Chinese Law Prof Blog

Editor: Donald C. Clarke
George Washington University Law School

Saturday, April 15, 2017

Full Private Land Ownership Returns to China’s Cities

Did that headline get your attention? If it’s an exaggeration, it’s not much of one.

Last week a student brought to my attention a statement Li Keqiang made last month that I and just about everyone else (I can’t be sure) seem to have missed. At a press conference at the end of the National People’s Congress session, Li announced that full private ownership of land has been restored in China’s cities. Of course, he didn’t use those exact words, but the effect of this statement was the same. Here’s why.

Since the mid-1990s, the state—the owner of all urban land—has sold long-term leaseholds in that land called “land-use rights” (LURs): a maximum of 70 years for residential use, 40 years for commercial use, and 50 years for everything else. These LURs are a lot like long-term leases in Western countries: you can sell them, and if the government takes them, it has to compensate you. There are restrictions on use, but they aren’t different in nature or degree from the zoning restrictions you see in market economies. (I’ve written in detail about the urban land regime here.)

Also like Western long-term leases, when they expire, they expire. If you want to keep using the land, you have to pay again. At least that used to be the rule. But everyone would like something for nothing, and after the new regime went into effect, LUR-holders began to complain that the rules about renewals were unclear or unfair or both. (They were neither.) But LUR-holders are a powerful group; by definition, the group consists exclusively of people rich enough to own urban LURs, and it certainly includes every powerful family in China. Thus, pressure mounted for free renewals at the end of the term, at least for residential LURs.

In 2007, the authorities granted a teaser: the Property Law was promulgated, and it stated that residential LURs would, at the end of their term, be renewed “automatically.” But it didn’t say what “automatically” meant. As Professor Wang Liming, a member of the drafting team, later admitted, this lack of clarity was no accident; the drafters had deliberately opted for ambiguity.

Why? Think about what automatic, no-fee renewal implies. It means that the 70-year term becomes meaningless; the LUR becomes perpetual. The fact that the land would ultimately revert to the state at the end of the term was what had allowed the government to maintain all along that the LUR regime was consistent with socialism and state ownership of land. If the LUR-holder has the right to the land in perpetuity, that story, already somewhat implausible, becomes impossible to maintain.

On the other hand, if the drafters had stated clearly that renewal required the payment of a fee, LUR-holders would have been outraged. Hence Prof. Wang’s almost comically self-contradictory assurance: “There will be no conditions on extension. As for the term of the extension and the cost, specific measures will be made clear through the promulgation of implementing rules.”

Ten years have since passed. The holders of the first batch of 70-year LURs granted in the mid-1990s are getting itchy. Everyone has been waiting for increased clarity—and by “clarity” they mean “clarity that favors LUR-holders.”

It is that shoe that finally dropped in Li’s statement last month. In answer to a reporter’s question (very possibly planted) about what would happen when the 70-year LURs expired, Li said:

There’s an old saying in China: Economic security brings peace of mind. . . . [T]he term can be renewed, there is no need to apply for renewal, there will be no pre-conditions, and there will be no effect on the ability to buy and sell. Of course, some people may say, “That’s what you say, but is there any legal guarantee?” Let me stress this here: the State Council has already tasked the relevant departments with urgently studying the laws relating to the protection of real estate and coming up with a proposal.

中国有句古话:有恒产者有恒心。. . . 可以续期,不需申请,没有前置条件,也不影响交易。当然,也可能有人说,你们只是说,有法律保障吗?我在这里强调,国务院已经责成相关部门就不动产保护相关法律抓紧研究提出议案。

I don’t see how to read this other than as a promise of perpetual free renewals. This means that people who paid for a 70-year LUR now find themselves with a perpetual LUR: the equivalent of full fee simple ownership. That’s worth noticing.

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Thanks, Don, as always, for updating everyone. I wonder if the granting of renewals without payment or condition will actually weaken property rights in the long term. China's land owners (or "owners") really need a property tax system by which they can finance improvements that benefit their land, but I understand that such taxes are deeply unpopular with LUR holders who are used to the proverbial free lunch. Granting renewals without a big renewal payment was the carrot by which to induce them to accept property taxes. Now that Li Keqiang has given up the carrot for nothing, LUR holders will continue to be stuck in an unsustainable fiscal situation in which cities raise money by surrendering their land for 40-70 years -- a recipe for improvident "build-a-ghost-city" sort of management.

Posted by: Rick Hills | Apr 16, 2017 5:44:36 AM

Thanks, Rick. Yes, looks like property tax is the only way to go now. As you hint, the free renewals should have been presented as part of a package deal that included property taxes. But they have another few decades to solve that problem. My guess is they'll be able to get property taxes up and running before the first non-renewal (so to speak) rolls around.

Posted by: Don Clarke | Apr 17, 2017 12:41:55 PM

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