How to end rural land expropriation and secure tenure for urban property owners at the same time.

Consider two apparently distinct problems that currently vex Chinese land policy.

First, what is going to happen when the seventy-year term of land use rights (LURs) for homeowners in Chinese cities expires? LURs are similar to ground leases in common law jurisdictions, except that the owner and lessor of all urban land is the government. Although shorter-lived LURs in some cities have already reached term and been renewed, and Premier Li Keqiang assured homeowners in 2017 that there was no need for worry, the continued absence of formal legal guidance is striking. The drafting of China’s new Civil Code, which replaces the Property Law among others, offered a good opportunity to solve the LUR puzzle, but the final draft approved in May 2020 failed to do so. As more and more LURs come to the end of their terms in coming decades, the question about whether and how such leases can be renewed has become increasingly pressing. To frame the issue in more radical terms, as Professor Robert Ellickson did in 2012: “[I]f current policies continue, the health of every private industrial, commercial, and residential enterprise in China will fade as its fixed-term land contract winds down.”

Second, how can Chinese local officials be deterred from expropriating rural land? Expropriation has become local governments’ main source of revenue, but it causes numerous conflicts and instability across the country. The 2019 revision to China’s Land Administration Law allows for rural construction land to be put on the market by rural collectives themselves, bypassing government expropriation and theoretically allowing more profits to go to the farmers, but the procedure for doing this remains unclear. Instead, when Shandong Province sought to boost economic development following the nationwide coronavirus lock-down in spring 2020, it launched a campaign to consolidate villagers on less land, triggering conflicts and grievances as people were kicked off their land with insufficient compensation.

The difficulty of clarifying the uncertainty of urban LUR renewals and the challenge of constraining local governments from encroaching upon farmers’ land rights are both rooted in local government reliance on land transactions for revenue. That is why in 2016, when one of the earliest batches of LURs expired in Wenzhou, the city government imposed high fees for renewal. It’s also why local governments are so obsessed with rural land expropriation. According to Chinese government data, between 2005 and 2015 local governments annually expropriated 10,000 to 50,000 hectares of rural land without authorization. Considering that Chinese farmers own on average 0.09 hectares, local governments took land away from 100,000 to 500,000 farmers every year in violation of national land law and quotas.

Unless an alternative source of local government revenue is found, it is unlikely that local governments will cooperate with central government plans for solving the rural land marketization and urban LUR renewal problems. Here we provide a solution that kills both birds with one stone.

The sale of LURs has been an important source of revenue for Chinese local governments since the 1990s. The long terms of LURs, however, make them an extraordinarily inelastic device for obtaining the revenue needed to run a local government. LURs afford local governments no means to recover additional revenue from LUR holders during the LURs’ lifetime. A new mayor whose city’s land has already been fully leased cannot capture new revenues from lessees to improve the city’s infrastructure or provide other public goods, even if those amenities are precisely what home hunters are currently seeking, leaving her with no choice but to expropriate more rural land from the city outskirts.

By rendering the costs of governmental services more visible, property taxes would force local cadres to justify those costs.

Why not replace high LUR renewal fees with property taxes? The Chinese government has put property taxation on its agenda for many years, but has not made much progress in face of strong public opposition. From a property owner’s perspective, the up-front cost is so large that nothing could justify the imposition of a new property tax. The coming expiration of more and more LURs, however, provides an opportunity for the Chinese government to sign a new contract with property owners in which the local government’s right to receive large LUR payments every 70 years is exchanged for the right to receive smaller sums in the form of quarterly or annual property taxes. Moreover, precisely because they are levied for shorter intervals of time, the holders of LURs would have more opportunities to contest the amount of the taxes and demand equivalent returns in services. To sweeten the pot for property owners, the National People’s Congress could make a local government’s authority to impose property taxes contingent upon its assurance to lessees that no further fees or rents will be imposed when LURs are renewed, thereby eliminating the uncertainty of title suffered by ground lessees in a system of multi-decade renewals. Various kinds of property-related taxes currently paid by real estate developers actually constitute 50-60 percent of property prices. Although these taxes are paid indirectly by property buyers, they are often unaware of the magnitude of these charges. Replacing the current regime of fragmented property-related taxes with a uniform property tax would not necessarily increase the burden on property buyers but would make their contribution to the government finances more visible, giving them greater leverage in urban governance.

By rendering the costs of governmental services more visible, property taxes would force local cadres to justify those costs. Similarly, by rendering public expenditure more visible, property tax would give property owners a stronger incentive to review local government spending. Moreover, local leaders seeking to raise property taxes for new projects would have an incentive to assuage local homeowners with opportunities to review budgets and comment on expenditures. In the longer term, if property tax were to become the main source of local government revenue, taxpayer demands for fiscal accountability might constitute a first step toward democracy, as in Douglas North and Barry Weingast’s account of England’s Glorious Revolution.

The gradual expiration of LURs in Chinese cities provides a golden, once-in-a-generation opportunity for the National People’s Congress to replace an inelastic, politically contentious, and unpredictable source of revenue with a system of property taxation that would allow local officials to compete with one another on their ability to reduce the tax burden as well as to provide services. With a stable revenue flow from urban property taxation, Chinese local governments would have much less incentive to monopolize the supply of construction land or inhibit rural collectives’ marketization of rural construction land; nor would they be as interested in expropriating rural land for revenue as they currently are. We might then see the demise of the blood-shedding expropriation and demolition that has been ongoing across China for decades.

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Shitong Qiao is an associate professor of law at the University of Hong Kong and has been a visiting professor at NYU School of Law.

Roderick M. Hills Jr. is the William T. Comfort, III Professor of Law at NYU School of Law.

The views expressed in USALI Perspectives essays are those of the authors, and do not represent those of USALI or NYU.

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