Visitors to China, even frequent ones, marvel at the construction boom in the country's largest and even relatively remote cities. The surprise is not only over the scale of expansion; some of the disbelief has more to do with the innovative and occasionally outrageous architectural designs on display. There is a nagging concern behind all this rapid development, however. How can individuals and companies inject so much capital into a market where the government owns all of the land?

It is a frequently asked question, and one with a fairly simple answer. While the government does technically own all of the land, there is a relatively clear and transparent leasehold system that provides the foundation for today's developments.

A host of legislation, mostly dating from the mid to late-1980s, established a system for dealing with land and the rights of use in China. Since then, the laws have been updated, with several important changes as recently as 2004. The system allows users to acquire the rights to develop on a piece of land and retain the structures on it for periods of 40, 50 or 70 years, depending on the specific use. This system is similar to, and in fact partially based on, the approach the British took in Hong Kong. Variations on these rules are actively utilized in both Singapore and Hong Kong, and occasionally in other parts of Asia today.

Questions persist over how these leasehold rights will be renewed, but private property ownership has been an important pillar of government policy. Wealth creation from investment in private housing has provided stability, with millions of stakeholders who will continue to support the concept of private home ownership and hopefully take a greater stake in the infrastructure and public space that supports it.

There are lingering issues relating to land dispersed prior to the clarification of this system and its evolution, but investors in China should find the process relatively clear. The system is becoming increasingly transparent by the day.

Allocated and granted use rights are the two basic types of land use rights in China. Allocated land was set aside by the government for specific purposes, such as for schools and hospitals, and cannot be sold or transferred unless the rights are converted to granted land use status. This conversion involves the payment of associated fees to the government and is not a common way to acquire land.

Granted land use rights are applied to land currently being used in commercial and residential developments throughout the country. When a commercial entity obtains land from an appropriate government body, a land use fee is paid up front and a certificate is issued for the property clearly stating the intended use and duration of the grant.

Nominal annual rental payments are directed to the government, but the substantial costs of land use rights must be paid before development begins. There has been some discussion about changing this system to one where payments are due through an annual tax assessment, as is done in other countries. The details have yet to be worked out, however.

Over the past several years, the government has worked to ensure development proceeds at a measured and sustainable pace. This has meant purchasers are no longer able to obtain loans to acquire land use rights, but must pay cash in advance. Additional controls also dictate that developers must substantially develop a property before they can pre-sell residential units. These rules are in place to ensure land is put into productive use as quickly as possible.

China's sheer size often belies the fact that arable land is scarce. National, provincial, municipal and other governments have occasionally banned the use of land for specific uses such as villas and golf courses that were perceived as encroaching on arable land or had been deemed unnecessary.

A freeze on the sale or conversion of agricultural land for a six-month period in 2004 was a substantial move to ensure land would not be unsustainably misused. There were widespread reports of rural authorities acquiring land from farmers only to profit substantially by selling the use rights to developers, which led the central government to consolidate the power to approve all agricultural land conversions. This consolidation has made the establishment of new industrial parks slower and more methodical. The development of commercial and residential space has been similarly affected, particularly in rural areas, but this situation has also driven the consolidation of industrial use within major cities.

Proceeds from the sale of land use rights and a portion of taxes paid by companies within a jurisdiction are key revenue sources for these government entities. Central, provincial and municipal government authorities determine macro levels of land supply to be released for development, but it is often up to local authorities to decide which land rights are sold and what to build on specific plots of land. Local authorities used to privately negotiate prices, development densities and uses with developers, in the hopes of creating concentrations of businesses, either in industrial parks or central business districts. This would pay taxes and provide consistent revenue streams for the related government jurisdictions.

A subsequent change to the rules means that land released by these entities must now pass through a tender or auction process to ensure neutrality and eliminate potential conflicts of interest. Some jurisdictions have gone to great lengths to publish auction schedules and land plots. They promptly post the outcomes, winners, and details on the size of developments, rights and uses. In other jurisdictions the progress is slower, but systems are markedly clearer than they were in the past.

Once land use rights have been sold to a private entity, use rights can then be transferred on the open market, creating more transparency for the market value of the land. Singaporean developer CapitaLand acquired several sites in Shanghai from third parties in 2004, and will soon complete development of residential schemes on these sites. Other developers, including Hutchison Whampoa and Sun Hung Kai Properties from Hong Kong, have participated in government auctions and acquired sites to develop in Hangzhou and Shanghai respectively.

Participation in the system by individuals and development companies will continue to clarify and support the Chinese property market. Progress also means future visitors will continue to be impressed by subsequent phases of development and the pace of construction. This illustrates how far the economy has come over the past several decades, and how deeply enshrined private participation has become in a communist country that nationalized property 50 years ago, but has spent the last 20 years figuring out how to get it back into private hands for productive purposes.

The opinions expressed are the author's and do not necessarily reflect the beliefs of this publication.

(China Daily 03/13/2006 page4)