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Living on Borrowed Land

Legalizing the renting of rural dwellings on the outskirts of cities will be a boon for the people who live there. But how will it affect China’s rental market?

By NewsChina Updated Nov.1

China’s housing market, which draws in the banking, manufacturing and construction sectors, makes up a large part of the nation’s economy and growth. For many Chinese families, owning a home or an apartment opens the door to the possibility of romance, parenthood, and wealth. But there’s another side to the story: the role of Chinese farmers and rural land. It’s a side long neglected.  

The way things currently stand, rural construction land is collectively owned by members of “rural collective economic entities” in villages or towns, which include villagers’ committees and teams. Farmers can build houses there to live in, or to use for business purposes, or they can transfer the land to other members of the same entity. Meanwhile, farmers and migrant workers from rural areas can rarely afford to buy an apartment in the city. The only legal way to use rural land for urban development is for the government to take the land over from farmers in a process that often provokes social unrest, and transform its title to State hands. Property developers can then bid for the right to use the land.  

This could be about to change. Recently, the central and local governments have adopted a suite of policies to encourage the growth of residential rental markets, including a trial program building rental housing on rural construction-zoned land which launched in 13 cities, including the mega-cities Beijing, Shanghai and Guangzhou, as well as other large centers around the country. These cities are well-prepared for the program: they have a huge demand for rental housing, collective rural economic entities there have the necessary drive and resources, and their respective governments have good regulations and services, according to an announcement by the Ministry of Land and Resources and the Ministry of Housing and Urban-Rural Development on August 28. The purpose is to develop a rental housing market and provide a new source of income for farmers. There may be a nationwide rollout based on a final assessment by the end of 2020, and lay the foundation for an integrated urban-rural land market for construction, granting farmers the right to trade their construction land on the market.  

Farmers and their collective economic entities have long played a role in the rental housing market in China’s urbanization process. As cities have expanded over the past few decades, a lot of rural land, including arable and construction land, has given way to high rises, factories and roads. This land has already been transferred to State ownership. But a lot of rural construction land remains in the hands of farmers. Some have built multi-story buildings and rented the rooms to migrant workers and newcomers, including young graduates and artists. Those farmers have become landlords, and many no longer farm. As these communities exist mostly on the outskirts of cities, they have long been known as “urban villages,” a term that points not only to their rural ownership and origin, but also their poor living conditions. The reality is that they are slums built on rural land in cities, and the rental housing market there is of dubious legality. However, as land prices have climbed due to urbanization, and the interests of farmers as landlords and their tenants have become entangled, it has become costly for the government to take such places over for development. Since they provide cheap accommodation to migrant workers and newcomers, local governments often give them their tacit consent.  

However, the new scheme not only legalizes rural rental markets, but encourages them. Professor Liu Shouying of the Renmin University of China’s School of Economics is an expert researcher of China’s land system. He shared his views on the new scheme with NewsChina. The way Liu sees it, the trial should focus more on “urban villages” than on tapping new land. He pours cold water on the argument made by other analysts that the scheme will bring down housing purchase prices. He is also skeptical about whether the trial will lead to fundamental reform of China’s rural land system. 
NewsChina: What do you think is the purpose of the scheme? How will it make a difference? 
Liu Shouying: The main purpose of the trial project is to provide settlements for the “three x 100 million.” [This refers to a central government vow to afford 100 million stably-employed migrant workers the same rights as their urban counterparts when it comes to public services, renovate shanty towns for 100 million urban residents, and attract 100 million farmers from the less developed mid-western region of China to settle in the urban areas of their nearby towns and counties.] In the past, China’s urbanization process was not inclusive. With the trial project, the 100 million migrant workers with stable jobs will be able to settle in cities in a decent way. In this sense, it is part of the solution to the urban housing problem.  

Furthermore, it will create a market around rural construction land for commercial operations, and make it possible for farmers to benefit from the market. The goal of the reform of rural construction land for commercial operations is to unify the rural and urban construction land markets. 

The trial project means that villages, as collective economic entities, can engage in urban housing operations directly, with no government takeover or developer bidding involved.  

In reality, farmers in the suburbs or at the margins of cities have already built many houses on their construction land to rent to people from elsewhere. As this is illegal, it has brought the problem of poor sanitation and a low level of public services. Local governments have had difficulty managing these urban villages.  

This complex issue has been solved by the trial project, which will allow rental housing to be built on rural construction land. Rural entities can do this openly, as long as local planning authorities approve the use of the land for this purpose. They can choose to build and operate rental housing by themselves, or together with external commercial entities.  
NC: Some analysts believe the program will help bring down housing prices. Do you agree? 
LSY: The scheme aims to address the urgent problem of providing decent residences for people in cities where there are huge population inflows, particularly of migrant workers who live in villages on the outskirts of cities. It is too early to predict whether this rental housing will curb housing prices. I think such expectations are an exaggeration. Few migrant workers living in urban villages have the chance to buy a house in the city. They have little impact on the purchase price of urban housing, but are very sensitive to housing rent charges.  

China’s residential housing market is comprised of three parts, commercial, affordable and leasing. Commercial housing is fully market-oriented. Developers bid for land from the government, and sell houses at any price deemed acceptable by buyers either for residential use or investment. Land for affordable housing for lower-middle-income and low-income groups is allocated by the government. But for newcomers to the cities, rental housing in urban villages is the most attractive place to live.  

The price of commercial housing is based on the expectations of the market about its future asset value, as well as on land supply. This has little to do with the rental housing market in urban villages and much to do with the function of the housing. The central government has made it clear that “houses are for living in, not for speculating on.” This does not exclude housing from being used as an asset, however. Rather, it intends to match supply with demand so that housing will be used less as an asset for speculation, and so potential buyers may opt instead to rent a home.  

The interplay of the rental, commercial and affordable housing markets could affect commercial housing prices in the future. But it is too early to say if this will be the case, and what the impact will be.  
NC: What problems will the new scheme face in its implementation? 
LSY: The first question is whether local fiscal revenue will remain sound once the selling of land-use rights [the main source of local fiscal revenue] is no longer an option [after much of the rural construction land is used as rental housing by farmers themselves, instead of for commercial development by developers or local governments]. Another problem is the deep-rooted desire of many Chinese families to own their own home. Given this, it is hard to predict how many people will choose to rent instead of buying. A critical factor in their decision will be whether the new policy of entitling renters equal access to education, healthcare and other public services is implemented well.  

Furthermore, who should take responsibility for building infrastructure for the rental blocks on rural construction land? Can this land be used as collateral to finance infrastructure investment? Under the existing system, local governments build infrastructure after they take the land over for development. Under the new scheme, the land will not be taken over in such a way – if rent is collected by rural entities that build and operate the housing, how will local governments pay for the construction of infrastructure there? 

There’s also the question of investors. Farmers and their rural entities are the developers and operators of rental housing on their land. If this continues, the scheme will not be as successful as predicted. Rural researchers agree that external resources, including capital, ideas and entrepreneurship, are necessary to develop a market. However, rules on who can invest in the new rental market and how have not yet been drawn up.  

Under the existing system, urban developers negotiate with local governments over land use. If the scheme is implemented, village heads will probably negotiate on behalf of villagers with local governments. However, if the above questions are not answered in the regulatory framework, the negotiations will be very difficult, and the scheme may go nowhere. Local governments may knock back the project on the pretext that a parcel of land is not designated for use as rental housing in the planning blueprint. 
Even if local governments approve the project, they may still prohibit using the land as collateral for financing, or exclude outside investors from involvement. As a result, farmers will continue to be the only players in the market and provide only small buildings, as they already do. These problems may only be resolved if implementation policies give rural construction land in those urban villages the same rights as urban construction land.  

When rural entities are both owners and operators, severe corruption among rural officials may be ameliorated. Collective assets, and who benefits from them, must be laid out clearly. Once rural construction land can be traded openly on the market the same way as urban land, farmers will be motivated to keep a close eye on officials in order to ensure their own rights and interests are not infringed.  

Urban developers hold much more capital and operational experience than farmers and rural entities. They know better how to cater to renters. Their participation will improve the rural rental market.  
NC: You said that the sooner China’s local governments wean themselves off “land-oriented finance,” the better. Can you explain this? 
LSY: For more than three decades, land has driven China’s rapid industrialization and urbanization. It is a unique growth model. The government takes the helm of the economy by controlling land. However, the practice of putting land up as collateral to get finance that is needed for growth has built up unprecedented risks for the sustainability of growth, economic restructuring, fiscal and financial systems. 
It is time to halt local governments’ reliance on selling land to finance growth. Local governments in China have to realize this, or they will be trapped by their addiction to land-underwritten finance – until they run out of land to sell. Giving up the addiction brings short-term pain, but paves the way to get out of the woods.  

Making rural construction land in villages in or at the outskirts of cities part of the housing market represents major progress. China’s urbanization so far has been on a dual track. On one track, the government has taken land from farmers and sold it to developers. Urban families will then purchase the housing using a mortgage. Migrant workers, lower middle-income groups and newcomers are on the other track. They cannot afford commercial housing. They rent rooms built by villagers. The first track is beautiful, while the second is filthy. The result is a widening gap between the rich and poor. Migrant workers can only dream of settling down in cities where they work. This type of urbanization is not inclusive. The new scheme is meant to integrate the two tracks.  

Rural construction land in urban villages is a good place to start the integration. Land there is already highly valued on the market. Rental housing already exists there, and new rooms to be built under the scheme will provide housing stock for those who cannot afford to buy commercial housing. The integration of the beautiful side and the filthy side will put China’s urbanization back on the right track.  

That’s why I believe the new scheme should focus on land in “urban villages.” The scheme starts with a trial in cities where such rental conditions have existed for a long time, and demand is high. If the trial is successful, then further land reform is possible.