Chapter Three Land Use Conversion from 1988 onwards Land Use Conversion from 1988 onwards: Paying for Land Use Rights The commodification of land in China preceded constitutional changes. From September to December 1987, the Shenzhen government thrice conveyed land use rights through negotiation, tender, and finally through an open auction which fetched 5.25 million yuan for 8,588 square metres of land for housing. Although the conveyance of land use rights in Shenzhen contravenes the 1982 Constitution of the PRC, which forbids the buying, selling and leasing of land, the auction took place in the presence of a member of the Politburo of the Central Party Committee and chairman of the State Economic System Reform Committee.1 Shortly after, Article 10 of the Constitution was amended in April 1988 to legalize the transfer of land use rights. The collection of land use tax in cities and town (chengzhen tudi shiyongshui), superseding the collection of the land use fee, was also implemented in the same year.2 While these changes should have sparked off a surge in the conversion of agricultural land, they did not, presumably due to the austerity measures adopted in late 1988 and the tense political situation in China after the 1989 Tiananmen protests and massacre. In Guangdong, the taking of cultivated land fell by more than 3,000 hectares from 1988 to 1989, dipping to a low of 2,540 hectares in 1990. Thereafter, the depletion of cultivated land climbed to slightly more than 4,000 hectares in 1991, following which there was a drastic surge to nearly 13,000 hectares in 1992, the year Deng Xiaoping made his second round of southern tour.3 Reforms to China’s land He Guanghuai and Jiang Shunzhang, “Shenzhen shouci paimai tudi shiyongquan” (“Shenzhen auctions land use rights for the first time”), Liaowang (Observation), No. 50 (1987), pp. 4-5. Refer to the 1986 Land Administration Law, Article 2; “Zhonghua renmin gongheguo xianfa xiuzhengan”; Guofa document no. 17 (1988), “Zhonghua renmin gongheguo chengzhen tudi shiyongshui zanxing tiaoli” (“The PRC’s provisional regulations on land use tax in cities and towns”). Refer to Figure 1.4 in Chapter One. Yew Chiew Ping 42 Chapter Three Land Use Conversion from 1988 onwards use regime resumed in 1990, during which two pieces of legislation were enacted to allow the transfer of land use rights among users and the development and operation of state-owned land by foreign investors.4 Prior reservations on land speculation seem to have been cast aside. Three year later, in 1993, the State Council passed provisional rules on the levy of land appreciation tax on the profits from the transfer of land use rights and buildings and other attachments on land.5 This chapter and the next examine the institutions that shape the incentives and constraints for land use conversion by local cadres from 1988 to the present. This is situated in the political and social milieu of the period as China quickened its pace of market reform in the 1990s and sustained high GDP growth for over a decade.6 It is also a period during which bureaucratic corruption became endemic and the wealth gap between and within localities widened.7 Incentives to profit from land are greatly boosted by the commercialization of land and the dual track land management system, a legacy of the free allocation of land from previous eras. The continued revenue squeeze from fiscal recentralization since 1994 has also compelled local government to seek alternative revenue sources increasingly derived from land and land development activities. Yeh and Wu, “The new land development process,” pp. 337; Guowuyuanling document no. 55 (1990), “Zhonghua renmin gongheguo chengzhen guoyou tudi shiyongquan churang he zhuanrang zanxing tiaoli” (“The PRC provisional regulations on the conveyance and transfer of the land use rights of stateowned land in towns and townships”); Guowuyuanling document no. 56 (1990), “Waishang touzi kaifa jingying chengpian tudi zanxing guanli banfa” (“Provisional measures to manage the development and operation of tracts of land by foreign investors”). Guowuyuanling document no. 138 (1993), “Zhonghua renmin gongheguo tudi zengzhishui zanxing tiaoli” (“The PRC provisional regulations on land appreciation tax”). Lieberthal, “Governing China,” pp. 129; Maurice Meisner, Mao’s China and After: A History of the People’s Republic, (New York: The Free Press, 1999), pp. 518. Meisner, Mao’s China, pp. 532-34. Yew Chiew Ping 43 Chapter Three Land Use Conversion from 1988 onwards Land Leasing Revenue and the Local Treasury According to Ministry of Finance, revenue from the conveyance of land use rights of state-owned land (guoyou tudi shiyongquan churang shouru) refers to all land proceeds the state obtains from the assignment of land use rights of state-owned land through conveyance and other methods, which includes: 1. The total transacted sum (excluding taxes) from the conveyance of land use rights of state-owned land through tender, auction, bidding and negotiation; 2. The land proceeds in arrears from the transfer of land use rights of allocated stateowned land or from using originally allocated land for commercial construction in accordance with the law; 3. The land proceeds in arrears from the disposal and mortgage of land use rights of allocated state-owned land; 4. The land proceeds in arrears from the transfer of reformed housing (fanggaifang), economical housing (jingji shiyong fang) in accordance with regulations; 5. The land proceeds in arrears from changing the usage and other land use conditions after the sale of land use rights of state-owned land; 6. Other revenues related to the conveyance or change of land use rights of stateowned land.8 The conveyance of the right to use state-owned land – defined as the process by which the State, as landowner, grants land use rights to the land user for a specific period of time, for which the land user pays the state a land conveyance fee – takes place on the primary market.9 On top of the land conveyance fee, land users incur a number of other payments, including the expropriation cost of the land, various Caizong document no. 68 (2006), “Caizheng bu guanyu yinfa ‘guoyou tudi shiyongquan churang shouzhi guanli banfa’ de tongzhi” (“A Ministry of Finance’s notice to promulgate ‘measures to manage the revenues and expenditures of the conveyance of state-owned land’”), Chapter 1, Article 2. Other sources of income to be incorporated under the management of land conveyance revenue are: land rental revenue paid by the lessee to the land resources management department for leasing stateowned land; land proceeds from the lease of houses on allocated land; land compensation, resettlement subsidy, compensation for young crops and attachments and relocation compensation etc. (excluding land expropriation management fee) paid by the land user after the acquisition of land use rights through allocation. Guowuyuanling document no. 55 (1990), “Zhonghua renmin gongheguo chengzhen guoyou tudi shiyongquan churang he zhuanrang zanxing tiaoli” (“The PRC temporary regulations on the conveyance and transfer of the land use rights of state-owned land in towns and townships”), Chapter 2, Article 8. Yew Chiew Ping 44 Chapter Three Land Use Conversion from 1988 onwards stipulated land fees and land taxes.10 Commercial developers and users purchase land use rights by means of public auction (paimai), tender (zhaobiao), bidding (guapai) or negotiation (xieyi) with land administration departments at various levels, acting on behalf of the State.11 The primary land market is monopolized by the State – land collectively-owned by peasants is forbidden from entering the market directly. Land conveyance and state allocation (huabo) constitute the dual-track land system in the primary land market. Non-commercial land users may acquire land use rights through state allocation in accordance with the law, without paying for the rights although urban land use tax and various compensation fees to original landowners are still payable.12 Land use rights acquired on the primary market may be circulated multiple times on the secondary land market through transfers (zhuanrang) or leasing (chuzu). The transfer of land use rights refers to the process by which the land user re-transfers land use rights obtained on the primary market through sale, exchange or bestowal.13 However, the land use rights of land, which has not been invested in, developed and used within the period and according to the terms as stipulated by the agreement on the sale of land use rights, are not to be transferred.14 The lease of land use rights refers to process by which the land user, as the leaser, leases to the lessee the land use rights together with buildings and other attachments on the land, Lin and Ho, “The State, Land System,” pp. 420. Bidding is supposed to be an open process in which details of the land to be conveyed are displayed as a public notice in the land transaction centre for a specific period of time, during which highest bidding price is constantly renewed and displayed on the notice until the period expires. For further details on the procedures of auction, tender and bidding, refer to Guotu ziyuanbu ling document no. 11 (2002), “Zhaobiao paimai guapai churang guoyou tudi shiyong quan guiding” (“Regulations on the conveyance of land use rights of state-owned land through tender, auction and bidding”); Guotuzifa document no. 114 (2006), “Guanyu yinfa ‘zhaobiao paimai guapai churang guoyou tudi shiyongquan guifan’ (shixing) he ‘xieyi churang guoyou tudi shiyongquan guifan’ (shixing) de tongzhi” (“Regarding the notice to promulgate ‘Regulations on the conveyance of the land use rights of state-owned land through tender, auction and bidding’ (tentative) and ‘Regulations on the conveyance of the land use rights of state-owned land through negotiation’ (tentative) ”). 12 Guowuyuanling document no. 55 (1990), Chapter 7, Article 43; Caizong document no. 68 (2006), Chapter 3, Article 22, No. 1; See Yang Peichuan, Huang Meng and Song Haiou, “Lun woguo huabo tudi shiyongquan zhidu de biduan ji qi wanshan” (“The shortfalls and correction of China’s system of state allocated land”), Chongqing daxue xuebao (Journal of Chongqing University), Vol. 10, No. (2004), pp. 146. 13 Guowuyuanling document no. 55 (1990), Chapter 3, Article 19. 14 Ibid. 10 11 Yew Chiew Ping 45 Chapter Three Land Use Conversion from 1988 onwards for which the lessee pays a rent to the leaser.15 Land use rights may also be mortgaged or used as collaterals (diya) on the secondary market.16 According to an analysis by the State Council’s development research centre, proceeds from the leasing of land use rights comprises more than 60 percent of local governments’ extrabudgetary revenue and is the major force driving growth in local investment.17 In 2004, revenue from land was estimated to be 589 billion yuan.18 This, together with the rest of the 470 billion yuan of extrabudgetary funds, amounted to almost 90 percent of total local revenue in 2004.19 At the bottom of the hierarchy, land leasing had also become the main income source for county and township governments’ extrabudgetary revenue, leading to the practice of “yidi shengcai, yidi xingzhen” – literally, using land to grow wealth and invigorate towns.20 Some Chinese scholars estimate that income from land leasing might constitute up to 80 percent of a township governments’ extrabudgetary revenue, and 20 to 60 percent of some county-level governments’ revenue.21 In three Ibid., Chapter 4, Article 28 Ibid., Chapter 5. 17 Chang Hongxiao, “Xinyilun tudi tiaokong chengsuan jihe” (How much success for the new round of land control and management), Caijing (Finance), No. 168, 18 September 2006. 18 Dong Ya, “Yusuanwai shouru naru zhengfu shouru fenlei tixi xianshi yueshu fenxi” (The incorporation of extrabudgetary revenues into the classification system of government revenues: an analysis of the realistic constraints), Caijing luncong (Collected Essays on Finance and Economics), No. 21 (2007), pp. 21. 19 The total local revenue was 1189.3 billion yuan in 2004; see Zhongguo tongji nianjian 2006, pp. 286. In 2004, extrabudgetary fund is refers to “financial fund of various types not covered by the regular government budgetary management, which is collected, allocated or arranged by government agencies, institutions and social organizations while performing duties delegated to them or on behalf of the government in accordance with laws, rules and regulations.” Refer to Zhongguo tongji nianjian 2005, pp. 295. 20 Wen Tiejun and Zhu Shouyin, “Tudi ziben de zengzhi shouyi ji qi fenpei” (“The appreciation of land value and its distribution”), Diaoyan shijie (World of Survey and Research), No.1 (1996), pp. 39. 21 Wen Tiejun and Zhu Shouyin, “Tudi ziben de zengzhi,” pp. 39; Wu Liping, “Difang zhengfu zai tudi shichang shang de juese yu diwei” (“The role of local governments in the land markets”), Tongji yu juece (Statistics and Policy Decision), April (2004), pp. 52; Zhang Fei, Chen Chuanming and Kong Wei, “Difang zhengfu jingzheng, nongdi feinonghua yu jingji zengzhang” (“Competition among local governments, the non-agriculturalization of land and economic growth”), Ziyuan chanye (Resources and Industries), Vol. 7, No. (2005), pp. 88. According to a survey of 13 provinces and 12 cities including Shanghai, most of the land revenues accrue to prefecture, county, town and township governments. The land conveyance fee alone comprised 30 to 70 percent of the prefecture and county governments’ financial revenue. Refer to Baohu gengdi wenti zhuanti diaoyanzu, “Woguo gengdi baohu mianlin de yanjun xingshi he zhengcexing jianyi” (“The dire straits of China’s arable land preservation and policy suggestions”), Zhongguo tudi kexue (China Land Science), Vol. 11, No. (1997), pp. 15 16 Yew Chiew Ping 46 Chapter Three Land Use Conversion from 1988 onwards county-level units in Zhejiang, for instance, income from land leasing alone made up 58 to almost 70 percent of the local governments’ extrabudgetary revenue.22 Table 3.1 Revenue from the Conveyance of Land Use Rights, 2006 Land Area (hectare) Conveyance Fee Net Profits* (million yuan) (million yuan) Guangdong Province 14460.3 61602.20 10687.70 Guangzhou 1302.5 15827.07 286.24 Shaoguan 232.9 749.96 306.99 Shenzhen 1581.0 12939 1940.85 Zhuhai 1091.7 3865.51 709.13 Shantou 127.7 536.82 77.94 Foshan 4159.1 13959.25 4250.54 Jiangmen 1237.6 673.87 348.19 Zhanjiang 114.8 425.65 59.91 Maoming 247.4 268.47 128.95 Zhaoqing 652.3 977.10 208.54 Huizhou 1317.5 2904.44 896.81 Meizhou 121.3 194.99 87.37 Shanwei 82.6 174.09 45.98 Heyuan 433.7 917.32 69.96 Yangjiang 125.6 145.07 57.37 Qingyuan 394.1 725.54 63.68 Dongguan 581.1 4381.80 928.19 Zhongshan 380.2 1262.99 33.87 Chaozhou 47.7 161.18 31.91 Jieyang 140.2 375.14 127.33 Yunfu 89.1 136.95 27.93 * After deducting land compensation, initial development costs, administrative costs of conveyance, and the cost of developing agricultural land.23 Source: Guangdong guotu ziyuan nianjian 2006, pp. 501. Revenue-Sharing Below Provincial Level: Constricting Local Revenues The growing importance of land income has to seen in the context of the revenue squeeze on local coffers in the post-1994 context. Table 3.2 illustrates China’s taxsharing system today. On top of implementing the tax-sharing system to replace the pre-1994 fiscal-contracting system, local governments’ discretionary power in granting tax breaks was curtailed and tax collection was centralized.24 A Chinese analyst suggests, Zhang Hong, “Tudi zhengyong guocheng zhong de difang zhengfu xingwei fenxi” (“An analysis of local governments’ behaviour in land expropriation”), Zhonggong Zhejiang shengwei dangxiao xuebao (CCP ‘s Zhejiang School of Party Committee Journal), No. (2007), pp. 68. 23 Refer to “2007 nian zhengfu shouzhi fenlei,” (“Year 2007 classification of government revenue and expenditure”), item no. 103013301, “tudi jingshouyi.” 24 Wang Shaoguang, “China’s 1994 Fiscal Reform: An Initial Assessment,” Asian Survey, Vol. 37, No. (1997), pp. 803; Becky P. Y. Loo and Sin Yin Chow, “China's 1994 Tax-Sharing Reforms: One System, Differential Impact,” Asian Survey, Vol. 46, No. (2006), pp. 216. 22 Yew Chiew Ping 47 Chapter Three Land Use Conversion from 1988 onwards The tax-sharing system drives local governments to seek revenue growth mainly through extrabudgetary and off-budget funds – administrative fees are the mainstay for the former while principal sources for the latter are agriculture-related retained funds (tiliu) and fees (tongchou), and land sales revenue related to land development.25 The sections that follow summarize the major changes – expanding expenditure responsibilities and the cancellation of agricultural taxes that constitute a revenue squeeze on local finances at the county level and below. Table 3.2 China’s Current Tax-Sharing System Central Taxes Business tax and urban maintenance and construction tax of railways, head offices of banks, head offices of insurance companies Central-Local Shared Taxes Value-added tax: central 75%, local 25% Value-added tax levied by the customs Local enterprise income tax: central 60%, local 40% Consumption tax levied by the customs Personal income tax: central 60%, local 40% Income tax of central enterprises Resource tax: tax on offshore petroleum resources to central, others to local Stock trading stamp duty: central 94%, local 6% Local Taxes Business tax (other than that of railways, head offices of banks, head offices of insurance companies) Urban land use tax Income tax of local banks, foreign-funded banks and nonbank financial institutions Fixed asset investment adjustment tax Urban maintenance and construction tax Property tax Vehicle and vessel license tax Stamp duty Tariff Arable land use tax Vehicle purchase tax Contract tax Vessel tonnage tax Land appreciation tax Interest income tax Sources: Tsang Shu-ki and Cheng Yuk-sing, “China’s Tax Reforms of 1994: Breakthrough or Compromise?,” Asian Survey, Vol. 34, No. (1994), pp. 779; Jean C. Oi, Rural China Takes Off (Berkeley: University of California Press, 1999), pp. 217; Sui Xiao, “Goujian guifanhua he xiangdui duli de defangshui tixi” (“Building a standardized and relatively independent local tax system”), Shuiwu yanjiu (Tax Research), Vol. 201, No. (2002), pp. 35; Guofa document no. 85 (1993), “Guowuyuan guanyu shixing fenshuizhi caizheng guanli tizhi de jueding” (“Regarding the State Council’s decision to implement the tax-sharing finance management system”); Guofa document no. 37 (2001), “Guanyu yinfa suodeshui”; Guofa document no. 26 (2003), “Guanyu mingque zhongyang yu difang suodeshui”; Wang Yongquan, Ji Zhendong and Li Bing, “Woguo zhengquan yinhuashui fenxi” (“An analysis of China’s stock trading stamp duty”), Luhang jingyuan xuebao (Luhang Economic School Journal), No. (2003), pp. 69-70. See Zhou Feizhou, “Fenshuizhi shinian: zhidu ji qi yingxiang” (“Ten years of tax sharing: the system and its impact”), Zhongguo shehui kexue (China Social Sciences), No. (2006), pp. 112-13. He observes that county and township governments in central and western China rely on agriculture tax, retained funds and fees levied on villagers, whereas governments in the east on land-related revenues. 25 Yew Chiew Ping 48 Chapter Three Land Use Conversion from 1988 onwards 1) Growing Expenditures and Diminishing Revenues Besides allocating different revenues to the central and provincial governments, the 1994 tax-sharing system clearly designates expenditure responsibilities between the top two levels of governments. Between any two tiers of governments at the provincial level and below, however, leaders at the higher level have the upper hand in the assignment of revenue and expenditure responsibilities. As a result, fiscal power has shifted upwards while work responsibilities has cascaded downwards (caiquan zaishang, shiquan zaixia), meaning that revenues converge in the hands of upper level governments whereas expenditures are passed down to lower level governments.26 The 1994 tax-sharing system has already disadvantaged local governments with a smaller share in the major tax revenues. Yet provincial governments often retain a substantial part of the local share, leaving subordinate levels with a further reduced portion.27 As some scholars suggest, Under the current system, revenues from the VAT, business tax, consumption tax and income tax, which are closely tied to economic progress, mostly accrue to the central, provinces, and prefectural-level cities. The portion shared by the county and township levels is very small, and tax collection and administration are assigned to higher level tax departments; local taxes controlled by counties and townships are minor, unstable, and weakly linked to economic growth. Both the elasticity and growth potential of the revenues are low.28 Shi Yuping, “Nongcun shuifei gaige hou jiceng zuzhi jianshe de jige wenti” (“After the village tax reform: some problems for the building of grassroots organization”), Baoji wenli xueyuan xuebao (Journal of Baoji University of Arts and Sciences), Vol. 24 No. (2004), pp. 27; Jin Taijun and Shi Congmei, “Xiangzhen caizheng zhidu bianqian de lujing yilai ji qi pojie” (“Changes in the fiscal system of towns and townships: path dependence and solutions”), Xuexi yu tansuo (Study and Exploration), Vol. 4, No. 165, pp. 86. 27 For example, the central apportions 75 percent of the VAT, the province takes up another 15 percent, leaving a balance of 10 percent to be shared between the county and the township. Furthermore, a lower proportion of the local taxes is allocated to townships, such as 60 percent of the business tax accrues to the province while the county and township share the remaining 40 percent. Refer to Liu Shanghe and Jiang Shilong, “Fenshuizhi hou xiangzhen caizheng mianlin de tiaozhan yu duice” (“Challenges for town and township finances and countermeasures after the tax-sharing system”), Jilin caishui (Jilin Finance and Taxation), No. (1994), pp. 29-30. 28 Jiang Haichen and Yan Yan, “Qianxi fenshuizhi xia xianxiang caizheng shouru de guanli” (“A preliminary analysis of county and township revenue management under the tax-sharing system”), Caihui yuekan (Finance and Accounting Monthly), No. (2006), pp. 26. 26 Yew Chiew Ping 49 Chapter Three Land Use Conversion from 1988 onwards The upper level government, with its relative superiority in political power and position, often indiscriminately transfers the resources of its subordinate level to its own coffers.29 “Lucrative” departments are assigned to higher level governments while cumbersome ones are to townships.30 Revenue drain at lower levels is exacerbated by cascading workload and expenditures. This is most evident in the case of compulsory education in villages. After the tax-sharing reform, only percent of the expenses for compulsory education come from central coffers. The remaining expenditure for this item is broken down as follows: 11 percent from provinces and prefecture, percent from counties and a hefty 78 percent are borne by townships.31 Situated at the lowest rung of the hierarchy, county and township governments, especially the latter, have borne the brunt of this divergence in fiscal power and workload, so much so that their finances have fallen into dire straits. Between the county and the township, most revenues accrue to the former.32 In other words, the township coffer is but an empty shell and lacks relative autonomy since most of its revenues are remitted to the county. The late 1990s saw the decline of county-owned enterprises – the mainstay of county revenues – changing the counties’ main tax sources to small-scale commercial and industrial enterprises, the construction and tertiary industries. To allay its financial difficulties, county governments vie with townships for revenue, making the government at the bottom of the five tiers the biggest loser under the tax-sharing Ba Zhipeng, “Woguo fenshuizhi gaige dui xiangzhen caizheng de yingxiang” (“The influence of China’s tax-sharing system on town and township finance”), Dangshi Bocai (Party History Discovery), No. 12 (2006), pp. 37; Yan Yongbo, “Woguo xiangzhen caizheng de kunnan yu wenti fenxi ji zhengce jianyi” (“Problems and analysis of China’s town and township finance and policy suggestions”), Jinrong jingji (Finance and Economy), No.14 (2006), pp. 154; Zhou Feizhou, “Fenshuizhi shinian,” pp. 102. 30 Hu Xiaoqin, “Shui wei xiangzhen jianfu” (“Who to cut down the liabilities of towns and townships”), Xiangzhen luntan (Town and Township Forum), No. 10 (2005), pp. 7. 31 Han Jun, “Caizheng tizhi yu xianxiang caizheng” (The financial system and finances of counties and townships), Shuishou yu shehui (Tax and Society), No. (2003), pp. 2; for other township expenses, see Yan Yongbo, “Woguo xiangzhen caizheng,” pp. 153. 32 Chen Huagui and Liu Kewen, “‘Fenshuizhi’ dui xiangzhen guoku de yingxiang chu tan” (“The ‘taxsharing system’ and its influence on town and township coffers: a preliminary analysis”), Jinrong jingji (Finance and Economy), No. (1995), pp. 45-46. 29 Yew Chiew Ping 50 Chapter Three Land Use Conversion from 1988 onwards arrangements. For instance, agricultural taxes formerly collected by townships were subsumed into county coffers, leaving to townships only part of the four agricultural taxes and petty revenues from industrial-commercial taxes.33 In another township, all takings from tongchou, business tax, VAT, and some agricultural taxes were remitted to the county. The township was left with paltry revenues from minor agricultural taxes such as contract tax , arable land use tax (gengdi zhanyong shui), and miscellaneous income from fines and administrative fees.34 On top of that, all towns and townships had to bear the cost of staff remuneration.35 The lack of revenue has also affected the operations of village grassroots political organization. After the abolishment of village fees and taxes, some villages cannot even pay for basic expenditures such as the cadres’ allowances, salaries and operational expenses, resulting in villagers’ reluctance in taking up cadre posts.36 2) Cancellation of Agricultural Taxes After the implementation of the tax-sharing scheme in 1994, most of the revenues of governments at the county level and below derived from agriculture, such as the agricultural taxes, the arable land use tax etc.37 Ba Zhipeng, “Woguo fenshuizhi gaige,” pp. 37. Among the four agricultural taxes (nongye sishui) classified as local taxes – the rest being the special agricultural product tax, arable land use tax and contract tax– agriculture and livestock farming tax generated the most revenue, close to 40 percent all agricultural taxes in 2003. Refer to “What are agricultural taxes?,” Renmin ribao (People’s Daily), 21 March 2004; Caishui document no. 120 (2004), “Caizhengbu guanyu quxiao chu yanye wai de nongye techanshui youguan wenti de tongzhi” (“A Ministry of Finance’s notice on the relevant issues regarding the abolishment of the special agricultural product tax with the exception of tobacco leaves”); “Woguo jiang zai mingnian quanbu mianzheng nongyeshui” (“China to abolish agricultural taxes nationwide from next year”), Nongcun caiwu kuaiji (Village Finance and Accounting), No. (2005), pp. 6. 35 Cao Liqun, “Butong leixing xiangzhen caizheng shouzhi ji qi pingheng wenti de shizheng yanjiu” (“The revenues and expenditures of different types of towns and townships and the problem of financial balance: an empirical study”) in Nongyebu nongcun jingji yanjiu zhongxin, Zhongguo nongcun yanjiu baogao 2004 nian (China Village Research Report 2004), (Beijing: Zhongguo caizheng jingji chubanshe, 2005), pp. 555. 36 Shi Yuping, “Nongcun shuifei gaige,” pp. 27; Liu Guochun, Lin Zhonggeng, Xu Xiaohua, and Ma Yaxue, “Nongcun shuifei gaige dui jiceng zhengquan jianshe yingxiang de diaocha yu sikao” (“The impact of village tax reform on the building of grassroots political power: a survey and some thoughts “), Zhonggong Sichuan shengwei dangxiao xuebao (Journal of Sichuan Party School), No. (2005), pp. 98. 37 Zhan Mingfang, “Fenshuizhi tiaojian xia xianji caizheng de chulu” (“Seeking a way out for county finances under the conditions of the tax-sharing system”), Hubei caishui (Hubei Finance and Taxation), No. 12 (1994), pp. 13. 33 34 Yew Chiew Ping 51 Chapter Three Land Use Conversion from 1988 onwards Table 3.4 Local Governments’ Land Revenues64 Within-Budget Funds A. Land-Related Taxes Direct Taxes 65 Indirect Taxes Land Business tax from development: the construction arable land use industry tax, fixed asset investment Enterprise income adjustment tax tax from the construction Transfer of land industry use rights (zhuanrang): land Business tax from appreciation tax, the real estate business tax, industry urban maintenance and Enterprise income construction tax, tax from the real contract tax, estate industry stamp duty, enterprise income Property tax tax, personal income tax Land Use: urban land use tax Extrabudgetary Funds B. Administrative Fees66 C. Land Conveyance Fee Land Management department： 1〕 Stipulated fees: fee for the development of agricultural land, management fee, administrative fee 2〕 Special fees： resettlement fee, newspaper announcement fee, compensation for the repossession of state-owned land, fee for offsetting the land use quota 3〕 Land use fee for newly acquired land for construction Finance department：Land conveyance fee (see column C for details), land use fee, land rent. Taxes: includes the taxes in column A as well as government funds such as the agricultural development fund and the social security fund. Compensation: land compensation, resettlement compensation, compensation for young crops and other attachments Land development: fees for channelling road, water, electricity and telecommunication etc. Administrative fee: 2-5 percent of the land conveyance fee for the Land Management department. Other departments： miscellaneous fees levied by the agriculture department, housing property department, water conservancy department, traffic department, post and telecommunication department, heritage department, forestry department etc. Sources: Guotu ziyuanbu tudi liyongsi diaoyanzu, “Chonggou tudi shouyi,” pp. 63-68; Jin Dongsheng, “Woguo tudi shuishou,” pp. 7-9; Zhou Feizhou, “Shengcai youdao,” pp. 50-82. All land revenues accrue to the local government, with the exception of 60 percent of the enterprise income tax from the construction and real estate industries, which accrue to the central government. 65 Direct taxes related to land make up a relatively small part of local revenue, around to 14 percent. However, these taxes are still significant to local governments since they get to retain all of direct tax proceeds. Most of the land taxes centre around the transfer of land use rights, i.e. land use conversion, meaning that tax revenue increases as the government appropriates more agricultural land. See Jin Dongsheng, “Woguo tudi shuishou zhidu gaige shexiang” (“Some thoughts on the reform of China’s land taxation system”), Zhongguo tudi (China Land), No. 11 (2006), pp. 7-9; Zhou Feizhou, “Shengcai youdao,” pp. 7. 66 For more examples on the miscellaneous fees, refer to Guotu ziyuanbu tudi liyongsi diaoyanzu, “Chonggou tudi shouyi,” pp. 64. 64 Yew Chiew Ping 58 Chapter Three Land Use Conversion from 1988 onwards Table 3.5 Land Taxes and Tax Rates Tax Arable land use tax Taxable Item Area of arable land occupied Fixed asset investment adjustment tax Land appreciation tax Sum of investment Business tax Urban maintenance and construction tax Stamp duty Contract tax Urban land use tax Tax Rate yuan to 50 yuan per square metre 0% to 30% Transfer of land use rights and attached structures on land Turnover in the transfer of intangible asset Sum of business tax 30% to 60% Transacted sum specified in the transfer of title deed Transacted sum in the transfer of land use rights Area of urban land used 0.5% 5% 1% to 7% 3% to 5% 0.6 yuan to 30 yuan per square metre Property tax Property value and rent 1.2% to 12% Sources: Jin Dongsheng, “Woguo tudi shuishou zhidu,” pp. 7; Guofa document no. 90 (1986), “Zhonghua renmin gongheguo fangchanshui zanxing tiaoli” (“PRC provisional rules on the property tax”); Guowuyuanling document no. 511 (2007), “Zhonghua renmin gongheguo gengdi zhanyongshui zanxing tiaoli” (PRC provisional rules on the arable land use tax”); Caishui document no. (2007), “Guanyu guanche luoshi Guowuyuan guanyu xiugai ‘Zhonghua renmin gongheguo chengzhen tudi shiyongshui zanxing tiaoli’ de jueding de tongzhi” (“Notice to implement the State Council’s decision to amend the ‘PRC provisional rules on the urban land use tax’”). An analysis of the contribution of land revenues to the local treasury in Shaoxing county in Zhejiang shows that income from land conveyance made up 66 percent of the county’s extra-budgetary revenue in 2003. The contribution of direct and indirect land-related taxes to the county’s within budget funds also grew from 30.5 percent in 2001 to 38.4 percent in 2003.67 In addition to revenue from leasing land use rights, ad hoc fees and taxes from land development activities, local cadres may also use their power to create rent in land markets to exchange for bribes. Rent-Seeking and Corruption in China’s Land Markets Rent-seeking, suggests Buchanan, is just another word for profit-seeking. What differs is the institutional context. Whereas profit-seeking refers to the maximizing of returns in an “ordered market structure” with “socially beneficial consequences,” rentseeking describes behaviour under particular institutional settings where “individual 67 Zhou Feizhou, “Shengcai youdao,” pp.12-13. Yew Chiew Ping 59 Chapter Three Land Use Conversion from 1988 onwards efforts to maximize value generate social waste rather than social surplus.”68 Rent is created when the government interferes with markets to manipulate prices. This power of rent-creation may be used to seek bribes, which results in corruption defined as “the sale by government officials of government property for personal gain.”69 The sections below analyze the transaction of state-owned land, desired by land buyers such as property developers etc. to pursue economic activity, for personal gain.70 According to a survey on land policy reform by the State Council’s development research centre, only 15 percent of land conveyance in eastern China were conducted through more transparent channels of auction, tender or bidding while the remaining 85 percent were transacted via state allocation or negotiation; in western China, the percentage of land conveyance through auction, tender or bidding was less than 10 percent.71 A Chinese scholar also estimates that up till year 2000, only five percent of the total number of land conveyance took place through auction, tender and bidding.72 Nationwide statistics are consistent with those of the Guangdong province, where out of a total of 8,546 cases of land conveyance in 2006, 6,964 cases or 81.5 percent James M. Buchanan, “Rent Seeking and Profit Seeking,” in Robert D. Tollison and Roger D. Congleton (eds.), The Economic Analysis of Rent Seeking (Aldershot, Hants, England: Edward Elgar Publishing, 1995), pp. 46-47. The motivation of profit seeking and rent seeking is the same across the two institutional settings but the outcome differs. In other words, resources devoted to rent-seeking are non-productive since they not create value. 69 Andrei Shleifer and Robert W. Vishny, "Corruption," The Quarterly Journal of Economics, Vol. 108, No. 3, pp. 599. 70 Incidentally, it is an open secret that the price of rent is incorporated into property prices in China. This is to say that consumers bear the cost of rent-seeking while the State suffers a loss through land disposed at low prices. See “Ba bumen yanda fangchan quanqian jiaoyi” (“Eight departments toughen up on the exchange of favours in real estate”), Beijing chenbao (Beijing Morning News), April 2007; Deng Dacai, “Zhidu shilling: nongdi jiaoyi shikong zhi yuan” (System failure: the root of disorder in agricultural land transactions”), Diaoyan shijie (World of Survey and Research), No. (2004), pp. 36. 71 Gao Juhui and Wu Chunlai, “Fenshuizhi, tudi caizheng yu tudi xinzheng,” (“The tax-sharing system, land financing and new land policy”), Zhongguo fazhan guancha (Observation on China’s Development), No. 11 (2006), pp. 26. 72 Deng Dacai, “Zhidu shilling: nongdi jiaoyi shikong zhi yuan” (System failure: the root of disorder in agricultural land transactions”), Diaoyan shijie (World of Survey and Research), No. (2004), pp. 37; See also Wong and Zhao, “The Influence of Bureaucratic Behavior,” pp. 120 on the infrequency of open tender and auction of land. 68 Yew Chiew Ping 60 Chapter Three Land Use Conversion from 1988 onwards were conducted by negotiation, 18 by tender, 376 by auction, and 1,188 by bidding.73 Furthermore, although the regulations promulgated by the MLR specifiy that land for commercial, tourism, entertainment and commercial housing purposes must be conveyed through auction, tender or bidding, local governments have been slack in implementation and enforcement.74 As shown in Table 3.6, land for commercial, industrial and housing purposes are predominantly conveyed via negotiation. However, the price of land conveyance through negotiation is lower than that generated through the supposedly more open and transparent channels. In Guangdong in 2006, for instance, the average price of land through negotiation was 1.4 million yuan per hectare, whereas the average prices through tender, auction and bidding are 57.8 million yuan per hectare, 22.7 million yuan per hectare and 8.2 million yuan per hectare respectively.75 Profit was also lower for land conveyances through negotiation (see Table 3.7). A comparison of three cities in eastern, central and western China also shows that land proceeds from auction, tender and bidding were higher than those from negotiation.76 If local governments were revenue-driven, why, then, is land conveyance through negotiation the most prevalent practice? Table 3.6 Land Conveyances in Guangdong Province, 2006 Negotiation Tender Land Area (hectares) 10688.8 128.8 Transaction Price (million 15130.8 7442.3 yuan) Profits (million yuan) 813.9 (5.4%) 703 (9.4%) Source: Guangdong guotu ziyuan nianjian 2007, pp. 501-502. Auction 622.9 14169 Bidding 3019.8 24860 3317 (23%) 5853 (23.5%) Guangdong guotu ziyuan nianjian 2007, pp. 501-502. Guotu ziyuanbu ling document no. 11 (2002), Article 2. See also Guotu ziyuanbu ling document no. 21 (2003), “Xieyi churang guoyou tudi shiyongquan guiding” (“Regulations on the conveyance of the land use rights of state-owned land through negotiation”), Article 9. 75 Guangdong guotu ziyuan nianjian 2007, pp. 501-502. 76 Wang Xiaoying et al., “Woguo nongdi zhuanyong.” 73 74 Yew Chiew Ping 61 Chapter Three Land Use Conversion from 1988 onwards Table 3.7 Supply of State-Owned Land in Guangdong by Land Use Type, 2003 (No. of Cases) Tender Auction Bidding 59 69 801 (2.2%) (2.5%) (29.4%) 1928 1777 33 31 87 (92%) (1.7%) (1.6%) (4.5%) 2358 1768 41 205 344 (75%) (1.7%) (8.7%) (14.6%) Source: Guangdong guotu ziyuan nianjian 2004 (Guangdong Land Resources Yearbook 2004), Lin Haokun et al. (eds.), (Guangdongsheng ditu chubanshe, 2004), pp. 532-33. Commercial and Services Industrial, Mining and Warehouses Housing TOTAL 2722 Negotiation 1793 (65.9%) One scholar’s observation provides some clues. Referring to the transfer of land use rights in China through leasing, Ting Gong points out that the process is often subject to price negotiations, despite the central government’s call to adopt more transparent methods such as bidding. Since such closed-door negotiations cannot be effectively regulated due to its convert nature, they are the hotbed for the exchange of favours between public authorities and private interests.77 The above observation is also relevant to land conveyances in China’s primary land market, where opportunities for rent-seeking abound, all the more owing to government monopoly. One prominent example of corruption revolving around land in China is the case of Yin Guoyuan, vice bureau chief of Shanghai housing and land resources bureau for a decade from 1994 to 2004. During his tenure, Yin used his power in approving land conveyance deals to exchange for at least 30 housing properties worth a few million yuan each. Even after his retirement, he was able to manipulate land prices through his cronies, getting in return bribery in cash and other forms of over 32 million yuan. In 2005, he even openly assured property developers Gong Ting, “Corruption and Local Governance: The Double Identity of Chinese Local Governments in Market Reform,” The Pacific Review, Vol. 19, No. (2006), pp. 90. As Gong suggests, this does not mean that corruption is absent in land conveyances through open channels such as bidding, since officials in charge may divulge crucial information or create preferential conditions to aid favoured parties in winning land deals. See also Lichtenberg and Ding, “Assessing Farmland Protection,” pp. 65-66; Cui Jie, Xiao Shuijin and Liuyan, “Quanqian jiaoyi, gaofangjia beihou de ‘heishou’” (“The powermoney exchange: the ‘manipulator’ behind high housing prices”), Jiancha ribao (Procuratorial Daily), 17 April 2007, p. 006. 77 Yew Chiew Ping 62 Chapter Three Land Use Conversion from 1988 onwards that the government had reduced the supply of land for commercial use to arrest the fall in property prices and drive up land prices in Shanghai.78 Thus one explanation for the prevalence of land conveyance via arbitration vis-à-vis other channels is the opportunities for local authorities to use rent creation to seek bribes or other personal gains from land buyers.79 This also illuminates why local officials take an active role in land apportionment and development. In the “bottomup” process, officials first identify land tracts with potential market value and then seek investors through agents or middlemen, who will negotiate with interested parties on behalf of the authorities, collecting bribes in the process.80 Government monopoly provides a conducive institutional context for rent-creation.81 In China’s primary land market, the government holds a monopoly over land supply as the rural collectives that own land use rights to agricultural land are barred from entry. Land use rights of collectively-owned land must be transferred to the state through land expropriation before conveyance to the land user can take place.82 Not only is the government the sole supplier of land, it also dictates who may buy land. Restrictive participation in the land market enlarges the room for corruption as only “insiders” may gain access to the primary land market.83 As Ting Gong suggests, Yang Jinzhi and Liu Dan, “ ‘Fanfu xingui’ zhiwang, douzhu hu ‘tudi jutan’,” (“ The net of ‘new anticorruption regulations’ caught Shanghai’s ‘major land corruption’”), Xinhua meiri dianxun (Xinhua Daily Dispatch), 22 February 2008, pp. 4; “Shi ge tanguan ba ge ‘zaijin tudi’” (“Eight out of ten corrupt officials entrapped by land”), Chongqing shibao (Chongqing Times), 13 April 2007. For other prominent land corruption cases, see Gong Ting, “Corruption,” pp. 90-91; Li Le and Wang Qiming, “Siyue fengbao ‘tudi duoguan” zhendong Jing Hu” (“April Tempest: ‘Land claims officials,’ Beijing and Shanghai shaken”), Zhongguo jingyingbao (China Business News), 16 April 2007, pp. A01; Li Dai, “Fuzhou tudi lianzheng fengbao” (“Anti-land corruption tempest in Fuzhou”), 21 shiji jingji baodao (21st Century Economic Report), 28 July 2006, p. 001. 79 Buchanan defines rent as “that part of payment to an owner of resources over and above that which those resources could command in any alternative use. Rent is receipt in excess of opportunity cost . . . it is an allocatively unnecessary payment not required to attract the resources to the particular employment.” See Buchanan, “Rent Seeking,” pp. 46. 80 Wong and Zhao, “The Influence of Bureaucratic Behavior,” pp. 118. 81 Zhang Fei et al, “Difang zhengfu jingzheng,” pp. 89; Li Yin and Zhang Chengyong, “Tudi ziyuan peizhi zhong de ‘xunzu’ xianxiang jiexi” (“An analysis of ‘rent seeking’ in the allocation of land resources”), Nanfang jingji (Southern Economy), No. (1997), pp. 13. 82 Li Yin and Zhang Chengyong, “Tudi ziyuan peizhi,” pp. 13; Cartier, “‘Zone Fever’,” pp. 458. 83 Interested buyers not granted entry into the land market will resort to bribing government authorities. See Keng, “China’s Land Disposition System,” pp. 337-38. 78 Yew Chiew Ping 63 Chapter Three Land Use Conversion from 1988 onwards The authority over land (including planning, developing and leasing etc.) has provided government officials with means of money making. Possessing the power to decide whether, how, to whom, and at what price to lease the land, they could easily abuse power by requesting bribes from interested individuals or institutions.84 In the absence of comprehensive statistics on land-related corruption in China, economic theories on rent-seeking are useful in explaining why corruption is rampant in China’s monopolistic primary land market. First of all, rents prevail and not dissipate over time in a monopoly with barriers to entry.85 As the sole legal purveyor of land, local authorities decide how much of land to supply. When the quantity of land supplied is not congruent with (either higher or lower than) that which the market would have generated, rent-seeking takes place to bring about mutually advantageous deals for the buyer and seller.86 For instance, suppose land is undersupplied in the market resulting in shortage. Land buyers who demand a larger quantity may then cajole local authorities into selling land outside of the market. Alternatively, property developers who desire land at prices lower than the market rate may resort to bribery. Under these circumstances, both parties seek to profit from violating the law. In the words of Olson points, “. . .any legislation or regulation that is ‘market contrary’ must leave all or almost all parties with the incentive to evade the law and is likely to promote criminality and corruption in government.”87 Gong Ting, “Forms and Characteristics of China's Corruption in the 1990s: Change with Continuity,” Communist and Post-Communist Studies, Vol. 30, No. (1997), pp. 280. 85 In the primary land market, barriers exist on two levels for potential land suppliers, i.e. collective landowners, and for land buyers. Black or “invisible” markets (yinxing shichang) have resulted due to the first restriction. Refer to Luo Yingxin, “Woguo tudi yinxing shichang de xianzhuang, weihai ji qi duice” (“China’s invisible land markets: current situation, perils and countermeasures”), Jiaying daxue xuebao (Journal of Jiaying University), No. (1995), pp. 67-69; Zhou Ling and Yang Gangqiao, “Tudi yinxing shichang de jingjixue fenxi” (“An economic analysis of the invisible land market”), Guotu ziyuan keji guanli (Scientific Management of Land and Resources), No. (2004), pp. 9-12. 86 Olson uses an example to illustrate why rent seeking takes place when the government interferes in the market to set prices: “Suppose that the government fixes prices and that is lower than the marketclearing price, the quantity demanded will be higher than the quantity that the suppliers, at that lowerthan-market-clearing price, want to supply. So it will then be the case that there can be a mutually advantageous trade, one with two parties, a buyer and a seller, gaining – at a price that is higher than the controlled price and lower than the market-clearing price. Here is a situation in which both parties gains by violating the law – essentially all of the parts of the private sector act to undermine the law.” See Mancur Olson, “Why Poor Economic Policies Must Promote Corruption: Lessons from the East for All Countries,” in Mario Baldassarri, Luigi Paganetto and Edmund S. Phelps (eds.), Institutions and Economic Organization in the Advanced Economies: The Governance Perspective (London: Macmillan Press Limited, 1998), pp. 22. 87 Ibid., pp. 23. 84 Yew Chiew Ping 64 Chapter Three Land Use Conversion from 1988 onwards Yet it may be argued that market forces shall reduce the occurrence of rent seeking even under monopolistic conditions, if land were transacted through auction, tender or bidding.88 In contrast to these channels, land conveyance by negotiation is a form of political allocation that transpires outside of the market. As attested to by statistical evidence cited earlier, arbitration dominates China’s land markets. This is because it creates a win-win situation for both buyers and sellers – it allows buyers to secure land at below market-clearing prices and the price-fixing officials to reap personal gains.89 In other words, rent-seeking emerges as institutions deviate from ordered markets toward direct political allocation.90 Having established how a monopoly and closed-door negotiations breed corruption, attention may now be turned to why and how corruption spreads under such conditions.91 Corruption proliferates because of competition among buyers. Shleifer and Vishny explain: “If buyer A can buy the government service more cheaply than buyer B can, then he can outcompete buyer B in the product market. So if buyer A bribes an official to reduce his costs, his competitors must so also.”92 Research based on data from 35 cities in China also confirms that property developers are twice as motivated to secure lower land prices than higher property prices.93 This is not to say that land conveyance through auction etc. is free from corruption. For instance, the outcome of bidding may be predetermined. See Zhang Shuisheng, “Jingfang tudi churang jia guapai” (“Beware of bidding shams in land conveyance”), Zhongguo tudi (China Land), No. (2004), pp. 32-33; Huang Shisong, “Tudi ‘zhao, pai, gua’ zhong de wenti yu duice” (“Problems and solutions in the tender, auction and bidding of land”), Zhongguo fangdichan (China Real Estate), No. (2005), pp. 26-28. 89 The biggest losers are the original landowners and the state. Qian Zhonghao and Qu Futian, “Zhongguo tudi zhengyong zhidu: fansi yu gaige” (“China’s land expropriation system: reflections and reform”), Zhongguo tudi kexue (China Land Science), Vol. 18, No. (2004), pp. 5-11. 90 Buchanan, “Rent Seeking,” pp. 47. 91 Li Ying and Zhang Chengyong, "Tudi ziyuan peizhi,” pp. 13-14. The authors examine corruption in land allocation (primary and secondary land markets) by various government departments, such as the under-reporting of land conveyance fee, illegal approval of land or multiple approvals by departments across the same level, collusion between government-related land developers and local authorities and the collection of ad-hoc fees etc. 92 Shleifer and Vishny, “Corruption,” pp. 604; Mu Xiaoman, “Tudi shichang zhong zhengfu yu kaifashang de boyi fenxi” (“A analysis of the game between the government and property developers in the land market”), Shangye shidai xueshu pinglun (Financial Times Academic Review), No. 15 (2006), pp. 7-8. 93 Ping Xinqiao and Chen Minyan, “Rongzi, dijia yu loupan jiade qushi” (“Trends in capital financing, land prices and properties”), Shijie jingji (World Economy), No. (2004), pp. 10. 88 Yew Chiew Ping 65 Chapter Three Land Use Conversion from 1988 onwards Another reason for the pertinacity of corruption is because collusion among the participating parties gives each the incentive to cover up legal violations, particularly in the case of corruption with theft. Land conveyance by negotiation may manifest as corruption with theft and without, both of which are promoted by the opaque process of political allocation. In corruption without theft, the official charges the official price p of land plus a bribe. Price p is turned over to the government.94 In the case with theft, the official charges a price q of land plus a bribe, which may add up to below the official price p of land. He turns over price q to the government while keeping the bribe.95 The latter is more persistent and prevalent than the former. In the words of Shleifer and Vishny, Corruption with theft spreads because the observance of law does not survive in a competitive environment. In addition, the buyer in this case has no incentive to inform on the official, and hence the likelihood that corruption is detected is much smaller. This creates a further incentive for corruption with theft to rise. Because corruption with theft aligns the interests of the buyers and sellers, it will be more persistent than corruption without theft, which pits buyers against sellers.96 To sum up thus far, institutional flaws in the primary land market allow profiteering officials and land buyers to maximize personal gains through land transactions, thereby reinforcing immoderate land use conversion and requisition. On top of the flawed processes in the primary land market, China’s less regulated secondary land market, in which land use rights obtained in the primary market are circulated, has also contributed to undue land use conversion and requisition by providing a platform for land speculation.97 Shleifer and Vishny suggest that in the case without theft, “It pays the official to create a shortage at the official price, and then to collect bribes as a way to clear the market for the government-supplied good.” See “Corruption,” pp. 602. 95 The example is modified from Shleifer and Vishny, “Corruption,” pp. 601-602. 96 Ibid., pp. 604. Olson explains: “Thus one reason why many societies have a lot of corruption in government is that they prescribe outcomes that all or almost all private parties have an incentive to avoid, and almost no one has an incentive to report violations to the authorities.” See Olson, “Why Poor Economic Policies,” pp. 23. 97 Zhou Weimin and Chen Yan, “Qianlun huabo tudi shiyongquan de zhuanrang xingwei” (“On the transfer of land use rights obtained through state allocation”), Xizang minzu xueyuan xuebao (Journal of Tibet Ethnic School), No. (2000), pp. 63. 94 Yew Chiew Ping 66 Chapter Three Land Use Conversion from 1988 onwards The formation of China’s secondary land market lags behind her primary land market in many cities, in that there has yet to be a fixed location for transactions to take place and the information available to potential buyers is incomplete.98 Despite these shortcomings, the secondary land market is more vibrant than the primary land market in terms of the number of transactions. In 2006, for instance, there were a total of 8,546 transactions in Guangdong’s primary land market whereas the number of transactions in the secondary land market was 121,871, 14 times that of the former.99 In the same year in Guangdong, the total sum of transactions in the primary land market was 61.6 billion yuan while that of the secondary market was 202.6 billion yuan.100 As seen from Table 3.8, land use rights were mainly circulated through transfers (over 60 percent), followed by mortgage (over 30 percent) in 2006. Due to the lack of a proper system, most transactions were carried out through negotiation, although other channels such as auction, tender and bidding are also available to buyers in more developed markets.101 Table 3.8 Circulation of Land Use Rights in Guangdong by Land Use Type (No. of Cases) 2003 2006 Transfer Leasing Mortgage Transfer Leasing Mortgage Commercial and 27773 27 8348 8331 4245 Services (76.8%) (0.07%) (23%) (66%) (33.8%) Industrial, Mining 2193 1956 14733 9121 and Warehouses (52.8%) (0.07%) (47.1%) (61.8%) (38.2%) Housing 41570 11879 53301 31907 (77.8%) (22.2%) (62.6%) (37.4%) Sources: Guangdong guotu ziyuan nianjian 2004, pp. 537; Guangdong guotu ziyuan nianjian 2007, pp. 507. Pan Sunwei, “Tudi erji shichang de wenti yu duice” (“The secondary land market: problems and solutions”), Zhongguo tudi (China Land), No, (2006), pp. 34-35; Ye Mingquan, “Chengshi tudi erji shichang de zhidu quexian ji duice” (“The urban secondary land market: institutional flaws and countermeasures”), Zhongguo tudi (China Land), No. (2005), pp. 21-22. 99 Guangdong guotu ziyuan nianjian 2007, pp. 501, 507. 100 Ibid. 101 Ye Mingquan, “Chengshi tudi erji shichang,” pp. 22; Shenzhenshi renmin zhengfu ling docment no. 100 (2001), “Shenzhenshi tudi jiaoyi shichang guanli guiding” (“Regulations on the management of Shenzhen’s land market”); Zhang Quanjiang and Deng Yuefang, “Guapai jiaoyi – tudi shiyongquan zhuanrang de xin xingshi” (“Bidding – a new way to transfer land use rights”), Zhongwai fangdichan daobao (China and Foreign Real Estate Herald), No. 14 (2001), pp. 17. 98 Yew Chiew Ping 67 Chapter Three Land Use Conversion from 1988 onwards Two types of land obtained at low cost circulate in the secondary market to reap high returns – land conveyed by negotiation in the primary market and state allocated land. To seek rent from artificially low price land, land buyers may use bribery in gaining the land use rights of these two types of land. As mentioned earlier, land use rights may be acquired through arbitration at a relatively low price, which means the land user may subsequently transfer the rights at a high profit margin in the secondary land market.102 This is especially true of land initially acquired for industrial purposes, which are conveyed to the user mostly through negotiation. The users of industrial land transfer land use rights to property developers in the secondary market to earn high returns. Comparatively, it is easier for buyers to acquire industrial land in the less regulated secondary market than in the primary market since there is a legal lapse in this arena, although land users who obtain land use rights through negotiation and subsequently wish to change the use of land to commercial purposes have to make up for the shortfall in land conveyance fee.103 Most of the land transferred this way are either used for property development or left idle, resulting in wastage.104 Similarly, users of state allocated land that fulfil the following requirements may transfer its land use rights to commercial users by paying the land conveyance fee in arrears – the land user is a company, enterprise, other economic organizations or individuals; the land user holds the land use certificate and legal proof of property rights over the buildings or other attached structures on the land.105 In 2006, for Chen Hongxia and Zhao Zhenyu, “Tudi shichang fazhan guocheng zhong zhengfu xingwei guifan wenti tanjiu” (“A study on regulating governments’ behaviour in the development of the land market”), Guotu ziyuan keji guanli (Scientific Management of Land and Resources), No. (2006), pp. 58-59. 103 Zhou Lifeng, “Gongye yongdi zhuanrang jidai guifan” (“The pressing need to regulate the transfer of industrial land”), Zhejiang guotu ziyuan (Zhejiang Land and Resources), No. (2005), pp. 26-29; Guotu ziyuanbu ling, document no. 21 (2003), Article 16. 104 Zhou Lifeng, “Gongye yongdi zhuanrang,” pp. 27. 105 Guowuyuanling document no. 55 (1990), Chapter 7, Article 45. See also Guotuzi document no. 114 (2006), “Xieyi churang guoyou tudi shiyongquan guifan (shixing)” (Regulations on the conveyance of the land use rights of state-owned land through negotiation [tentative]). 102 Yew Chiew Ping 68 Chapter Three Land Use Conversion from 1988 onwards instance, there were 1,090 cases of land allocation in Guangdong, involving 2,815 hectares of land, more than half of which were newly acquired land.106 Without paying the arrears in land conveyance fee, however, state allocated land may find its way into the secondary land market through transferring, leasing or mortgaging the ownership of housing property on the allocated land.107 Other enterprises that hold the rights to allocated land may transfer their rights to property developers by jointly constructing a commercial or residential property on the land. For instance, the land user that provides the land is compensated by the developer for the initial costs it incurs while the latter shall own the rights to use and sell the property.108 In addition, land management or land reserves bodies set up by the government may reacquire formerly state allocated land and transfer the land use rights at a higher price on the secondary market.109 In addition, state allocated land may be transferred on the secondary market through shareholding (rugu) or authorized management (shouquan jingying). When a stateowned enterprise undergoes restructuring, the land use rights of its allocated land may be transformed into national shares, which the State invests in while ownership remains with the reformed enterprise. The enterprise may subsequently transfer, Guangdong guotu ziyuan nianjian 2007, pp. 505. Under the planned economy in China, urban land was allocated to users at no cost. The circulation of these allocated land is not the author’s concern since it does not contribute to greater land use conversion and requisition. Instead, the focus is on newly acquired land through state allocation. Refer to Yang Peichuan et al., “Lun woguo huabo tudi,” pp. 146 ; Yin Lin, “Zhimian huabo tudi shiyongquan” (“Confronting the problems with the land use rights of state allocated land”), Henan guotu ziyuan (Henan Land and Resources), No. 12 (2003), pp. 19-20. 107 Shi Xianying, “Huabo tudi shiyongquan jinru shichang de xingshi, nandian ji sikao” (“The land use rights of state allocated land in the market: means, difficulties and reflections”), Zhongguo tudi kexue (China Land Science), Vol. 8, No. (1994), pp. 7-8; Pan Sunwei, “Tudi erji shichang,” pp. 34; Samuel P. S. Ho and George C. S. Lin, “Emerging Land Markets in Rural and Urban China: Policies and Practices,” China Quarterly, No. 175 (2003), pp. 704; Yeh and Wu, “The New Land Development Process,” pp. 350-51. 108 Yang Peichuan et al., “Lun woguo huabo tudi”; Yang Xiaofeng, “Gai zong huabo tudi shiyongquan zhuanrang shifou fuhe fading tiaojian?” (“Is this transfer of the land use rights of state allocated land legal?”), Nanfang guotu ziyuan (Southern Land and Resources), No. 12 (2005), pp. 48, 51; Shi Xianying, “Huabo tudi shiyongquan,” pp. 7-8; Li Jianjian, “Zhongguo chengshi tudi shichang jiegou yanjiu” (“A study on the structure of China’s urban land markets”), Fujian shifan daxue (Fujian Normal University), PhD thesis (2002), pp. 154-55. 109 Zhong Jingtao, “Woguo huabo tudi shiyongquan zhuanrang xiangguan wenti tantao” (“An exploration of the relevant issues to with the transfer of the land use rights of state allocated land in China”), Zhongguo fangdichan, No. (2002), pp. 17; see also Lin and Ho, “The State, Land System,” pp. 420. 106 Yew Chiew Ping 69 Chapter Three Land Use Conversion from 1988 onwards lease or mortgage the land use rights in accordance with the law.110 Furthermore, the State may also, after the land use rights of state allocated land are transformed into shares, authorize a national shareholding company approved by the State Council. The company can then circulate the land use rights either through lease, transfer, or allocating shares or to its direct subsidiaries, holdings enterprises, shareholding enterprises.111 For both methods, the arrears in land conveyance fee must be compensated for when the circulation of land use rights involves a change in land use.112 When state allocated land enters the secondary market through shareholding or authorized management, there is a smaller discrepancy between the implementation process and the way conveyed land enters the secondary market.113 Through these channels, formerly allocated land may be transferred to subsidiaries and other government-related companies at a low price, which in turn develop commercial properties on the land to sell at a profitable sum that encompasses both property and land prices.114 Land users tend to prefer these two methods since they can take advantage of the ambiguity in the profit distribution of national shares to capture land proceeds. Power-money exchanges (quanqian jiaoyi) described above are particularly prevalent in the real estate sector. A property development project requires 20 to 30 stamps of Guojia tudi guanliju ling document no. (1998), “Guoyou qiye gaige zhong huabo tudi shiyongquan guanli zanxing guiding” (“Tentative regulations in managing the land use rights of state allocated land in the reform of state-owned enterprises”), Article 3. 111 Guojia tudi guanliju ling document no. (1998), Article 4; Guotuzifa document no. 433 (2000), “Guanyu jiaqiang tudi zichan guanli cujin guoyou qiye gaige he fazhan de ruogan yijian” (“Some suggestions on strengthening the management of state assets to promote the reform and development of state-owned enterprises”). See also Lei Aixian, “Guanyu guoyou tudi shiyongquan shouquan jingying wenti de tantao” (“An examination of the authorized management of the land use rights of state-owned land”), Zhongguo tudi kexue (China Land Science), No. 15 (2001), pp. 22-27; Pan Sunwei, “Tudi erji shichang,” pp. 34; Miao Lijing and Li Jinhua, “Huabo tudi shiyongquan de rushi ji qi guanli” (“Land use rights of state allocated land in the market and its management”), Liaoning jingji (Liaoning Economy), No. (1998), pp. 41. 112 Guotuzi fa document no. 433 (2000). 113 Ye Mingquan, “Chengshi tudi erji shichang” pp. 21. 114 Fan Huaichao and Chen Tao, “Chengshi yinxing tudi shichang tantao” (“An exploration of the invisible market for urban land”), Guotu jingji (Land Economy), No. (1997), pp. 21. 110 Yew Chiew Ping 70 Chapter Three Land Use Conversion from 1988 onwards approval from various departments such as the land bureau, planning bureau, housing management bureau, city building bureau and tax bureau etc.115 An investigation in Nanjing city reveals that 52.7 percent of commercial bribery cases fall within the realm of city and town building and that there is a high incidence of corruption in city building and related arenas such as land conveyance, construction, real estate development and administrative approval. According to a local public prosecutor, this was because of the huge investment and the concentration of means of production i.e. land and capital involved in city building.116 Conclusion The local “land coffer” comprising of miscellaneous ad hoc fees and land rent has grown to become a separate and huge revenue source beyond the within-budget fund that is entirely managed by the local governments.117 The lack of a standard accounting practice in the management of land revenue means that it is difficult to verify its exact amount. Many local governments use it to pay for land development and related taxes, or to defray other government expenditures such as administrative expenses.118 The exact components of the land conveyance fee also differ from place to place. Sometimes, land compensation, land development costs and miscellaneous fees are incorporated into the conveyance fee; others not distinguish between various land revenues such as the conveyance fee, payment for newly acquired land for construction, land rent and so on.119 Hou Dawei and Zhou Qiaochun, “Kaifashang zijie fangdichan heimu”(“Property developer discloses shady deals in the real estate industry”), Wuzhi xinxibao (Material Information News), 27 May 2005, pp. 002. See also Song Zhenyuan, Deng Huaning and Wang Junyong, “Loushi fubai bukan rumu, guaibude jia zheme gao” (“Corruption in property market reaches intolerable levels; No wonder that prices are sky high”), Xinhua meiri dianxun (Xinhua Daily Bulletin), 27 December 2007, pp. 001; Huang Huo, “Fangdichan ‘hangyexing fubai’ jidao Chongqing ba ming tingji ganbu” (“’Industry corruption’ in the real estate sector brings down eight government department cadres in Chongqing”), Zhongguo gaigebao (China Revolution News), 30 October 2008, pp. 008. 116 Jiang De, “Chengjian lingyu weihe cheng shangye huilu ‘gaofaqu’ (“Why the urban construction arena has become the ‘hotbed’ of commercial bribery”), Fazhi ribao (Law and Order Daily), 24 June 2008, pp. 008. 117 Zhou Feizhou, “Shengcai youdao,” pp. 11. 118 Anhui sheng caizhengting ketizu, “Jiyu gonggong caizheng shijiao de tudi churangjin yanjiu” (An analysis of the land conveyance fee from the perspective of public finance), Jingji yanjiu cankao (Economic Research and Reference), No. 94 (2006), pp. 27. 119 Guotu ziyuanbu tudi liyongsi diaoyanzu, “Chonggou tudi shouyi,” pp. 63. 115 Yew Chiew Ping 71 Chapter Three Land Use Conversion from 1988 onwards Time and again, the central government had attempted to rein in irregularities in the use of the land conveyance fee as part of its multi-pronged, macro-regulation of land.120 Management of the land conveyance fee, classified as a form of government funds under the Ministry of Finance’s annual list of government revenue and expenditure items, had undergone several changes since 1995.121 Initially, land conveyance fee was to be remitted in full to finance departments, which would incorporate the revenue into budget management and use the funds for urban infrastructural construction and land development.122 Subsequently, land conveyance fee was to be paid directly to a specialized bank account set up by the Ministry of Finance.123 To regulate usage of the funds, it was required that no less than 15 percent of the average earnings from land conveyance be channelled to the development of agricultural land since 2004.124 In 2006, the Ministry of Finance issued another document specifying in detail the definition of revenue from the transfer of land use rights (guoyou tudi shiyongquan churang shouru), its collection, management, usage and accounting methods.125 While the effectiveness of these measures remains to be seen, the drawing of capital through land and land development activities in local states has intensified in the name of urbanization. The next chapter shall investigate local strategies in Other government measures include the regulation and control of land management rights and responsibilities, the regulation of land supply and so on. Refer to Table 1.1 in Chapter One; see also Yu Feng, “Qianlun woguo tudi hongguan tiaokong tixi de chubu goujian” (“The preliminary formation of China’s macro-regulatory system of land: a brief analysis”), available at the MLR website, http://www.mlr.gov.cn, accessed 28 February 2008. 121 It was first classified under “other revenues” in 1996 and later as a form of government funds; see “Zhonghua renmin gongheguo 1996 nian guojia yusuan shouzhi kemu” (“The PRC’s 1996 national budgetary revenue and expenditure items”). 122 Caizong document no. 10 (1995), “Guanyu jiaqiang tudi shiyongquan churangjin zhengshou guanli de tongzhi” (“Regarding the notice to strengthen the collection and management of the land conveyance fee”).This document is now defunct. 123 According to an official with the Ministry of Finance, although land revenue is supposed to be managed through a specialized account, there is no knowing the actual revenue and expenditure before the sum is paid to the account, during which land departments act as an interim manager of the fund, using it to pay the land developer and land compensation etc. See Wang Weimin, “‘Tudi churangjin guanli banfa’ mingnian chu shixing; san da yuanze baozhang tudi shouyi fenpei” (“‘Measures to manage land conveyance fee’ to be implemented early next year; three key principles to protect the allocation of land proceeds”), Zhongguo fangdichan bao (China Real Estate), 16 October 2006, pp. 2. 124 Caizong document no. 49 (2004), “Yongyu nongye tudi kaifa de tudi churangjin shouru guanli banfa” (“Measures to manage the land conveyance fee to be used for agricultural land development”). 125 Caizong document no. 68 (2006). 120 Yew Chiew Ping 72 Chapter Three Land Use Conversion from 1988 onwards maximizing returns from land through large-scale construction projects and development zones. It will also explore the social, economic and political costs of such opportunism and the constraints that central government faces in restraining the transgressions of its local agents. Yew Chiew Ping 73 [...]... primary land market in terms of the number of transactions In 2006, for instance, there were a total of 8,546 transactions in Guangdong s primary land market whereas the number of transactions in the secondary land market was 121,871, 14 times that of the former.99 In the same year in Guangdong, the total sum of transactions in the primary land market was 61.6 billion yuan while that of the secondary market... allocation in Guangdong, involving 2,815 hectares of land, more than half of which were newly acquired land. 106 Without paying the arrears in land conveyance fee, however, state allocated land may find its way into the secondary land market through transferring, leasing or mortgaging the ownership of housing property on the allocated land. 107 Other enterprises that hold the rights to allocated land may... Ping 69 Chapter Three Land Use Conversion from 1988 onwards lease or mortgage the land use rights in accordance with the law.110 Furthermore, the State may also, after the land use rights of state allocated land are transformed into shares, authorize a national shareholding company approved by the State Council The company can then circulate the land use rights either through lease, transfer, or allocating... construction tax Stamp duty Contract tax Urban land use tax Tax Rate 5 yuan to 50 yuan per square metre 0% to 30 % Transfer of land use rights and attached structures on land Turnover in the transfer of intangible asset Sum of business tax 30 % to 60% Transacted sum specified in the transfer of title deed Transacted sum in the transfer of land use rights Area of urban land used 0.5% 5% 1% to 7% 3% to 5% 0.6 yuan... arable land use tax of 4,000 yuan, land expropriation administrative fee of 1,500 to 1,800 yuan, cultivation and reclamation fund of 10,000 yuan, agriculture insurance of 6,000 yuan, and irrigation construction fee of 1 ,33 3 yuan; to convert the same land area by a conveyance of land use rights incurred the preceding costs and an additional amount for buying over the rights, which was in the range of 10,000...Chapter Three Land Use Conversion from 1988 onwards The reclassification of local enterprise and personal income taxes as shared taxes from 1 January 2002 spurred the growth of other local taxes, attesting to the observation that a fall in a tax revenue source is compensated with a rise in another to make up for the shortfall in earnings Urban land use tax and urban maintenance and construction tax... land, land buyers may use bribery in gaining the land use rights of these two types of land As mentioned earlier, land use rights may be acquired through arbitration at a relatively low price, which means the land user may subsequently transfer the rights at a high profit margin in the secondary land market.102 This is especially true of land initially acquired for industrial purposes, which are conveyed... thereby reinforcing immoderate land use conversion and requisition On top of the flawed processes in the primary land market, China s less regulated secondary land market, in which land use rights obtained in the primary market are circulated, has also contributed to undue land use conversion and requisition by providing a platform for land speculation.97 Shleifer and Vishny suggest that in the case without... 63 94 Yew Chiew Ping 66 Chapter Three Land Use Conversion from 1988 onwards The formation of China s secondary land market lags behind her primary land market in many cities, in that there has yet to be a fixed location for transactions to take place and the information available to potential buyers is incomplete.98 Despite these shortcomings, the secondary land market is more vibrant than the primary... state allocated land and transfer the land use rights at a higher price on the secondary market.109 In addition, state allocated land may be transferred on the secondary market through shareholding (rugu) or authorized management (shouquan jingying) When a stateowned enterprise undergoes restructuring, the land use rights of its allocated land may be transformed into national shares, which the State . Use Conversion from 1988 onwards Table 3. 5 Land Taxes and Tax Rates Tax Taxable Item Tax Rate Arable land use tax Area of arable land occupied 5 yuan to 50 yuan per square metre Fixed asset investment. 20 03 2004 Urban Land Use Tax Urban Maintenance & Construction Tax Agricultural Taxes Arable Land Use Tax Chapter Three Land Use Conversion from 1988 onwards secondary transfer (zhuanrang) of. change of land use rights of state- owned land. 8 The conveyance of the right to use state-owned land – defined as the process by which the State, as landowner, grants land use rights to the land