EMPIRICAL EVIDENCE FROM HANGZHOU’S URBAN LAND REFORM EVOLUTION, STRUCTURE, CONSTRAINTS AND PROSPECTS

Zhu Qian

Texas A & M University

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ABSTRACT

China’s urban land reform is a gradualist process of transforming a planned land allocation system to an open land market system, while the ownership of land remains under the control of the state. Through a series of reforms in institutions and policies, urban land markets have emerged rapidly. This study analyzes the evolution of urban land reform in Hangzhou, one of the spearhead cities in China’s urban land reforms, to discuss its emerging structure of urban land market—its legal, institutional and fi nancial frameworks, to identify the current urban land management characteristics and the principal constraints, and to propose relevant recommendations for urban land reform with emphasis on rural land rights and expropriation, interactions between central and local governments, and non-government sector’s participation in urban land use management. Besides the policy implications, the study concludes that: (a) urban land reform in Hangzhou actively interacts with economic reforms in other fi elds in a variety of ways; (b) a monopolized supply mechanism of urban land is not necessarily a detriment to the development of a market system in the urban land economy; (c) a government-led land use management model with little civil society and public participation is one of the most signifi cant constraints in China’s urban land reforms.

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Urban land reform constitutes one of the most important areas of China’s socialist economic reform, which was launched in the late 1970s. Within the overall reform framework of establishing a developed socialist market economy, urban land reform is a process of transforming the administrative land allocation system in a planned economy to an open land market system. Urban land reform has evolved in a gradual process where the public ownership of land remains unchanged, but land use rights can be granted by the state and transferred between land users.

Given the nature of China’s economic reform, fi scal and administrative decentralization has been adopted as public policy, which has greatly revitalized the urban economy. The highly localized privatization process combined with less emphasis on political reform mean that local governments now have to face an emerging market economy subject to the constraints of an old political system. Many experts quickly sensed the important role of the local government in China’s urban land reform (World Bank, 1993). Empirical evidence also suggests that local government rather than central government policy may be more important in promoting urban land reform (for example, see Deng, 2003; J. Zhu, 2002).

Urban land reform in China has been the subject of much research in recent decade. While some works have investigated the overall policy of urban land reform (Li, 1996; World Bank, 1993; Zhang, 1997; Zhu, 1999), others have chosen specifi c aspects of the reform, such as: the political economy of urban land reform (Deng, 2003; Li, 1997); property rights (Che and Qian, 1998; Li, 1996; J. Zhu, 2002); emerging land and real estate market (Li, 1997; Xie et al., 2002); land pricing system (Li, 1995; Li and Walker, 1996); and the land development process (Wu, 1997; Yeh and Wu, 1996). A body of literature has also emerged on China’s local governments under economic reform (Qian and Weingast, 1997) and their relationship with State Owned Enterprises (J. Zhu, 2002) and growing non-state businesses (Nee, 1989; Wank, 1996). Through analysing the legal, fi nancial, and administrative frameworks, this study fi rst reveals the key characteristics of the urban land system. While acknowledging common factors underlying urban land reform in China, the study highlights the signifi cance of gradual urban land reforms in Hangzhou. The magnitude of growth and transformation experienced by emerging coastal City of Hangzhou, particularly in the 1990s, is unlikely to be paralleled in many other Chinese cities (Wei and Li, 2002). The study examines the challenges encountered in a city adjusting to a socialist urban land market, focusing on the experiences and diffi culties of introducing a land use fee and tax reforms, land leasing, land market formation, and institution arrangements.

Instead of addressing extensive issues in urban land reform, the study provides a close observation of Hangzhou by investigating the key characteristics of the evolving land reform process. Given its overall economic situation and size, Hangzhou was selected by the state to test out some of the key land policy initiatives. One such policy was the benchmark land leasing price mechanism in 1991. Hangzhou was also designated by the State Land Administration Bureau (the Ministry of Land and Resources since 1998) as one of the fi ve contacting cities for the National Urban and Town State-owned Land Use Reforms.

While investigators have previously focused on urban land reform in major cities like Beijing, Guangzhou, Shanghai, and the fi ve Special Economic Zones, Hangzhou has escaped the attention of academics. The analysis is followed by policy implications on urban land reform, with emphasis on rural land rights and expropriation, interactions between central and local governments, and non-government sector’s participation in urban land use management. The study is based on intensive fi eldwork in Hangzhou during the summer of 2004, and the beginning of 2005. Besides documentation and archival records collection I conducted 14 open-ended interviews with government offi cials, scholars, developers, rural collective leaders, and ordinary rural residents within the study area.

URBAN LAND MANAGEMENT BEFORE REFORM

Labour, capital and land are recognized as the three primary production factors in political economy. Marxists argue that land has no value until labour, the only creator of products, is added to it. The added value of land in capitalist economy is therefore interpreted as an exploitation of labour involved in production activities. The revenue of any landowner is an output of exploitation. Since one of the ultimate goals of socialism is to terminate exploitation through discarding private ownership, China’s pre-reform urban land system was based on this Marxist theory and took the form of state ownership of urban land. The pre-reform urban land system can be characterized by the following institutional aspects: public ownership where the state is the trustee of the public; absence of land value; no clearly specifi ed time limits for users; and prohibition of land transactions apart from administrative allocation.

During the pre-reform era, land expropriation converted collective-owned rural land to state-owned urban land to meet the demands of economic development. Instead of paying the aff ected rural collectives or residents for the expropriated land at market value, or its real value in pursuing economic goals, the state provided a compensation

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46 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT package that covered for the loss of crops and provided rural site residence, employment opportunity, and urban resident status permit (or city Hukou, a city Hukou holder can have access to social welfare such as medical insurance, retirement plans, education, and subsidized agricultural products that were usually confi ned to urban residents).

After land expropriation, local governments, authorized by the state, granted land to potential users by administrative allocation only, according to their local socio-economic development plans. Local governments decided the locations and extents of urban capacity expansion to meet the comprehensive economic plans. Insuffi cient capital however was a major barrier to realize the capacity of the expansion plans. The fact that land did not have value made land the only eff ective factor for consideration. The governments thus substituted land for capital to overcome the fi nancial barrier. For State-Owned Enterprises (SOEs), which predominated, the ability to obtain more land from the government rather than other factors such as new technology, labor skills, management capability, and enterprise reform, was the key competitive advantage (Ding, 2003).

URBAN LAND REFORM AND EMERGENCE OF URBAN LAND MARKET

In 1978 China decided to initiate reforms which have dominated the country’s economic and political agenda in the proceeding decades. In contrast to the ‘big-bang’ reform policies of the Former Soviet Union and some former socialist countries in Central and Eastern Europe, where the reforms moved countries towards a complete capitalist socioeconomic system, the reforms in China are moving towards market socialism (Adlington et al., 2000; Jin and Haynes, 1997; Stiglitz, 1998). Instead of sweeping away the existing socialist planned economy completely, China’s strategy is to merge it with the incoming market mechanism. The reform process has been described as incremental or gradual, with step-by-step, trial and error changes, reversals of policy, and having no defi nite, clearly defi ned goals (Lindblom, 1992; Ma, 2002; McMillan and Naughton, 1992; Nee, 1992). This “muddling through” process, as Deng Xiaoping depicted, has been notably pragmatic and has its ideological foundation on a shifting emphasis in Marxism. The Central Communist Party justifi ed the economic reforms by adapting Marxism as a developing ideology under the changing situation. Therefore, China’s socialist revolution would be more eff ectively facilitated by the coexistence of multiple economic elements. This emphasis on Marxism has helped the State maintain a balance between its economic reforms and political power stability. The ideological principles involved have provided a unique context in which China’s urban land reform was designed.

The emergence of a market economy led to the expansion of the non-state economy, mainly private and foreign entities. On the one hand, the increasing demand for urban public infrastructure pushed governments to initiate public fi nance alternatives, whilst on the other hand, concerns for foreign investment provided a chance for the reformers to re-examine the existing urban land use system. The 1979 Sino-Foreign Joint Venture Enterprises Law marked the start of China’s urban land reform by terminating the free land use rights of foreign investment related enterprises, requiring those enterprises to pay land use fees. Free, unlimited and non-transferable land use led to problems such as diffi culties with reallocating land, unlimited demand from powerful state agencies (Deng, 2003), waste of land and ineffi cient use of land to meet economic need, infl exibility in rational urban restructuring (Bertaud and Renaud, 1992), a shortage of local public fi nance for urban infrastructure, and distorted local government responses.

In 1981, Shenzhen, a newly established special economic zone, began to impose a levy on land use to all land users, and the practice spread to a third of Chinese cities by the mid-1980s (Editorial Committee, 1992). Then the State Council took a further step and decided to introduce an experimental land market with pilot projects in six cities in September 1987. The urban land market concept was regarded as transforming the “administrative allocation only” system into a dual-track land system, which referred to the co-existence of a planned approach with a market channel including the options of negotiation, tender and auction for land leasing. It should be noted however that the state still retained the urban land ownership, with the newly established land market providing land use rights. By 1989, most coastal cities had produced regulations to facilitate land use rights transfers (Editorial Committee, 1992). In April 1988, the PRC Constitution was amended to allow the land use rights transfer, which provided a legal foundation for the establishment of land markets. In May 1990, the State Council’s enforcement of Provisional Regulations on China’s Urban Public Land Leasing and Transfers constructed the urban land market system where land value and market competition were honoured and land use rights became tradable and transferable. Since then, China’s urban land reform has developed quickly and fostered a fast growing property market that has brought signifi cant changes to the urban structure.

The primary characteristics of China’s urban land reform can be depicted as: (1) The central feature is the separation of land use rights from public land ownership, as political ideology has restrained the reform from extending to ownership. Public land ownership therefore retains political and ideological meanings and its impact on actual land market operations is limited (Zhang, 1997); (2) Another feature is the dual-track

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48 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT system, which refers to the coexistence of a traditional planned approach and a market channel for land allocation. The administrative allocation of land is conducted through a planned approach wherein land users pay only a nominal compensation fee for property attached to land and resettlement. Land users under the planned approach are usually not allowed to dispose of their land use rights in the market. Land allocated through the market channel, on the other hand, is based on the market mechanism and is completely transferable and tradable; (3) The third feature is that the reform adds value to land in the market through charging land allocated premiums, land transaction related fees in the market of transfers, subleases and mortgages, and annual land use fees.

LEGAL FRAMEWORK

The State established the Land Administration Bureau in 1986 to oversee land development, and responded to the policy problems of increased land use pressure with the 1988 Land Management Law. This land law required all administrative levels to conduct land surveys, prepare land use plans, report land statistics, coordinate construction projects, and conserve arable land. A quota system set limits for each level of government’s power on the amount of land that could be approved for conversion. The 1988 Land Management Law was in general not a detail-specifi c law and left many undefi ned areas (i.e., the Law did not even clarify who is the exact representative of the state-owned urban land) in the land use system. That made the implementation highly variable from one administrative jurisdiction to another.

Between 1988 and 1993, the state issued over twenty diff erent types of land regulation measure, from circulars, opinions, and tentative procedures, to new and substantial regulations (Zhang, 1997; Cartier, 2001; Xie et al, 2002; Lin and Ho, 2005). Among the various types of land regulation measures, three measures gradually erected a framework for real estate development in urban areas. The Provisional Administrative Measures for Commercial Land Development and Management by Foreign Investors and the Provisional Regulations on China’s Urban Public Land Leasing and Transfers both called for more effi cient and rational land development to promote local economic growth and the establishment of a preliminary structure for a partially market-oriented urban land system in 1990. The 1995 Urban Real Estate Law enhanced regulations for land market transactions, and guided a shift in investment from the overheated villa, offi ce, and fancy townhouse development to average and low cost housing development, by off ering the latter certain tax waivers, low land lease rents, and competitive loan terms. In order to cool down overheated land development and minimize land speculation, the Law imposed on the developer a fi ne of twenty percent of the contracted land invest-

ment if the land lay idle for more than one year, and confi scated land use rights from developers without any compensation if the proposed construction did not start for more than two years. In order to further regulate arable land conservation and, more important, to prevent state over-requisitions of village and township land for industrial construction purposes, the Primary Arable Land Conservation Regulations was formulated in 1994. This regulation set an institutional basis for primary arable land conservation and management and structured a conservation system inside designated agricultural conservation zones. Provincial government was required to establish minimum areas of primary farmland and locate these conservation areas.

The 1988 Land Management Law has many weaknesses. From a land revenue perspective, the philosophy of “selling land to obtain fi nancial reward” made localities emphasize short-term economic benefi ts, downplay the benefi cial simultaneous development of land use and economic growth, and ignore the overall and long-term interests (Cartier, 2001; Guo, 2001; Deng, 2003). The root cause of the problem was that rural land could be directly converted to urban construction land upon expropriation approval. Localities took illegal but common strategies such as “breaking the whole into parts” or “devolving approval power” so that the size of the proposed land conversion could be within the local (i.e. provincial, municipal, or town) approval limits (Cartier, 2001; Lin and Ho, 2005). Large areas of arable land were converted to urban land, but was not necessarily used in an effi cient manner.

The new 1998 Land Management Law no longer delegates municipal and county level governments any power to approve arable land expropriation. The expropriation of this type of land must be authorized by either the provincial or state level governments depending on the size. In addition, the new law raised the cost of occupying arable land through increasing the land compensation fee and settlement allowance fee from twenty times the average annual product revenue for the previous three years to thirty times in total (Table 1). The new law emphasizes the importance of land use master planning and its decisive role in land use management and regulation. The new law takes back the authorization of land use master plans, arable land conversion, and the total volume control of land supply to provincial and higher level governments.

ADMINISTRATIVE AND INSTITUTIONAL FRAMEWORK

Before the enactment of new Land Management Law and the establishment of the Ministry of Land and Resources in 1998, there were three key government departments directly involved in urban land administration: the National Land Administration

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50 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT TABLE 1 Rural Land Expropriation Fee in China.

Type of Land Item of Compensation 1988 Land Management Law 1998 Land Management Law

Arable Land Compensation for Land 3 to 6 times of the annual value of production which is calculated by the average production in the previous 3 years 6 to 10 times of the annual value of production which is calculated by the average production in the previous 3 years

Compensation for Young Crops and Improvements on the Site

Decided by the provincial governments Decided by the provincial governments

Housing Displacement Allowance 2 to 3 times of the annual value of the production per Mu (667 square meters) for each person; it can be increased in special cases, but the sum of the allowance and compensation should not exceed 20 times of the annual value of production 4 to 6 times of the annual value of the production per Mu (667 square meters) for each person; it can be increased in special cases, but the sum of the allowance and compensation should not exceed 30 times of the annual value of production

Other Collectively-owned Rural Land Compensation fo Land Decided by the government at provincial level, referring to the compensation for arable land

Decided by the government at provincial level, referring to the compensation for arable land

Compensation for Young Crops and Improvements on the Site

Decided by the government at provincial level Decided by the government at provincial level

Housing Displacement Allowance 2 to 3 times of the annual value of the production per Mu (667 square meters) for each person; it can be increased in special cases, but the sum of the allowance and compensation should not exceed 20 times of the annual value of production Decided by the government at provincial level, referring to the compensation for arable land;it can be increased in special cases, but the sum of the allowance and compensation should not exceed 30 times of the annual value of production

(based on 1988 Land Management Law and 1998 Land Management Law.)

Bureau, the Ministry of Construction, and the National Surveying and Mapping Bureau. They all had branches from provincial to town level governments: the Land Administration Bureau, the Urban and Town Commission of Construction, and the Surveying and Mapping Bureau.

The institutional reorganization in 1998 arranged by the State Council integrated the National Land Administration Bureau and the National Surveying and Mapping Bureau into the newly established Ministry of Land and Resources. The Ministry of Construction has managed to grasp more power in urban land management. The situation is particularly apparent at the local level, administrative confl icts are found between the Urban Planning Bureau and the Urban Housing and Property Administration Bureau, both of which are subordinates of the Urban and Town Commission of Construction and the Urban Surveying Authority. There are overlapping administrative areas between the Ministry of Land and Resources and the Ministry of Construction.

To respond to such confl icts, central government tried to defi ne the respective functions for those departments more clearly. The Bureau of Land and Resources is authorized to administrate both urban and rural land, to be responsible for land ownership and rights management, land lot registration, land use plan making and land resource conservation, and also to be responsible for land use rights conveyance in cooperation with other relevant departments such as the Urban Planning Bureau and the Urban Housing and Property Administration Bureau (Xie et al, 2002). The establishment of the Ministry of Land and Resources and its branches below the state level is clearly an attempt to minimize the confl icts. Besides those administrative units, the National Development and Reform Commission and its branches at the provincial and local levels have indirect infl uences on land use through the comprehensive economic development plan and the national productivity distribution plan (table 2).

In addition to the enforcement and coordination confl icts, the hierarchical structure of the land use planning approval process has created tensions and incoherence (Cartier, 2001). Land use plan making does not have a hierarchical structure to mirror that of the administrative levels. In some cases, lower level governments make their land use plans well before the higher administrative level plan has completed, which often leads to the disapproval of the plans made by the lower levels. The hierarchical system does not facilitate the eff ective and effi cient implementation and monitoring of the plans. When land use conversions occur, the existence of many government departments, agencies, and state-affi liated companies (i.e., SOEs) at each administrative level, all with vested

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52 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT TABLE 2 Functions of Urban Land Use Management in Diff erent Central Government Sectors.

Ministry/Commissions Department in Charge Functions in Urban Planning

Ministry of Construction Department of Urban and Rural Planning To frame the drafting methods of urban planning, and town and village planning;To supervise and approve town system plans of provinces,autonomous regions, and some large cities; To supervise and approve plans of important national parks.

Ministry of Land and Resources Department of Planning To draft the national land use plan; To frame the drafting methods of land use master plans and other thematic land use plans; To supervise and approve land use master plans and other thematic plans for provinces, autonomous regions, and some large cities

National Development and Reform Commission Department of Development Planning, Department of Regional Economy To draft long-term, and yearly national economic and social development plans; To decide on key national projects; To draft plans of national productivity distribution.

(Source: Han and Nishimura, 2006) interests in land, has made it unclear who should actually act as the bona fi de land owner.

FINANCIAL FRAMEWORK

Rural land expropriation by the state is conducted without any market-based compensation. For administrative allocation, the compensation is usually paid by the urban land user to the rural collective, and bargaining is often the key processes between urban land users and rural collectives. The compensation for land expropriated for public leasing is diff erent. In this case, local government pays compensation directly to rural collectives, and then leases the land to the potential user. However, the compensation fee is usually far below the market value of land. It is not possible for rural collectives to obtain compensation based on market value under the current land legislation (Xie et

al, 2002). Besides expropriated land from rural collectives, existing urban land is also available for public land leasing. In the latter case, the local government takes back the land from the existing user with a compensation and puts the parcel of land to the land market. Here the compensation only refl ects the value of the properties on the land and relocation costs rather than the full market value of the land. In some cases, the compensation can be higher as an incentive to achieve the goals of quick relocation to facilitate urban renewal.

In the public land lease market, which includes negotiation, tender and auction for land transactions, the payment for leasing land usually consists of four major fi nancial components: the land premium, the urban infrastructure fee, the community infrastructure fee, and various kinds of fees collected by the municipality that vary from one to another. Each city has a standard guideline that classifi es land ranks and stipulates land prices for diff erent physical parts of the city, these benchmark prices are produced to serve as a reference for the minimum premium rate in land leasing. However, since land benchmark prices are set every fi ve years or longer, contrasting with the fast pace of urban development, most cities rely on updated land appraisals to adjust leasing prices to more accurate land values.

In practice, many land leasing prices are determined by negotiation between local governments and land users with limited reference to the price guidelines. Land leasing revenues are shared by diff erent levels of governments. Although the central government tried to share a certain percentage of the revenues with the localities (for instance, in the early 1990s it was 30 percent), this was very diffi cult to realize as local governments understandably hided their revenues through diff erent approaches and made various excuses in order to retain more revenue at the local level. The 1998 Land Management Law terminated the debate, resolving the struggle for land revenue sharing by stating that the central government would no longer require a certain portion of land leasing revenue from the localities. However, a thirty percent share of the land use fee is imposed on newly acquired arable land for construction purposes, all of which would be invested in arable land reclamation. According to the Provisional Regulations on China’s Urban Public Land Leasing and Transfers (1990) and the Urban Real Estate Law (1995), there is also a secondary land market where prospective users obtain land from other existing users instead of the state, through land transfer, sublease and mortgage. Upon the completion of more than twenty fi ve percent of the proposed investment, land users are allowed to dispose their land in the secondary market as long as the transactions are registered with the local land authority. The transaction price is normally negotiated

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54 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT and determined by the parties involved with limited government fi nancial intervention. Land tax was calculated on the basis of the actual size of the occupied land. Land used by government agencies, charities, military services, and others specifi ed by the Department of Finance is exempted from taxation. This annually collected tax is rated based on the status of the city1. This land taxation seems more like a charge of land use fee rather than a tax since the increased value associated with the land is not taxed and the system is independent from the type of development or land use on the site2. Land tax only refl ects land ownership but does not indicate land value since it is size-based. The size-based taxation has its drawbacks in practice. Area-based land tax could be tremendously higher than that based on value or rent because it is neither a tax on capital value nor a tax on site or rental values. Because the tax distribution approach determines that the majority of the tax income goes to the central government which leaves only a small part of it with the localities, it creates a catch-22 situation for the state, by encouraging localities to collect land tax and to avoid state tax loss.

THE CITY OF HANGZHOU

The capital of Zhejiang province, Hangzhou, lies 180 kilometres southwest of Shanghai. With a total area of 16,596 square kilometres (Hangzhou Statistical Bureau, 2002), it forms part of the Yangtze River Delta (YRD) region (Figure 1). In 1984, the State Council permitted Hangzhou to open up to foreign investment, and the city soon initiated incentives for foreign investment. By late 1990s, Hangzhou had been transformed from a socialist town to a transitional city experiencing rapid economic growth, a booming service sector, a massive infl ow of migrants, rising foreign investment, and expanding trade (Wei and Li, 2002). In 2001 Hangzhou’s GDP reached $18.9 billion, a 12.2 per cent increase from the previous year. GDP per capita was 25,000 RMB, or the equivalent of more than $3,000. The population of the Hangzhou Municipality was 6.29 million, of which approximately 3.79 million was in the administratively defi ned urban core (Hangzhou Statistical Bureau, 2002).

Hangzhou’s geographic orientation in the YRD region places it in the shadow of Shanghai when competing for intellectuals, talents, and capital resources. There is obviously a risk of losing valuable resources to Shanghai, however the situation can be viewed from two angles. Since the late 1990s, with Shanghai’s rise as China’s emerging global city, Hangzhou has been pushing hard for globalization and growth, due to its concerns over possible marginalization by Shanghai. This competition has pushed Hangzhou to be innovative and creative in policy-making. The natural environment along with the living quality is a counterbalance for the possible high fi nancial compensation one can obtain

FIGURE 1 Hangzhou and the Yangzi Delta Region. (Source: Hangzhou Municipality. www.hangzhou.gov.cn ) in Shanghai. To the city of Hangzhou, Shanghai’s recourses are easily accessible with one and a half hour’s drive. and a half hour’s drive. Because Shanghai has offi cially been identifi ed as the leading city of the YRD region, and even of the whole country by the central government since the 1990s, the city is always willing to cooperate with Hangzhou in one way or another to enhance regional competitiveness.

URBAN LAND USE FEE REFORM

The 1979 Sino-Foreign Joint Venture Enterprises Law introduced for the fi rst time in China the concept of a land use fee. The Hangzhou Municipality followed Shenzhen’s model and immediately adapted its successful policy, charging a land use fee to foreign and joint ventures in the early 1980s. The fee was categorized into four diff erent rates according to diff erent functions (Y. C. Zhu, 2002): for business, fi nancial, tourist, and service uses, the rate was $1.2-$3.6 per square meter per year; for entertainment, offi ce, and residential uses, the rate was $0.6-$2.4 per square meter per year; for indus-

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56 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT trial/warehouse, transportation uses, the rate was $0.5-$1.9 per square meter per year; and for cultural, educational, and public health uses, the rate was $0.2-$1.2 per squareand for cultural, educational, and public health uses, the rate was $0.2-$1.2 per square meter per year. The nominal charge of the fee indicated the acceptance of the land value concept, but demonstrated the cautious implementation of the reform at the municipal level. During the early days of the reform, it was obviously premature to apply such regulation to other economic entities as the majority of the economic entities in the city were still state owned and responsible for public welfare and private sectors, with most being not fi nancially competent.

The Hangzhou Municipality established the Land Administration Bureau in 1988. Like its corresponding organization at the central level, most staff in the newly established administration were from the existing municipal agriculture and surveying bureaus. The Bureau was very active in exploring the implementation of the land use fee to other economic entities though the lack of expertise made investigation, research, and drafting of fee collecting standards, approaches, and boundaries a pains-taking experience. The eff orts were terminated by the issuance of the Provisional Regulation of Urban and Town Land Use Tax by the State Council in the same year. In 1989 Hangzhou levied a land use tax.

URBAN LAND LEASE REFORM

The theoretical debate and practical experiment of land contract leasing (by negotiation) and land tender leasing in Shenzhen achieved great success in 1987. The new approaches to land commoditization widely spread to other cities in the nation. Hangzhou’s fi rst land leasing transaction was a 2,200 square meter land parcel in the city core obtained by a Zhejiang provincial trading company for a 50-year use right at the cost of $819 thousand (Y. C. Zhu, 2002).

Hangzhou’s eff ort in initiating the urban land market and its ambition in exploring land lease alternatives were well recognized by the State Land Administration Bureau. In 1991, Hangzhou was appointed as one of the fi ve “contacting” (pilot) cities of the National Urban and Town State Owned Land Use Reform and the pilot city for the Urban Land Benchmark Pricing System. In order to legalize and regulate urban land lease and transfer, the Municipality issued the Provisional Measures of State Owned Land Use Rights Leasing and Transfer in the early 1989, one of the earliest measures of its kind in the nation. The measures put an end to free, unlimited, and non-transferable urban land use in Hangzhou. The city experienced a phenomenal increase in land transac-

tions in the 1990s. From 1995 to 1998, Hangzhou Municipality leased a total of 614.8 hectares of land, among which 261.1 hectares was for residential use (42.5 percent of all leased land); 155.7 hectares was for industrial use (25.3 percent); and 198.0 hectares was for commercial and mixed use (32.2 percent) (table 3).

TABLE 3 Land Conveyances from 1995 to 1998 (Unit: Ha.).

Year Land Supply

Residential Industrial Commercial/ Mix-use Amount Ratio Amount Ratio Amount Ratio

1995 188.3 34.5 18.4 23.6 12.5 130.2 69.1 1996 56.2 38.8 69.0 7.5 13.4 9.9 17.6 1997 97.2 40.8 42.0 21.2 21.8 35.2 36.2 1998 273.2 146.9 53.9 103.4 37.9 22.8 8.4 Total 614.8 261.1 42.5 155.7 25.3 198.0 32.2

(Source: Hangzhou Municipal Land Reserve Center, 2000)

Economic development required greater land supply. A hidden land market spontaneously emerged in Hangzhou around the late 1980s. This market primarily comprised of land transfers, joint management or construction with land invested as capital, land-goods trade, housing trade with land attached as transaction item, land leases and leasing transfers (Zhu et al., 2001; Y. C. Zhu, 2002). The phenomenon revealed that the market had already existed in urban land allocation and distribution process. However, an open and legal land market had not been structured until the issuances of the Land Management Law (1988), the Provisional Regulations of Urban and Town State-Owned Land Use Rights Leasing and Transfer (1990), and the Real Estate Management Law (1995).

Hangzhou has made eff orts in fostering the urban land market including a series of local regulations and measures for land market structure. The Municipality in 1997 issued the Implementation Measures of Hangzhou Urban Land Reserve. Since then, the land reserve model has become a favourable approach for urban land conveyance from the local authority and a channel for urban land supply in the city3. The establishment of an urban land purchase and reserve mechanism has greatly facilitated effi cient land resource allocation through the government purchasing the unused land and then releasing it to the market. The mechanism, in the meantime, contributes to economic restructuring and enterprise reforms, assures the state-owned land capital value, regulates land transaction behaviors, and consolidates land management.

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58 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT Land reform has also been used to facilitate local enterprise reforms in Hangzhou. The Municipality stipulated that when enterprises (in most cases SOEs) are restructured into joint-stock ones, the land that an enterprise had previously obtained through administrative allocation, can be transferred or rented to the joint-stock enterprise, or invested as capital in the form of state stock in the newly established enterprise, contingent on appraisal from the licensed local property assessment agency and approval from the Municipal Land Administration Bureau and the stateowned assets management department. To ensure the land is transferred, the newly approved joint-stock enterprise needs to complete the land use rights conveyancing procedure by paying land rent at the rate of 40-60 percent of the evaluated land value upfront or by instalments within fi ve years as the land was previously obtained through administrative allocation. Until the user has paid off the rent, the land cannot be further used for transfer, rent, and mortgage. Another option for joint-stock enterprise is land tenancy for which the enterprise enters a contract with the land administration authority to obtain land tenancy for a certain period of time by paying an annual fee. The urban land reform frees up the capital from the formerly hidden fi nancial capability of the SOEs, and consequently helps the SOE reform from inside out. The joint ventures of SOE and other non-state sectors revitalize the SOEs while capitalising on the vibrancy of non-state entities. Furthermore, the ongoing SOE reform means that the state sector is shrinking while non-state sector employment is growing—the state sector would no longer be housing provider, which has signifi cant implications on land development.

URBAN LAND MARKET

In 1990 the Hangzhou Municipal Land Administration Bureau started to investigate the hidden urban land market that spontaneously emerged in the late 1980s, intending to structure a legal channel for urban land use rights transactions. The survey of the hidden land market4 aimed to make clear the formation, types, and development of this market, and more importantly, the land capital lost through this market. A series of measures and proposals were then produced to give the Municipality’s decisions on handling hidden land transactions. One key article of evidence from the investigation was the original (illicit) contract for land transactions. The 328 investigated cases of illicit land transactions covered a total area of 128,767 square meters with a total annual rent of $1 million, and a resultant annual rent rate of $7.7 per square meter (Y. C. Zhu, 2002). The survey revealed a considerably active illicit land market which had experienced a trend of exponential increase. The Municipality decided to encourage and facilitate rational land transactions and distribute land revenue among government, enterprises, and individuals. Aiming to draft an eff ective local regulation on land

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transactions in Hangzhou’s land market experienced steadily increase in the 1990s, with a signifi cant leap in the late 1990s in terms of both area and capital.

INSTITUTIONAL REFORM

The Hangzhou Municipality established several organizations and units responsible for urban land transactions. One of the key organizations is the Hangzhou Municipal Property Market, an affi liated agency of the Hangzhou Municipal Bureau of Land and Resources. The Property Market is primarily overseeing the daily management of land use rights transfer, lease, use change, mortgage, and relevant land issues in enterprise restructuring. The purpose of this initiative was to provide a one-stop service for land management and transactions. The Land Market Section within the Municipal Bureau of Land and Resources was also introduced, and is in charge of the routine process of land lease through negotiation, tender, and auction.

The land reserve system formulated in 1997 is the latest initiative to effi ciently use urban land. Two years later the Hangzhou Land Reserve Implementation Measures took eff ect and constituted the fi rst government regulatory document of its kind in the nation. The land reserve mechanism has a three-level management hierarchy for policy making, administration, and implementation. The Municipal Land Purchase and Reserve Committee is an offi cial government organization chaired by the deputy mayor and staff ed with the leaders from the land related departments citywide. The Committee makes land purchase and reserve policies and coordinates these departments. Directly under the Committee is the Hangzhou Municipal Bureau of Land and Resources, responsible for administrative functions. The Municipal Land Reserve Centre, at the third level in the hierarchy, works with the supervision and monitoring from the Committee and the Land Administration Bureau. The Centre carries out the specifi c tasks of land purchase, reserve, and preparation for land leasing on behalf of the Municipality. A basic model for the implementation of the mechanism is from land purchases5 (of unused or not effi ciently used land from the users) and reserves to preliminary land development (i.e., building and ancillary structure removal and land levelling off ), until the initial preparation for land lease (i.e., call for potential interested developers). The initiative activates the enterprise’s land capital that may otherwise be less valuable (e.g. idle land, and land not able to be developed by the user for various reasons), and helps to achieve land resource optimization. It also pushes forward land tender and auction approaches, facilitates the implementation of the urban master plan, and prevents state-owned land asset loss (Zhu et al, 2001; Xia, 2003) (fi gure 2).

In October 1998, the Municipal Land Reserve Centre released two parcels of land for public tender for the fi rst time after the establishment of the Centre. More than twenty developers showed interest in the tender and later six of them were short-listed in the formal tender process. The fi nal transaction price for both parcels was $1.2 million higher than the base price originally set for lease through negotiation, reaching as high as $9.45 million per hectare, on average. Land auction also debuted in January 1999 with the successful transactions for two parcels in the city centre (Y. C. Zhu, 2002). Until August 2002, the Hangzhou Municipal Land Reserve Centre accumulatively purchased and reserved 912.5 hectares land with a total cost of $0.89 billion, and also leased 497.9 hectares of land with a capital return sum of $0.83 billion (Xia, 2003).

Rural Land Conversion

Administratively Allocated Land Transition

Purchase, Reclamation Reserve

Preliminary Development Conveyance and Leases Land Market

FIGURE 2 Processing Model of Hangzhou’s Urban Land Reserve System (Source: based on Zhu et al. 2001: 68.)

The Land Reserve Centre plays a dual role. As a government affi liated agency, the Center works on behalf of the Municipality for issues such as land purchases, reserve plan making, and plan implementation based on urban land use planning. In addition as an enterprise the Center runs the reserve land management and raises capital depending on market demand and supply. The Hangzhou Land Reserve Centre was established in August 1997, and cost the Municipality $4.8 million. While land purchase and reserve needs a tremendous amount of capital input, the Hangzhou Land Reserve Centre currently has one-year term bank loans as its only fi nancial resource. By June 2001, the Hangzhou Land Reserve Centre had an outstanding loan balance of $204.8 million, which translates into $28.9 thousand per day in interest (Xia, 2003). The singular fi nancing approach and the large amount of debt placed the Land Reserve Centre at risk. To combat this problem, methods to attract capital from society such as land trusts and land bonds could be incorporated into the fi nancing of the Land Reserve Centre. Since there has been no practice in either land trusts or land bonds ever before, Hangzhou

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62 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT tried to obtain approval from the state as a pilot city. In 2001 the State Council in its Document No. 15 permitted local government to invest part of land revenue6 in land purchase and reserve and called for greater support from fi nancial institutes.

DISCUSSION ON POLICY IMPLICATIONS

Hangzhou’s desire for reform is genuine and its purpose is to increase land use effi ciency and to accommodate the interests of newly emerging sectors (i.e. private, joint and foreign investors) without jeopardizing the socialist principle of public and collective ownership. The city is on the way towards a complete system of public land leasehold where the state principal’s rights over land are fully in force. The Chinese approach of fi rstly encouraging market activities and then gradually creating a market structure has proved more eff ective than formulating an overall package (Li, 1999; World Bank, 1993). However, it should be recognized that despite the move towards marketization, current transitional land mechanisms and institutions may not provide suffi cient order and certainty for the emerging land market. The case of Hangzhou shows that a learning curve is being established allowing China to gradually enter the market system. The examination of the land reform in Hangzhou further illustrates that the development of the urban land market is possible within a socialist socio-political framework, provided that certain government guidelines and institutions are provided. However, the case also highlights the constraints from the ambiguous defi nitions of urban land property rights and rural collective land ownership, and therefore, the need for further reform and strengthening of urban land policy and management institutions, to keep pace with the complex and rapid process of change in Hangzhou.

Abuse of land expropriation rights and unreasonable land expropriation compensation are the primary problems of the current land expropriation system (Guo, 2001; Xie et al, 2002; Lin and Ho, 2005). Hangzhou is not an exception and its land reform has put little emphasis on these issues. The PRC Land Management Law clearly articulates that the rural collective is the owner of rural land. However, organizational types of rural collectives have not been specifi ed in any code, and therefore the property rights of rural collectives are vague in practice. As the basic self-governing body in China’s rural areas, the village committee has well-established sections and functions. Not surprisingly, the management of rural collectively owned land and land expropriation compensation distribution are the responsibility of the village committee. Rural land owned by rural collective, as legally specifi ed, in reality means that the land is owned by the village committees. Village committee cadres tend to decide on land expropriation compensation distribution and use themselves. The fairness of land expropriation compensation

distribution largely depends on village cadres’ moral character. In a sense, village administrators replace land property rights with administrative rights and are de facto collective landowners. Rural residents are not clear about their exact rights with collectively owned land and hence are unable to protect their land rights. Though rural residents are collective landowners, the land rights have not been clearly articulated in rural land readjustment and land conversion to construction use.

Rural collective property rights have been discriminated, failing to meet the land market principle of equal property rights, with land use rights conveyance and transfer applying only to state owned land. No regulation has been promulgated for rural land use rights transfer. The legal term that bans any rural land transaction needs to be reconsidered for amendment. A legal collectively owned land market, as an integral part of the whole land market, helps to protect rural land from abusive encroachment of urban land market. Land expropriation reforms could also be given a more coherent structure. Land expropriation should be strictly categorized into two: for public purpose and for other purposes7. Diff erent compensation criteria should apply to these two categories. Current land compensation does not take potential land value and revenue into consideration. More importantly, the dual functions of rural land as both a rural residents’ production resource and social insurance have not been fully integrated into compensation. Land expropriation compensation reforms therefore should introduce a new valuation mechanism that considers not only the rural land value before land expropriation but also issues like land location, supply and demand, the local economic situation and even local government’s macro economic policies.

Local government’s land administrative rights and de facto land ownership means that they have the upper hand: municipal and town governments have been given power over local land use regulation and fi nancial decisions. According to the current Chinese tax arrangement, the central and local governments share the urban land use tax and the arable land occupation tax. Municipalities often prefer not to charge land tax on local enterprises in order to keep revenue in localities. Local governments are reluctant to share the land leasing premium with the central government. The primary reason is that local investment in land development (for infrastructure improvement and extension projects), before the land can be marketable, justifi es the local retention of all land leasing income (Zhang, 2002). Land use planning and public participation would be able to add certain restriction to municipalities’ rights on urban land use so that the state and the public interests could be refl ected in urban land use. Since China’s economic reforms, a signifi cant portion of the land has been used for profi t making

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purposes (instead of public interests). Nevertheless, this land still enjoys the status of administratively allocated land8. The dual track land system creates fi nancial asymmetry between the two tracks, which might not be the original policy intention. Lowering the proportion of revenue to be submitted from an administratively allocated land transfer or lease would encourage the trade of administratively allocated land in the secondary urban land market and provide an open market for administratively allocated land transactions that previously existed in the hidden market.

Governments have fi nancial budget limits for large-scale urban developments such as infrastructure construction, public facilities, and housing. Local governments may request real estate developers to take responsibility for some infrastructure and public facility constructions, through administrative means so that local authorities can retain part of land revenue that is required to be submitted to the central government. Local governments may also divide land revenue into several categories and name the portion that will be shared with the central government as a land conveyance premium and with other agencies, as land development fees and diff erent types of relevant fees most of which will be retained by local authorities. Furthermore, a low land premium is used in exchange for a rapid land lease and development, as a visible achievement is appreciated by local government offi cials as it enhances their political assets towards promotion.

Other measures should be introduced to improve the urban land market such as: restricting administrative land supply to well-defi ned projects for public interest; promoting the use of tender and auction and at the same time restricting the use of negotiation9; restructuring the mechanism for land revenue distribution between central and local government; and exploring more market functions of the land reserve centre model.

CONCLUSIONS

Since the open door policy was adopted in the late 1970s, diff erent aspects of economic activity have started to move toward a market system. In the urban land system, it was not until the late 1980s when the ideological problem of privatizing land titles and ownership could be pacifi ed by way of leasehold land tenure reform, that the impact of the economic reform in the urban land system started to be felt. Since then, the Chinese government has attempted to rationalize the previously planned urban land use distribution system by way of economic reform measures.

This study examines the way in which economic reform has been carried out within the urban land mechanism under the ideology of ‘market-socialism’ in the city of Hangzhou. As part of China’s economic reform, urban land reform in Hangzhou, like that in other Chinese cities, has not occurred in an isolated way. Rather, it actively interacted with economic reforms in other fi elds such as State Owned Enterprises (SOEs) restructuring, urban infrastructure taxation, emergence of new economic entities such as foreign investors and joint-stock enterprises, and the changing urban management institutions. In fact, Hangzhou’s urban land reforms have contributed to reforms in many other fi elds in a variety of ways.

As one of the spearhead Chinese cities in urban land reform, Hangzhou has been active in uncovering the emerging problems created by the gradual land reforms and in exploring possible solutions. The investigations of the hidden land market and corresponding regulations and measures afterwards lead to greatly increased urban land transactions within an open arena. The reform of administrative institutions also added market elements to urban land management in Hangzhou, such as the affi liation of the Municipal Property Market with the Municipal Bureau of Land and Resources, and the Land Market Section within the Bureau.

The highlight of the latest policy and institutional reforms has been the land purchase and reserve system, a model orchestrated by the Hangzhou municipality, and a market approach given legitimate government guidance. The practice of Hangzhou’s Municipal Land Reserve Centre illustrates that a monopolized supply mechanism of urban land is not necessarily a detriment to the development of a market system in the urban land economy. When urban land ownership is in the hands of the government, maximum land revenue can be captured while allowing the market mechanism to develop.

A better understanding of China’s urban land reforms needs to consider geographical and economical diversity of the country. Zhejiang Province (of which Hangzhou is the capital) has been well known for its better-developed private economy. There land use rights have been better circulated in the secondary market through transfer or lease than in other provinces. Similar provinces and cities are Beijing, Shanghai, Jiangsu, Fujian, and Shandong. While in the economically backward provinces such as Jiangxi and Guangxi where fi nancial capital is in short supply, land use rights are used for transfer, lease, and as collateral to obtain bank loans (Lin and Ho, 2005).

Urban land management in China has not been a uniform and coherent national eff ort;

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rather, it has been a combination of central and local governments. The state’s intention to increase land use effi ciency has been compromised by the Chinese socialist state where the forces and interests of diff erent levels of the state are contested, negotiated, and mediated (Lin and Ho, 2005). Urban land use is a local issue with most of the authority and responsibility for urban land use planning and control delegated to local government, while the central government keeps the power to adjust them at any time to secure the national interests (e.g. economic development, industrialization, SOE reforms, and cultivated land conservation). Under China’s centralized legislation system, this may include the redistribution of the power and responsibility between the central, provincial and local governments, the issuance of national administrative ordinances and measures, and institution restructuring. Nevertheless, the rules and institutions have been contested, challenged, and circumvented by local governments, as well as land developers and users who are protected by localism.

There have been diff erence between the interests of the central and local governments, and the central government has been trying to exercise power and instruments to have more control over the resources and direct impact on the local governments’ land management practice. However, the economic interests in land conveyance and transfer have off set the local governments’ strategies from the track towards central government’s objectives. The original purpose of land reform was to encourage land use effi ciency through economic incentives. The intention has been constrained by local governments’ need for revenue generation. With land sales income as an important part of local revenue, local governments at various administrative levels have every motive to engage in land development either legally or illegally because the potential fi nancial gains are substantial (see other cases for example, Guo, 2001; Wong and Zhao, 1999). Furthermore, a government-led model with little civil society and public participation is still one of the most important characters in China’s land management practice. This can be most clearly seen in rural land expropriation practices. More social and environmental considerations need to be integrated into land management, and this would be more likely to be achieved through active involvement of non government organizations and societies.

ENDNOTES

1 For instance, the rates are $0.06-$1.20 per M2 for large cities, $0.05-$0.96 per M2 for medium size cities, $0.04-$0.72 per M2 for small cities, and $0.02-$0.48 per M2 for township areas.

2 However, the Provisional Act of Land Value Increment Tax on State-Owned Land regulates that land users that transfer land use rights need to pay a land value increment tax if they gain a net profi t exceeds 20 percent of total costs (i.e., land improvement costs, construction costs, management fees, transaction fees and taxes).

3 The practice of urban land reserve was mainly in the urban core at its incipient stage where the reserve centre purchases the land from the relocated industrial enterprises. It then spread to other land purchase with other reasons but still mainly in urban centre. In Hangzhou, land reserve practices have been usually not applicable to rural-urban land conveyance, or the land acquired through primary urban land markets. For instance, land in the Hangzhou High Technology Zone has not been leased through this model.

4 The survey covered contents such as (1) involved parties in land transfer and rent; (2) formats of transfer and rent; (3) land parcel locations; (4) area; (5) transaction dates and duration of the transferred use rights; (6) land usages before and after transaction; (7) revenues of transactions; and (8) fi nal destination of revenues (Y. C. Zhu, 2002).

5 The targeted land for purchase, according to the Hangzhou Land Reserve Implementation Measures, is: (1) urban land without any user; (2) land per-expropriated (based on plan) by the Municipality; (3) land with its use rights terminated according to contract and ready for returning to the government; (4) idle state owned land; (5) land acquired through illegal approach and so confi scated by the government; (6) previously administratively allocated land that has been adjusted out due to enterprise restructuring, bankrupt, relocation; (7) land not able to be developed yet not qualifi ed for transfer since use rights obtained; (8) land needed by the Municipality due to planning; and (9) land that requested by the user to be purchased by the Centre.

6 The annual land revenue is a signifi cant amount. For instance, Hangzhou’s annual land revenue (mainly from land lease premium) increased from 72.3 million USD in 1997 to 481.9 million USD in 2001 (Xia, 2003).

7 A strict defi nition of public interests for land expropriation should be made. Land expropriation reforms need to phase out land expropriation for commercial, tourism, and housing development. For those projects that are not truly for public interest purposes, land purchase should gradually replace land expropriation--a legacy from planned economy so that land market value can be refl ected in land compensation.

8 In the year of 2001, administrative allocation counted for 41.4% of the total urban land supply area. In 2003, of all the 286436.66 Ha. of new urban land supplied in China, 65258.16 Ha., or 22.8% were administratively allocated (Beijing Normal University, 2005; Wang, 2006).

9 In 2003, the total land conveyance area in China was 1868 square kilometers, among which 1349 square meters, or 72% of total land area conveyed through negotiation (Ministry of Land and Resources, 2004). While in 2002, 2001, and 2000, negotiation counted for an even higher ratio with 85% (Ministry of Land and Resource, 2004), 89% (Wang, 2005) and 95% (Liu, 2002) of the total land conveyance area respectively.

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