Tackling land abuse problem
By Zhou Tianyong (China Daily)
Updated: 2004-04-16 09:16

[The author is a researcher with the Central Party School.]

The central government is coming to grips with excessive land use and runaway industries such as steel, cement and electrolytic aluminium, as worried scholars and regulatory agencies have warned of the symptoms of unbridled economic growth.

But a precondition of correct regulation is full understanding of the real nature of the so-called  "overheating" in some sectors, whereas one-size-fits-all policies are uncalled-for.

How far are those sectors overheated? What are the causes, and how should we cope? These questions require objective assessment of the current situation.

The abnormal boom in some sectors is mainly a result of some local governments' investment mania, while investment from non-government sources is not really overheated.

In particular, some local governments have launched major projects like squares, skyscrapers and landscaped roads on borrowed capital without solvency concerns.

Some State companies have also been reckless in investing - in many cases on bank loans - which has brewed huge risks of creating distressed assets for State banks.

The fever of economic growth will cool down when the excessive investment from government-related sources is brought under control.

China is undergoing an age of heavy and chemical industries, with an urbanization rate narrowly above 40 per cent. Colossal use of steel, aluminium and cement is inevitable.

Years ago the administration tightened up the approval of power plants as it feared their mass construction would lead to a surplus of electricity. As a result, wide power shortages occurred amid the economic boom last year, resulting in heavy losses.

Such lapses should be avoided now when it comes to handling the so-called overheated industries.

Compared with the government's planning agencies, non-State investors who are willing to put multi-million dollars in heavy and chemical industries are more attentive to the market outlook and profitability of their ventures.

As long as the reckless bankers lending to these industries can be restrained, there is no reason to impose tough control on investment from non-State sources. Otherwise China's industrialization and urbanization drive may suffer from a shortage of raw materials. Such control might also sour international manufacturers' efforts to establish operations in China.

The industrial boom has been coupled with large-scale land development. Considering the rise of grain prices and the growing number of farmers whose land has been occupied by business projects, some analysts have suggested all land use applications be subject to approval of central government agencies to stop the abuse of farmland.

It is impossible to build up industries and metropolises without taking over farmland, because farmland is mostly in plain areas and thus economical for development.

Admittedly, problems accompany land development in many places. Too much farmland has been occupied, and farmers lost their land so easily that they barely received adequate compensation or economic guarantees.

But the real question for us to contemplate is: What is the root cause of such abuse?

In my opinion, it is because of the land system which grants farmers no real claim of land and permits the government's mandatory requisition of rural land.

If there was a clear-cut land property system that ensures fair land trade, how could local governments and developers have afforded to procure so much land from farmers to build luxury golf courses?

The compensation rate stipulated in the law for land requisition is too low. That local governments - even for commercial purposes - can forcefully take over rural land at a low cost is unfair. That farmers have only temporary, rather than long-term right to use rural land is equally unjust.

In a market system, key economic resources like land, labour and capital are distributed in line with market demand as well as price fluctuations.

 Shall we solve the current land problems by building a sound property system based on the market system, or simply by relying on the ways we used to have in the age of a planned economy?

Past experience has proven that under circumstances in which distribution of labour and capital has become market-oriented, centralized administration of land use will distort economic operation and create a string of troubles.

It may take a foreign investor one or two years to go through all the approvals with local and central administrations for only several hectares of land to build a workshop. Capital lays idle, and a prime business opportunity may well slip away.

It is also impossible to have a central bureau to deal with every land use case rising from the fast changing economy. The centralized system by no means guarantees efficiency and fairness, and is vulnerable to irregularities.

Worse, such a system will do immeasurable damage to the country's drive towards industrialization and urbanization. Lengthy approval procedures, especially in land-thirsty coastal areas, will hamper investment, which in turn will prevent rural labourers from securing employment in cities.

However, once the rigid land use regulation slackens, problems such as surplus rural labour forces, urban unemployment and stubborn non-performing loans will worsen.

When navigating the economy in 2004, the government should differentiate between government projects and non-government investment, and introduce a market-based land use system.

The prime job of the government's regulation is to control projects launched by local governments on borrowed money, especially those with poor solvency or involving backpay to workers.

In contrast, the control on non-State or foreign-funded projects, even those in steel, aluminium and cement, can be loosened so that the government incurs no risks. But loans to these projects should be limited to no more than half their capital portfolio in order to prevent financial risks being shifted to domestic banks.

Another imperative is to reform the rural land system. A system for leasing in perpetuity is advisable in order to allow farmers to enjoy permanent interests from the transfer, lease and mortgage of land.

In particular, approval of land use should be handled by governments at different levels according to the size and purpose of the land. The key is to respect market rules and the property system.

There is no need to impose uniform regulation on the development of farmland, which could affect China's great drive for industrialization and urbanization.

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