Following our newsletter of December 2019 Flashback: Revisions on Administrative Regulations on Urban Real Estate Development and Operation, which covered restrictions on foreign investment in real estate development enterprises, we noted that the Land Administration Law of the People’s Republic of China (“LAL”) and the Law of the People’s Republic of China on the Administration of Urban Real Estate (“UREAL”) were due to be revised and re-issued.
The new LAL and UREAL came into force on January 1, 2020 and also apply to the use of land by foreign-invested enterprises. The revisions are aimed, among other things, at the nationwide reform of rural land expropriation, collectively managed construction land and the administration of residential land (see the relevant Decision of the Standing Committee of the National People’s Congress, promulgated on August 26, 2019). The Chinese governmental authorities are required inter alia to stick to the principles of socialist public land ownership and arable land minimum policies, to protect farmers’ interests, to strengthen organisational leadership, to conduct legal publicity and to formulate and improve supporting regulations and rules.
The background to the above reform is the marketisation of rural construction land owned by agricultural collectives in association with unfair land expropriation by governmental authorities, including tragic cases of demolition and relocation disputes with peasants. The PR China has applied a strict dual land market system with respect to rural and urban land for decades. According to the previous LAL, any entity or individual that needed land for the purpose of construction was required to apply for the use of state-owned land. However, rural land owned by agriculture collectives and used by collective economic organisations for establishing local enterprises or building residential housing, or rural land owned by agricultural collectives for use in the construction of township/town public facilities or for public welfare projects, was excluded. In practice, such rural land was first transferred to the state (conversion) by way of expropriation (and requisition), with compensation being granted to the agriculture collectives and to rural families during the subsequent demolition and resettlement process. Expropriation is based on the concept of “public interest”, which has been severely criticised as legally ambiguous in the PR China. Also, agricultural collectives and peasants have strongly criticized the compensation paid as unreasonable and unfair. After conversion of the undevelopable rural land to state-owned developable urban land, the government then granted land-use rights to developers at much higher prices. In this respect, land and housing policy reforms in the PR China have been a focus of public attention for decades, including the special homestead system for rural residential land.
2. Significant Changes
a) Direct sale of rural construction land
Direct market investment in collectively-owned rural operation land is now permitted. The previous LAL required the conversion of plots of rural land into state-owned urban land by the government before it could be used by industrial or commercial enterprises. The new LAL has abolished the relevant Article 43 of the previous LAL and collectively-owned agricultural land for industrial or commercial development no longer needs to be converted to urban construction land.
This move towards a unitary market was preceded by a pilot reform in 33 counties and districts throughout the PR China. Since March 2015, central government has taken measures such as rural land requisition by agreement, marketing of collectively-owned land and the use of urban state-owned land to build apartments and residential quarters for peasants.
Under the new LAL, land-use rights relating to lawfully registered collective operation land (excluding residential land) can be sold or leased directly to enterprises or individuals. In this regard, Article 63 of the new LAL provides as follows:
The owner is entitled to hand over land to an entity or individual for use by means of transfer or lease, and shall conclude a written contract defining the land boundaries, area, construction period, use period, land use, plan conditions and other rights and obligations of both parties. The transaction shall be approved by more than two-thirds of the members of the collective economic organisation or more than two-thirds of the villagers. Also, the new owner of transferred land is entitled in accordance with Art. 144 of the Chinese Property Law to further transfer, exchange, offer as a capital contribution, give as a gift or mortgage this land, save as otherwise stipulated under any law or administrative regulations or under the respective written contract.
b) Clarifications on the expropriation of rural land
In order to avoid abuse of the state’s power concerning land expropriation and to protect the interests of peasants who lose their land, the new LAL explicitly reduces the scope of land expropriation. The following Art. 45 of the LAL has been newly added:
“Where it is really necessary to expropriate the land collectively owned by peasants for the need of public interests under any of the following circumstances, the land may be expropriated according to the law if:
(1) the land is needed for military and diplomatic affairs;
(2) the land is needed for infrastructure construction for energy, traffic, water conservancy, communication, postal services, etc. organised and implemented by governments;
(3) the land is needed for public utilities such as science and technology, education, culture, hygiene, sports, the ecological environment and resource protection, prevention and reduction of natural disasters, heritage conservation, integrated community services, social welfare, municipal utilities, veteran benefit and placement and hero protection organised and implemented by governments;
(4) the land is used for the construction of poverty alleviation and resettlement and government-subsidised housing projects organised and implemented by governments;
(5) within the range of urban construction land specified in the overall land utilisation plan, the land is used for tract development and construction organised and implemented by the local people’s government at or above the county level upon approval by the people’s government at or above the provincial level; or
(6) in any other circumstance under which the land collectively owned by peasants can be expropriated for the need of public interests as stipulated in a law.”
The expropriation of collectively-owned rural land is still based on the concept of “public interest”; however, the circumstances listed in the new Art. 45 of the LAL provide a better understanding of this vague legal concept.
The relevant expropriation procedure has also been improved to protect the rights and interests of peasants, including granting the peasants more rights of participation. The new LAL stipulates in particular that the local people’s government at or above the county level shall announce the scope of expropriation, status quo of the land, the expropriation purpose, compensation standards, resettlement methods, social guarantee and other relevant circumstances before its application for land expropriation. It must also implement a hearing procedure if the majority of the members of the rural collective economic organisation concerned believe that the plan for compensation and resettlement in respect of expropriation of its land does not conform to any law or regulations. The local people’s government at or above the county level must then amend the plan according to the laws and regulations or the results of the hearing, as the case may be.
In the past, the marginalisation of owners and peasants due to unfair and inadequate compensation for expropriation of collectively-owned rural land has affected China’s social development and been fiercely opposed by the local population. Compensation did not reflect the market value at all; rather, the annual yield of the relevant farmland was applied by the government. In this regard, the previous LAL provided that the compensation for the relevant land should be six to ten times the average value of the yield for the three years preceding expropriation. Now, Art. 48 of the LAL implements the concept of a comprehensive land price by providing standards for land compensation and resettlement fees with respect to the expropriated agricultural land, which are to be determined by the province, autonomous region or municipality directly under central government. These governmental authorities must formulate and announce the comprehensive land price of the relevant rural land area taking into account factors such as the original land purpose, land resource conditions, land value, land location, land supply and demand relationship, population and the level of economic and social development. This comprehensive land price must be adjusted or re-stated every three years.
c) Homestead system
Prior to promulgation of the new LAL, each rural household was entitled to own one parcel of land for the purpose of building a house covering an area not exceeding the standards stipulated by the provincial, regional and municipal governments. This concept is known as the “one homestead per household system”. The homestead system has had several meanings during the political and economic development of the PR China and remains legally ambiguous today. The term “homestead” refers to land collectively owned by collective economic organisations which is occupied or used by rural families for residential purposes. The right of the rural families to use the homestead includes the “right to use the land for constructing residences and the facilities to be attached to them according to law” (Art. 152, Chinese Property Law). As such, the right to use a homestead is defined as a special usufructuary right, but rural families have often been deprived of their rights, in particular during land requisition by the government and the migration of peasants from rural villages to urban areas in the course of urbanisation of the PR China.
Now, the new LAL ensures the right of peasants to use their homestead. Under Art. 62 of the LAL, the relevant governmental authorities must consider the interests of rural villagers and take measures to guarantee a house for each household in regions with less land per capita and where not all households are able to own homesteads. In addition, the state allows rural villagers who have become urban residents to dispose of their homestead in return for compensation and encourages rural collective economic organisations and the members thereof to activate and utilise idle housing land and residences. Since rural residential land is excluded from direct sale in the real estate market, even though it includes various plots of idle land and vacated houses, the new regulations are essential to revitalising the rural areas of the PR China.
This land reform will create new opportunities for development and modernisation, including interesting real estate investment prospects outside the major urban areas. It is to be expected that realisation of this new integrative concept of an urban-rural land market will establish a true market for rural construction land in the PR China.
The relevant implementation regulations of the new LAL have not been issued yet. We will closely observe application of the law, to see for example if there are restrictions on the transferability of the right to use collective operation land with respect to different land-use purposes as provided for in the Chinese Property Law (Art. 137), such as industrial, commercial, tourist, entertaining, commodity residence or for other profit-making purposes.