Establishing a Credible Land Institution in Transitional Chinese Cities: Shanghai’s Practice, Problems and Strategies
Yawei CHEN
Department of Real Estate and Housing
Faculty of Architecture, TU Delft
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Abstract
Since China adopted the Open Door Policy and economic reforms in 1978, Chinese cities have undergone a dramatic transformation. A series of land reforms has been implemented in China, resulting in an emerging market mechanism and the diminishing of the traditional allocation system used in the centrally planned economy. As land has become more marketised and commodified, however, there are increasingly indications that land reform strategies have failed to tackle various transitional problems and create credible institutions. There is a risk that the emerging institutions will benefit the wealthy few, rather than the masses. This paper examines the development of an emerging land institution in Shanghai, and analyses the extent to which credibility has been established in the local institutional land system during the last two decades. This paper suggests that, in order to improve the system’s credibility, Shanghai needs to address the issue of land justice and social goals. We argue that the state can, and should, play an important role in this process.
Keywords: Transition, land reform, credible institution, land justice,Shanghai
1. Introduction
‘Land is the essential raw material of all property development projects,’ as Syms (2002: 55) once put it. Extensive research in the fields of urban studies, planning, and land policy issues has found that land policy and land development play crucial roles in economic development and urban restructuring (Needham 2003). Land issues involve not only land resources and capital, but also various actors who have direct or indirect links with land resources via land ownership or land-use rights. Therefore, whether land is used in an efficient way, and whether the interests of different parties in land transfers – including economically marginalised ones – are balanced, will influence the speed and outcomes of specific urban (re)development processes.
AsChina continues with its economic reforms and the Open Door Policy, many Chinese cities have experienced explosive economic growth and dramatic transformations in their urban environments. Shanghai is China’s most important economic centre, and has striven to regain its image as China’s window to the world. It is also one of the international economic, financial, and trade centres on the west bank of the Pacific Ocean. Shanghai has paid particular attention to improving its urban physical environment and enhancing its attractiveness and competitiveness to business and investors. How to actively and successfully use urban land has become a priority for the local government in formulating urban land policy.
This paper examines how Shanghai has built up its land institutions by means of various land reform measures, and the extent to which these have attained credibility.Following an analysis of urban land reform in the national context, the paper focuses on land reform in Shanghai in terms of both regulations and practice, and analyses the effect that land reform has had on the city’s land market and the changing roles played by various actors. We point out that land reform has facilitated participation by market actors and has stimulated the emergence of local land and property markets. However, the fact that a series of pitfalls exists within emerging land institutions also prompts concerns about whether the newly created institutions lack credibility among social actors. The last part of the paper suggests a number of potential strategies to help create trust within emerging land institutions.
Figure 1:Location of Shanghai (Chen 2007)
2. Building a credible land institution
As a potential market asset and source of capital, land is central to capitalism. Governments and international agencies therefore always aim to create well-functioning land markets. This is particularly the case for many developing countries that struggle to build the necessary institutions for supporting market activities and creating wealth. Although many questions remain to be answered about how to build land markets, recent research has made significant progress in contributing to our understanding of their evolution (Ho 2005a and 20005b; Ho and Spoor 2006; Steudler et al 2004; Wallace and Williamson 2006; Williamson and Wallace 2007). As shown in Table 1, Williamson and Wallace (2007) suggest five stages in the establishment of a country’s land market, from the recognition of land to the creation of a complex market. The five evolutionary stages do not represent discrete empirical descriptions of how formal land markets actually evolve, but rather how land administrative systems can be developed to assist the actual and potential economic development of a country.
Table 1: Simplified characteristics of evolutionary stages of land markets (Williamson and Wallace 2007)
Stages / Characteristics1. Land / A group or country establishes a defined location with territorial security. The securing of spatial relationships in land arrangements among competing groups is fundamental to all later developments.
2. Land rights / Within the group, regularities of access create expectations that mature into rights. In formalised systems, these rights are reflected in the legal order. In some of these, the legal order is further embedded in the formal infrastructure of the Land Administrative System (LAS). The crucial element of the participants’ cognitive capacity starts with ‘my land’ and ‘not my land,’ and matures into everyone appreciating ‘your land.’ The power derived from land ownership is also managed and restricted via taxation and other systems.
3. Land trading / Virtually at any time during Stage 2, members of the group will develop a process of trading land. The traded rights in land evolve into property, the basic legal and economic institution in formal land markets. As economies become more complex, trading will include strangers and will depend on objective systems of evidence, and eventually on a well-run programme of recording property rights. Inheritance tracking processes will also develop. Commoditisation processes will involve public capacity to view land as offering a wide range of rights, powers and opportunities. The better these are organised and understood, the better the market will operate.
4. Land market / Trading increases in scale and complexity until it develops into a property market. In the latter, rights are converted with ease into tradable commodities. Significant government infrastructure supporting market activities in land stabilises commoditisation and trading.Land is used extensively as security, multiplying opportunities to derive capital. Capacity to invent and market new commodities emerges and gains strength.
5. Complex market / Market stability allows the spontaneous invention of complex and derivative commodities and ‘unbundling’ of land. This involves both imagination and globalisation. Typical Stage-5 machinery includes corporatisation, securitisation and separation. The system relies heavily on the rule of law, government capacity, and national ability to compete for capital in international markets.
Evolving land markets need a great deal of time, resources and capacity in the form of supporting infrastructure. Nevertheless, strengthening land administration capacity does not always aid the creation and management of a successful land market. This is not only because land markets are highly dependent on their political, economic and social contexts; it is also because the infrastructure that is needed to support a well-functioning land market, such as high-quality planning and diverse sources of financial and human capital, is expensive, and demand for cognitive capacity in beneficiaries and participants is high in land markets. Having examined the evolution of all 227 nations in the world, Williamson and Wallace found that only about 40 could claim to run effective, formal, comprehensive, national land markets, depending on the criteria used. As a result, Williamson and Wallace (2007) conclude:
Successful formal land markets require institutions organised by governments. Institutions include land registries and cadastres, and, most important, the institution of property. In addition to land administration infrastructure, land markets require well balanced legal systems, dispute management systems and financial systems of international standing. Most successful LAS provide the confidence and public face of land trading that, in turn, support highly geared trading processes that accelerate creation of national wealth.
For (former) socialist economies, whether in Central and Eastern Europe or in East Asia, the reform of land policy and the establishment of land markets are inevitable and essential components of reform agendas. These are daunting tasks, given that institutions that had been based on allocation must be reoriented towards the recognition of land as a market asset, and well-functioning land markets suited to local conditions need to be established during a process of continuous political and economic transition – a process that has taken some other countries more than two centuries. Indeed, despite their shared recognition of the value of land markets, transition countries have chosen quite divergent paths. The Chinese, for example, ‘have consciously opted to downplay the ex-ownership issue in favour of social stability – even up to the point of deliberately shrouding ownership rights in legal and political ambiguity’ (Ho and Spoor 2006: 585), and have placed land-lease rights at the centre of land policy reform. Central and Eastern European countries, on the other hand, as typified by the Hungarian transition, decided to dismantle rural collectives and return land holdings to their original owners. Nevertheless, both cases demonstrate the important evolutionary stages of recognising land, land rights and the establishment of land markets based on land reform, land titling and institutional changes, as suggested in Figure 1 by Williamson and Wallace (2007).
After two decades of land reform efforts in these transitional countries, questions have been raised as to whether social actors perceive the established institutions to be credible. Ho (2005a: 588; 2005b: 187) warns that the failure to create trust in land institutions and to undertake effective institutional reforms might jeopardise the social acceptability or credibility of those institutions. In other words, the new institution risks being an ‘empty institution,’ a paper agreement or hollow shell that has little impact – or even a negative impact – on social actors. In order to avoid this latter outcome, Ho advocates that the state should play a significant role in curbing market forces by means of the restriction or prohibition of land sales or rentals, in order to ensure that the emerging market does not result in a rapid concentration of land in the hands of the powerful.
3. Land reform in China
‘Gradualist urban land reform forms an intrinsic part of the incremental economic reforms in transitional China’ (Zhu 1999). The emphasis on social equality in China’s original planned economy has shifted to support the move to establish a land market that takes account of the value of land.Before 1978, under the central planning system, urban land was state-owned and farmland was collectively owned. Land was not considered to be a commodity and therefore had no value. The state decided what, and how much, the dominant state-owned work units (Danweis in Chinese) should produce, how much profit they were allowed to keep, and how much urban land they were allowed to acquire for production, expansion and residential use. The allocation of land was then free of charge for an indefinite period, and the Chinese constitution banned land transactions. Meanwhile, collectively-owned land in rural areas was converted to state-owned land by means of land acquisition. If the state acquired land from farmers, farmers received a compensation package that included job opportunities, housing compensation, compensation for the loss of crops, and the granting of urban residency licenses. The latter made farmers eligible for social welfare benefits such as medical insurance, pension and retirement plans, access to higher-quality schools, and subsidised goods that were not previously available to peasants (Ding 2003: 110-111).
The land tenure system that developed during this period (1949-1978) greatly influenced the land-use structure of urban areas, but created a series of land-use problems that were later encountered during the reform era. For example, land-use plans did not discriminate between commercial, residential or industrial functions. Factories and workers' villages were built side-by-side for reasons of efficiency. The mixture of land use was heightened further due to over-emphasis on industrialisation, as planners converted commercial sites into light industrial functions with little alternation. In Shanghai, more than 4,000 factories were established, taking up a quarter of the centre’s land and becoming the city’s main source of pollution (Wu 1999: 209). Furthermore, because the ownership of allocated land was ambiguous, the land acquired under the old regime could not be put in the emerging land market immediately due to the complex struggle of interests between local government, developers, work units and individual households. It became a strong barrier to the development of a mature land market.
Following the introduction of the Open Door Policy, China adopted a land-use rights tenure system similar to the leasehold tenure system used in western countries, which separates land from buildings or improvements. In 1980, the State Council drafted its first regulation on construction land used by a Chinese joint venture with a foreign party, in which the charging of a land-use fee was mentioned for the first time. The People’s Republic of ChinaLand Administrative Law, passed in 1986 and amended in 1998, legalised the accessing of state-owned land by private organisations. It was not until April 1988, however, that China’s Constitution was amended to permit the transfer of land-use rights from the state for a designated period of time (Ding 2003: 113). According to the People’s Republic of China Assignment and Transfer of Use Rights of State Owned Land in Urban Areas Temporary Regulation (1990), land-use rights are being commercialised. Having established the legal framework for China’s urban land-use rights reform, the State Council issued the Provisional Regulation on the Granting and Transferring of the Land Rights over State-owned Land in Cities and Towns in 1991. This provided concrete legal guidance for land users to let, transfer, rent, and mortgage land-use rights (Ding 2003). China does not intend to create a capitalist land market with full ownership rights, but rather intends to separate use and management from ownership; indeed, state ownership remains a key priority during the commercialisation of land-use rights. ‘Given the characteristics of the Chinese land tenure system, private land ownership does not exist in China’ (Chan 2003: 138). The primary rationale behind this and subsequent reforms has been to attract foreign investment in property, and to restructure the land supply- and land allocation systems so as to enhance economic efficiency (Olds 2001: 173). These basic principles have had important consequences for later land development.
Like most of the reform-era Chinese laws that borrow extensively from Western legal doctrines, concepts, procedures, and terminology (Guthrie 1999: 127; Pei 1997: 76), the new land policy was based on other countries’ and areas’ experiences in leasehold tenure systems and the maximisation of land transfer values, especially those of Hong Kong and Singapore (Chan 1999: 54; Li et al. 2000: 349). In these latter cases, both governments own most – if not all – of the land in their territories, and thus exert almost monopolistic control directly over land supply, planning and development control. Both governments use land as a revenue generator. In the case of Hong Kong, land lease through public bidding maximises land value and makes a significant contribution to Hong Kong’s economic development and government revenues. These advantages were taken into account in China’s various land ownership and land tenureship laws and regulations. It is interesting to note that, by adopting western legal doctrines, concepts, procedures, and terminology from various contexts, China’s new land policy has a certain degree of flexibility and there are possibilities for applying new and innovative strategies to the practice of land development.
‘The gradualist urban land reforms are intrinsically linked with the incremental economic reform in transitional China’ (Zhu 1999). Chinese land policy reform has undergone a long transformation process since 1978, pursuing a double-track system to allow the co-existence of both a land allocation system and a land market. The two were gradually integrated into one unified land market in the 1990s. Even though the acts were not immediately and rigorously enforced, due to resistance from vested interests at the local level, changes in the land-use regime and the increasing economic competitiveness between cities for cross-border investment has had a positive impact on land development, government finance and urban growth. In the process, local government has become a major actor in urban development, as is illustrated by the case of Shanghai below.