2008 will be remembered for the unprecedented global economic crises.  China was one of the many countries severly hurt by this crisis.  What happened in China was not only the recession and 70% declining stock market, but also the devastating earthquake.  The current rural problems will also largely effect China.

In October 2008, the Chinese ruling party held its Third Plenary Session of the Seventeenth Central Committee, and announced the “Conclusion of Momentous Issues of Boosting Rural Reform and Development” (“the Conclusion”). For solving China’s perplexing rural problems, the Conclusion sets forth three concrete measures including rural system innovation, agricultural productivity improvement, and rural public utilities development. The sector of “rural system innovation” shall be crucial and makes the Conclusion become the most important document concerning rural reform since the Third Plenary Session of the eleventh Central Committee of the Party in 1978.

The provisions of the sector abovementioned clarify the peasants’ usage privilege on rural land resources by contract with government and villagers’ committee, and allow the peasants to transfer or sell such privilege. Meanwhile, this sector also illustrates the policies to enhance the governmental investment and to encourage individual capital entering into the rural construction and agricultural development under the upcoming public financial leverage, taxation exemption and positive monetary policy.

There are two different situations of land ownership in China. Generally, the ownership of mineral resources and land of cities and towns belongs to the country, and the ownership of rural land of a certain village or meadow belongs in common to the all peasants who are statutory residents there. The peasants had the right, which is called “the privilege by contract” (“the privilege”), to use the land (to cultivate or to build residences according to the statutory layout). This rural land using system has been gradually adopted since 1978 and legitimized in August 2002 when the “Law of the People’s Republic of China on Land Contract in Rural Areas” (“LLCRA”) promulgated.

Actually, we can find relevant sections about the transfer of the privilege in LLCRA of which article 32 says, “………… the privilege on land contract can be transferred via subcontract, lease, interchanging, selling or other methods.” So why did the Conclusion emphasize it again? And why emphasize it right now?

Article 37 of LLCRA stipulates that “The transfer of privilege on land contract via selling shall be granted by the contract-issuing party.” Mostly, the contract-issuing party means the villagers’ committee mentioned in the third paragraph. The members of the villagers’ committee are elected by the villagers but actually can make decisions and generally keep the intimate relationship with government. From chart 01 below you can see in the past ten years the farmland area has reduced 119 million MUs (MU is a Chinese area unit which is approx 1/15 hectare) which is six percent to its original area in 1998, and at the same period the Chinese population reached 1.32 billion from 1.24 billion with six percent increase. These two “six percent” mean the Chinese national grain security strategy has been threatened for years. [The data above are from Xinhua Agency and “Chinese Population Report”.]

Most of the reduced farmland has been changed pursuant to local governments’ new industrial development zones, and resident buildings which could bring more taxation income and profits for the local government and some benefit-relevant groups. The peasants sometime did not gain adequate compensation when they lost the land. Recently, the officer of Ministry of Land and Resource of China separately met and censured nine cities’ local governors because of the farmland abuses in those locations.

With this situation, prior to the possible revising of relevant laws and regulations, the Conclusion expressed three signals: to hold the 1.8 billion MUs of farmland as the nation’s bottom-line; to keep the peasants’ privilege on rural land by contract stable and permanent; and to protect the peasants’ benefit from land using rights transfer.

In addition, there are some other reasons as follows to explain how important the Conclusion is.

Agricultural Productivity Improvement

Although the agricultural productivity has improved gradually since last reform of land using system in 1978, productivity stays compared with that in the developed nations because this improvement was on the basis of an initial much lower level. With simultaneous increasing population and decreasing farmland area, it is self-evident that the improvement of agricultural productivity is very important of the national grain security strategy.

As many people know, economy of scale can effectively improve the productivity and need the resources centralization and optimization. But the actual decentralization of the farmland became the chock point. It is expected that farmland resources will be clustering to some expert peasants or big companies under such encouraging transfer policy. Of course what they transfer is just the rights to use the farmland and only for agricultural usage.

Domestic Demands Pull Up

The economic crisis is sweeping every corner of the world. The declining consumption in western countries has hurt the export-orientated Chinese economy. In spite of lots of export stimulating policies, the export recession will be inevitable. The pull-up effect of investment enlargement will be sluggish. So the promotion of domestic consumption demands is a nice medicine not only for the present rescue and also for continuous development. The Chinese Government has announced some new plans and policies most of which are on the basis of tax exemptions to stimulate domestic consumption. But they could not be used frequently and consistently because of the consequent pressure to fiscal budget.

China has about 900 million peasants. A minority of them is going to the industries, but the majority of them has the strong consumption impulse but doesn’t have enough money to afford it. Meanwhile they possess the privilege by contract on land which is counted for decades of billion CNY, one of the largest wealth in China. That looks like a beggar with a gold bowl. What the government is doing is to release the huge wealth, let the peasants get money as well as let the land resources gather to eligible persons or organizations or companies with higher productivity and efficiency.

New Job opportunities and New Real Estate Demands

Obviously, some peasants will transfer their privileges. We can have a reasonable assumption that just one percent of peasants do it every year (According to data from the National Bureau of Statistics, China’s average annual urbanlization ratio is 1%), and fifty percent of the peasants who have sold their land rights will move to the cities and towns. So that means year by year 4.5 million people will enter into the cities and towns, and they need food, doctors, residences, and education for their children. Then, it is foreseeable that movement will promote the development of third industry, service sector and real estate market, especially in the middle and small cities and towns close to the suburbs. And during these periods, the government does not need to spend a lot of money except for the necessary public utilities both in cities and in countryside.

New Financing Service

The Conclusion specifically establishes a modern rural financing system and calls this system the core of modern rural economy. This system will involve banking operation, public financing and taxation leverage, monetary policy tools, insurance and reinsurance. It will broaden the banking industry’s involvement in rural credit, and allow the private capital to enter into rural banking practice which was prohibited before. Meanwhile the government will boost the establishment of the futures market of agriculture products. That will be providing the variety of capital supply for both the peasants and entities who buy the land-using privileges.

Legislation Orientation and Challenges

As we know, the Conclusion is the ruling party’s policy document and does not have statutory effectiveness. So when it comes to detailed transactions, we need specific provisions of laws and regulations. There are some conflicts between present provisions and the Conclusion. What needs to be revised includes the LLCRA, the Property Law, the Land Administration Law, the Guaranty Law and other several laws and regulations, and probably some new regulations will be approved and adopted.

For example, according to the present provisions, the contract period of plantation land, grass land and forest land are separately thirty years, thirty to fifty years and thirty to seventy years. Most of the farmland is plantation land with only a thirty- year contract period and some of them are approaching expiration. So if the contract period could be prolonged, that would be one of the key components of the new policy.

Besides, the rural land was frequently requisitioned by government and other entities for public benefit or for business. There should be different compensation to the peasants for the different purposes of requisitions. But Chinese laws at present neither have detailed provisions to explain what the public benefit is nor do they set up the different compensation standards. That meant a lot of farmland that was requisitioned in the name of public benefit was finally used for business development. So it is necessary to define the “public benefit” to decrease the mandatory requisition as well as to set up the entire and reasonable compensation system on rural land requisition. On the other side, the present laws did not recognize the pledge of the privilege and prevented the set up of modern rural financing system.

We also have to face other challenges. The government has to find the way to solve the social security problem of the former peasants who moved into cities and towns. And, whether the uninhabited rural residences could be sold to the urban buyers or could be purchased by the government would be the next topic for dispute.

However, the officer of Ministry of Land and Resource of China has stated a few days ago that the new administration regulation concerning rural land transfers is in draft and will probably be promulgated by the end of this year or the beginning of next year. So we are well-founded to expect it.