming, it is legally feasible and does not attract the requirement for bidding, auction, or quotation.

Preliminary Examination of Construction Land for Projects. In the past, the first step for the construction of a new project was always the initiation of the project upon approval from the relevant government agency.

However, in October 2004, a new "Administrative Rules on the Preliminary Examination on the Construction Land for Projects" was issued by the Ministry of Land and Resource, under which the preliminary examination on construction land for projects became the first step or procedure to start a new real estate project.

If a land user wants to use a plot of land for a construction purpose, it is required to present documents to the government authority for preliminary examination. The preliminary examination focuses on whether the land use for construction is consistent with the master plan for the land use and master urban plan.

Only after the preliminary examination is approved by the government agency may the land user move to the next step, i.e., the approval of initiation of project proposal. The preliminary examination on construction land for projects is designed to control the illegal use of land.

Although comprehensive reforms were made to the land system in China in 2004, more reforms are likely to be made in 2005. We anticipate that further reforms will focus on the following issues:

Land Used for Industrial Purposes May be Required to be Granted by Bidding, Auction, or Quotation. As mentioned earlier, unless the land is used for commercial purposes or there are two or more land users competing for the same plot of land, the land user can acquire land used for industrial purposes or for public undertakings by agreement.

Some developers first acquire the land use right in the guise of industrial use and then apply for the conversion of industrial use to commercial use. As a result, the developers avoid the procedure of land grant by bidding, auction, or quotation.

To address this issue, we anticipate that the Ministry of Land and Resource will issue a new regulation in 2005, under which land used for the industrial purpose will also be required to be granted by bidding, auction, or quotation.

The Land for Profit-Seeking Public Use May Attract Land Premiums. For many years, land users always acquired land use rights for public use by allocation. As mentioned previously, public use includes that land used for the construction of urban infrastructure and public schools and hospitals.

On October 22, 2001, the Ministry of Land and Resource issued the Catalogue for Allocated Land, which detailed under what circumstances the land user could acquire land use rights by allocation.

With the establishment of the market economy in China, many private, profit-seeking schools and hospitals were formed and many public schools and hospitals began to conduct business for profit. Some urban infrastructure is constructed for profit as well.

Accordingly, the land user may be required to pay the land premium if the land is being used to build profit-seeking schools and profit-seeking hospitals as well as some infrastructure facilities such as water supply or discharge facilities, electricity facilities, and telecommunication facilities, which are constructed for profit.

A Nationwide Rule to Regulate the Transactions of Collective Land May be Issued by the Ministry of Land and Resources. The collective land use right may be allowed to be sold, leased, or mortgaged to an individual or entity other than the members of the collective. This means the land requisition (by which collective land is converted into State land) will not be required under certain circumstances, and correspondingly land users will not need to pay the land premiums any longer. However, notwithstanding this, it seems that collective land will not be allowed to be used for the development of real estate projects.

Local Governments May Issue New Rules to Regulate the Primary Development of Land. As land for profit-seeking uses can only be acquired by bidding, auction, or quotation, developers have begun to look at engaging in primary development of land.

Primary development of land means that the government, usually through its land banking center, engages in such business as land requisition, conversion of agricultural land to construction land, as well as land leveling and construction of infrastructure. Upon completion of the primary development, the government grants the land use right by bidding, auction, or quotation or allocation to the successful land users.

In practice, the government often entrusts developers to conduct the primary development given the fact that government is often understaffed and lacks the funds and expertise to conduct primary development. Currently, although the government is legally required to entrust developers by bidding, most developers win the right to conduct primary development by agreement.

Developers can reap the following benefits by participating in primary development: First, they can earn a fixed percentage of profit, and second, they can know more about the project and gain advantage over other developers in acquiring the land use right through the process of bidding, auction, or quotation.

However, irregularities can also happen in the process of primary development. To seek more profit, developers often intentionally lower the compensation for the house owners whose homes are being compulsorily acquired as part of the primary development. To gain advantage over and defeat other developers in acquiring the land use right, some developers overevaluate the cost of primary development in bad faith. More seriously, however, to compete against other developers to participate in the primary development, some developers bribe government officials.

Therefore, this year, we anticipate that at least some local governments, for example, Beijing Municipal Government, will take measures to regulate primary development. To this end, we expect that developers to have to take part in the bidding, auction, or quotation process in order to win the right to undertake primary development.

China has 166 cities with populations over one million, compared with nine in the United States, and China’s urban population is growing at a rate of 2.5 percent per annum. This presents immense challenges and opportunities for urban real estate development and infrastructure projects.

Consequently, there are (and will continue to be) many changes taking place in China’s real estate market, and many of them will be welcomed by those who champion transparency and fairness. In addition, the surging residential and commercial real estate markets in Beijing, Shanghai, and Guangzhou, as well as other major Chinese cities, have led to concerns that a real estate "bubble" is emerging, and this is something the Chinese Government is anxious to avoid (or at least to control), with the tightening of bank lending for real estate projects. Consequently, we anticipate that the significant regulatory activity that took place in 2004 will continue in 2005.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.