China’s Property Rights — and Wrongs

small title

A steady stream of rural workers coming into urban areas has fueled China’s rapid economic rise. Yet, these migrants remain constrained in their upward social mobility by the household registration system – hukou – that assigns an individual residency status as either “rural” or “urban” and is very hard to change. As a result, some 260 million migrants – or about 20 percent of the country’s population – live as second-class citizens in their adopted cities. In the biggest cities, as much as 40 percent of the population does not have the city hukou.

In the 1950s, the Communist Party started using the ages-old hukou family tracking system to restrict population movement. The intent was to spur industrialization through the “iron rice bowl” deal: urban workers were compensated for low wages by the promise of lifetime employment, health care, pension, and education for their children. For the system to work, rural workers had to be kept on farms to supply cities with cheap food.

Many now recognize hukou as unjust and an obstacle to China’s further development, and the government is contemplating reform. For the time being migrant workers still lack the status of permanent urban residents and the access to public services that city residents enjoy. This, in turn, makes just paying rent a struggle and creates high demand for affordable housing.

Enterprising farmers on the outskirts of fast-growing cities took notice. They started renting or selling their houses to migrants and building new ones. In some cases the entire villages invested in such developments – which include not just housing but also small factories, shops, and hotels. The owners received certificates of “ownership” (actually a limited land use right that can’t be sold, inherited, or mortgaged) recognized by their rural collectives. But when cities expand, these so-called “small titles” have no outside legal standing. The owners are supposed to be fairly compensated for expropriation but that rarely happens given the incentive structure: city governments have a monopoly on buying rural land and converting it into urban land by reselling to commercial property developers at a considerable financial gain.

The central and city governments maintain that construction and sale of “small title” properties are illegal. Yet for decades they were tolerated or even encouraged by local governments to facilitate their land take as “sideline payments” or accommodate migrant workers or lower-income city residents. Once urban land prices exploded, and following the 1994 fiscal reform that centralized fiscal revenue and put more pressure to raise revenue on local governments, the incentives changed. Not surprisingly, though, the central government’s efforts to remove “small title” properties and re-develop the land are encountering strong local resistance. In fact, conflict over land accounts for 65 percent of the more than 180,000 mass protests occurring in China annually.

A 17-province survey conducted by Landesa in 2011 in cooperation with Renmin University and Michigan State University shows more revealing findings about the magnitude of land-related issues in China:

  • Every year, local governments appropriate land from 4 million rural Chinese.
  • Since 2005, there has been a steady increase in the number of “land takings” or compulsory state acquisitions; about 43 percent of the villages surveyed have been subjected to such land takings over the past decade.
  • The mean compensation paid by the local government to the farmers was about $17,850 per acre but when resold by to developers the mean price was $740,000 per acre.
  • When farmers are relocated or “urbanized,” only slightly more than 20 percent gained an urban hukou; 13.9 percent received urban social security coverage; 9.4 percent received medical insurance; and only 21.4 percent had access to schools for their children.

The evolution of China’s property rights system and further analysis of the “small title” problem in Beijing, Chengdu, and Shenzhen are also the subjects of research conducted by the Unirule Institute of Economics based on the initial findings of the China Property Markets Scorecard that Unirule compiled with CIPE’s support. The follow-up research focused on exploring the reasons for the existence of “small title” properties, the situation in the studied cities, and potential policy solutions. It culminated in a recent seminar in Beijing where Unirule presented its findings.

In Shenzhen, for example, as of December 2011 “small title” property reached 379,400 illegal constructions, covering an area of ​​405 million square meters, or 49.27 percent of the city’s total construction area. Some estimates go even higher, with the ratio exceeding 60 percent. In Beijing, according to unofficial statistics, “small title” property represents about 20 percent of the entire real estate market.

Due to the scale of the problem, Prof. Feng Xingyuan from Unirule and other experts speaking at the seminar argued that the central government and local governments can no longer rely solely on delaying reform and should instead focus on how to guide the “small title” property toward legalization. The growth of “small title” properties clearly had its reasons. It offered cheap housing for the lower income urban dwellers, eased the pressure on real estate prices, and provided village collectives with a new source of income.

But drawbacks have overwhelmed benefits. For one, many such constructions are of low quality and they undermine the efforts toward rational city planning. Crucially, “small title” properties easily lead to disputes – and even unrest as mentioned earlier – given uncertain ownership of rural and suburban land. “Despite reform in many areas in recent years, China remains backward when it comes to property rights: rights for rural and urban citizens are very different,” said Prof. Feng.

Experts also noted that problems with “small title” point to larger institutional issues in China where the meta property right – the right to property rights – often has not been respected despite the fact that as of March 14, 2004 it became a constitutional right when the Constitution was amended to include guarantees that “legally obtained private property of the citizens shall not be violated.” China’s institutional framework does not support effective judicial protection against confiscation of property or transparency of property transactions, either.

To improve the situation, Unirule argues, the government should focus on how to guide “small title” properties from being in the legal limbo toward legal compliance in the context of China’s broader urban and rural development. “Land must belong to individuals or else it’s not safe,” noted Prof. Mao Yushi, co-founder of Unirule and winner of the 2012 Milton Friedman Prize for Advancing Liberty. Policy options to achieve that can be considered in two categories: temporary and permanent.

Temporary stopgap measures include ways to change the existing classification of the “small title” property. For instance, in cases where such properties meet the goals of urban and land use planning, and where solidly built, they can be quickly formalized. In properties with poor quality of construction, appropriate renovation and maintenance of buildings would be first required. Furthermore, some “small title” properties, given their relatively low market price compared to legally constructed buildings, could be legalized and converted into affordable housing.

Longer-term measures should focus on the core of the “small title” problem by addressing the existing land system deficiencies in China. Specific measures may include: limiting land taking to cases which meet public interest requirements and submit to due process and proper compensation, giving collectively owned land equal access to real estate markets by allowing direct sales between the village collectives and end buyers; introduction of taxes that government would derive from all properties, including “small title” properties once legalized; giving farmers greater control over their own right to the collective share of land and other assets so that they can become independently self-employed, withdraw from a rural collective, or create a new collective. Ultimately, there is a need to amend the 1982 Constitution that enshrined the duality of land ownership by stating in Article 10 that “land in the cities is owned by the state; land in the rural and suburban areas is owned by collectives.” Removing this Article would restore the citizens’ private property in land and be an important step toward affirming the meta-property rights in China.

Additional reforms could also help change the cycle that fuels the rural-urban migration but then traps the migrants in an informal legal state. This includes improving the social security system, for instance. With a sound social security system decoupled from hukou many restrictions on the transfer of property rights of farmers would no longer be necessary. Local experimentation in cities such as Chengdu can provide useful lessons and examples to follow in other cities.

The time for legalizing most of the “small title” property is ripe. Legalizing these properties and allowing farmers to circulate their land freely would not only rationalize China’s confusing property market in fast-growing cities but also provide needed legal security for entrepreneurs and small businesses, creating employment. Legalization would as well promote more equal participation of migrant workers and SME owners in the benefits of urbanization that they helped to spur. Achieving greater legal protection and predictability in China’s urban development by solving the “small title” issue could therefore be a win-win scenario for all involved.

Anna Nadgrodkiewicz is Senior Program Officer for Global Programs at CIPE.

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