Land rush

 China, the world’s most populous nation, has long been short on arable land. Where once Chinese farmers feared flood and drought, now there is a new threat: conversion of their land into industrial property.

Sometimes these conversions serve the common interest. Consenting farmers receive funds to invest in things like education and health care, enterprising local governments receive revenue to develop the district’s infrastructure, and the creation of higher-paying jobs raises the standard of living for all.

But these scenarios are the exception, not the rule. In many cases, land conversions involve forced relocations of poor farmers for a pittance, the construction of industrial property that serves to aggravate manufacturing overcapacity and social unrest caused by job loss.

Recent changes in legislation indicate Beijing is concerned about the illegal conversion of collectively held agricultural land into privately leased industrial property – as well as offices and condominiums – but it is too soon to tell if the central government is willing or able to improve its enforcement mechanism.

Land grab

The dwindling of available land is clear from statistics. According to a 2008 report by Su Fubing of the National University of Singapore, Land Market in China’s Modernization: Regulations, Challenges, and Reforms, 43,000 hectares of developable land were leased out by various governments in 1995. That figure jumped to 232,500 hectares in 2006, a five-fold increase in approximately 10 years, not accounting for off-the-books transactions.

In the same year, the National People’s Congress strengthened the property law, explicitly prohibiting "conversions" of land usage at the local level.

"[The new law] defines collective land as agricultural land, urban land as developable land, and it says you cannot convert collective land to developable land unless the folks in Beijing agree," said Steven Dickinson, a Qingdao-based partner with law firm Harris & Moure, and a regular China Economic Review contributor.

He added these laws have not actually stopped the practice of land conversion or the undervaluation of farmland, largely because local governments remain dependent on land sale revenues – and the more farmers are paid for the sale of collective land, the less local governments gets to keep. In addition, land used for industrial purposes generates more GDP than a field of wheat, a fact not lost on officials whose career prospects remain inextricably tied to economic performance.

Given weak enforcement, local governments are also able to leverage their illegal ability to "convert" land. While agricultural land is worth less than industrial land, governments compensate farmers at agricultural rates. They then sell the land as reclassified industrial property, which is far more valuable, pocketing the difference.

"[The benefits] do not trickle down," Dickinson said. "It’s taken from peasants. It’s seized from them and they’re given some token payment in turn. Then, they’re told they can work in a factory and not to worry about it."

Although this is not ideal, in past years peasants could indeed console themselves with jobs created by industrialization of their farmland. A successful factory would provide jobs close to home with wages that would otherwise only be found at faraway coastal plants. Indeed, such arrangements became increasingly common. 

"If you examine the income of rural residents in China, they have a mixed income – part for agricultural activity, part is from other work such as construction or manufacturing. And most of it occurs relatively close to home," Dickinson added.

However, given recent government predictions of spiking unemployment as 50 million temporary jobs created by stimulus spending evaporate (including spending on industrial property for which there are no tenants in sight), peasants can no longer assume that a new industrial development will put money in anyone’s pocket besides that of the local government.

Investment incentives

The irony is that the downturn is partly responsible for the increased pressure to convert agricultural land to other purposes, even futile ones.

 First, it has become increasingly difficult for local governments to create revenue from business taxes given the punishment export operations have endured over the past two years.

In order to fill industrial projects with tenants, local governments have been compelled to offer more incentives to attract tenants, said Tony Su, DTZ’s senior associate director of industrial property and logistics in east China.

This includes corporate income tax  rebates of 15-25% and, in the case of many high-tech industries, complete tax exemption for the first two to three years. This usually means that a given property produces revenue for local governments when it is sold, but nothing afterwards. A national property tax is widely expected, but even if such a policy were to be enacted, implementation is far off.

George Ji, senior associate at legal firm CMS’ Shanghai office, has been working with due diligence, negotiation and documentation of real estate for the last six years. Ji said that local governments are increasingly paying for clearing and configuring the property prior to the developer taking possession. "The market practice shifted from ‘the developer takes the land and pays a company to clear the land’ to ‘the developer takes clear land,’" Ji said.

At the same time, property prices are increasing, in particular near urban centers. For example, the Waigaoqiao Free Trade Zone, located about 20 kilometers northeast of Shanghai, sold for US$100 per square meter from the mid-1990s through 2006, but is now valued at US$400 per sq m. This means low-end manufacturers looking to hold onto their cost advantage are now moving onto cheaper developments, and the cheapest land is agricultural.

The upside

It’s easy to forget that the situation, though flawed, still represents an improvement on past practice. What is more, turning agricultural land into a form of property that can be bought and sold is likely to pay off in the long run.

It was only recently that Chinese farmers were bound to their land by law, and when they abandoned it for factory jobs in the city, the land reverted to the collective. The compensation they receive for land is still more than they would receive if they didn’t use it.

Still, the short-term risk is that the current contradictory mixture of public and private incentives will benefit no one: Agricultural land will be converted to play host to a factory that lies fallow until demand recovers. Such a factory cannot provide jobs for peasants, nor can it generate tax revenues for local governments or profits for owners. And while a field of wheat may not be as sexy as a textile plant, you can, at least, eat the wheat.