The politics of land use conversion in china case study of a guangdong county 3

Land Leasing Revenue and the Local TreasuryAccording to Ministry of Finance, revenue from the conveyance of land use rights of state-owned land guoyou tudi shiyongquan churang shouru re

Land Use Conversion from 1988 onwards:

Paying for Land Use Rights

The commodification of land in China preceded constitutional changes From

September to December 1987, the Shenzhen government thrice conveyed land use rights through negotiation, tender, and finally through an open auction which fetched

5.25 million yuan for 8,588 square metres of land for housing Although the

conveyance of land use rights in Shenzhen contravenes the 1982 Constitution of the PRC, which forbids the buying, selling and leasing of land, the auction took place in the presence of a member of the Politburo of the Central Party Committee and chairman of the State Economic System Reform Committee.1 Shortly after, Article 10

of the Constitution was amended in April 1988 to legalize the transfer of land use

rights The collection of land use tax in cities and town (chengzhen tudi shiyongshui),

superseding the collection of the land use fee, was also implemented in the same year.2

While these changes should have sparked off a surge in the conversion of

agricultural land, they did not, presumably due to the austerity measures adopted in late 1988 and the tense political situation in China after the 1989 Tiananmen protests and massacre In Guangdong, the taking of cultivated land fell by more than 3,000 hectares from 1988 to 1989, dipping to a low of 2,540 hectares in 1990 Thereafter, the depletion of cultivated land climbed to slightly more than 4,000 hectares in 1991, following which there was a drastic surge to nearly 13,000 hectares in 1992, the year Deng Xiaoping made his second round of southern tour.3 Reforms to China’s land

1 He Guanghuai and Jiang Shunzhang, “Shenzhen shouci paimai tudi shiyongquan” (“Shenzhen

auctions land use rights for the first time”), Liaowang (Observation), No 50 (1987), pp 4-5.

2 Refer to the 1986 Land Administration Law, Article 2; “Zhonghua renmin gongheguo xianfa

xiuzhengan”; Guofa document no 17 (1988), “Zhonghua renmin gongheguo chengzhen tudi

shiyongshui zanxing tiaoli” (“The PRC’s provisional regulations on land use tax in cities and towns”)

3 Refer to Figure 1.4 in Chapter One

use regime resumed in 1990, during which two pieces of legislation were enacted to allow the transfer of land use rights among users and the development and operation

of state-owned land by foreign investors.4 Prior reservations on land speculation seem to have been cast aside Three year later, in 1993, the State Council passed provisional rules on the levy of land appreciation tax on the profits from the transfer of land use rights and buildings and other attachments on land.5

This chapter and the next examine the institutions that shape the incentives and constraints for land use conversion by local cadres from 1988 to the present This is situated in the political and social milieu of the period as China quickened its pace of market reform in the 1990s and sustained high GDP growth for over a decade.6 It is also a period during which bureaucratic corruption became endemic and the wealth gap between and within localities widened.7 Incentives to profit from land are greatly boosted by the commercialization of land and the dual track land management

system, a legacy of the free allocation of land from previous eras The continued revenue squeeze from fiscal recentralization since 1994 has also compelled local government to seek alternative revenue sources increasingly derived from land and land development activities

4 Yeh and Wu, “The new land development process,” pp 337; Guowuyuanling document no 55 (1990),

“Zhonghua renmin gongheguo chengzhen guoyou tudi shiyongquan churang he zhuanrang zanxing tiaoli” (“The PRC provisional regulations on the conveyance and transfer of the land use rights of state-owned land in towns and townships”); Guowuyuanling document no 56 (1990), “Waishang touzi kaifa jingying chengpian tudi zanxing guanli banfa” (“Provisional measures to manage the development and operation of tracts of land by foreign investors”)

5 Guowuyuanling document no 138 (1993), “Zhonghua renmin gongheguo tudi zengzhishui zanxing tiaoli” (“The PRC provisional regulations on land appreciation tax”)

6 Lieberthal, “Governing China,” pp 129; Maurice Meisner, Mao’s China and After: A History of the People’s Republic, (New York: The Free Press, 1999), pp 518.

7 Meisner, Mao’s China, pp 532-34.

Land Leasing Revenue and the Local Treasury

According to Ministry of Finance, revenue from the conveyance of land use rights of

state-owned land (guoyou tudi shiyongquan churang shouru) refers to all land

proceeds the state obtains from the assignment of land use rights of state-owned land through conveyance and other methods, which includes:

1 The total transacted sum (excluding taxes) from the conveyance of land use rights

of state-owned land through tender, auction, bidding and negotiation;

2 The land proceeds in arrears from the transfer of land use rights of allocated owned land or from using originally allocated land for commercial construction in accordance with the law;

state-3 The land proceeds in arrears from the disposal and mortgage of land use rights of allocated state-owned land;

4 The land proceeds in arrears from the transfer of reformed housing (fanggaifang), economical housing (jingji shiyong fang) in accordance with regulations;

5 The land proceeds in arrears from changing the usage and other land use

conditions after the sale of land use rights of state-owned land;

6 Other revenues related to the conveyance or change of land use rights of owned land.8

state-The conveyance of the right to use state-owned land – defined as the process by which the State, as landowner, grants land use rights to the land user for a specific period of time, for which the land user pays the state a land conveyance fee – takes place on the primary market.9 On top of the land conveyance fee, land users incur a number of other payments, including the expropriation cost of the land, various

8 Caizong document no 68 (2006), “Caizheng bu guanyu yinfa ‘guoyou tudi shiyongquan churang shouzhi guanli banfa’ de tongzhi” (“A Ministry of Finance’s notice to promulgate ‘measures to manage the revenues and expenditures of the conveyance of state-owned land’”), Chapter 1, Article 2 Other sources of income to be incorporated under the management of land conveyance revenue are: land rental revenue paid by the lessee to the land resources management department for leasing state-owned land; land proceeds from the lease of houses on allocated land; land compensation, resettlement subsidy, compensation for young crops and attachments and relocation compensation etc (excluding land expropriation management fee) paid by the land user after the acquisition of land use rights through allocation

9 Guowuyuanling document no 55 (1990), “Zhonghua renmin gongheguo chengzhen guoyou tudi shiyongquan churang he zhuanrang zanxing tiaoli” (“The PRC temporary regulations on the conveyance and transfer of the land use rights of state-owned land in towns and townships”), Chapter 2, Article 8

stipulated land fees and land taxes.10 Commercial developers and users purchase

land use rights by means of public auction (paimai), tender (zhaobiao), bidding (guapai) or negotiation (xieyi) with land administration departments at various levels,

acting on behalf of the State.11 The primary land market is monopolized by the State – land collectively-owned by peasants is forbidden from entering the market directly

Land conveyance and state allocation (huabo) constitute the dual-track land system

in the primary land market Non-commercial land users may acquire land use rights through state allocation in accordance with the law, without paying for the rights although urban land use tax and various compensation fees to original landowners are still payable.12 Land use rights acquired on the primary market may be circulated

multiple times on the secondary land market through transfers (zhuanrang) or leasing (chuzu) The transfer of land use rights refers to the process by which the land user

re-transfers land use rights obtained on the primary market through sale, exchange

or bestowal.13 However, the land use rights of land, which has not been invested in, developed and used within the period and according to the terms as stipulated by the agreement on the sale of land use rights, are not to be transferred.14 The lease of land use rights refers to process by which the land user, as the leaser, leases to the lessee the land use rights together with buildings and other attachments on the land,

10 Lin and Ho, “The State, Land System,” pp 420

11 Bidding is supposed to be an open process in which details of the land to be conveyed are displayed

as a public notice in the land transaction centre for a specific period of time, during which highest bidding price is constantly renewed and displayed on the notice until the period expires For further details on the procedures of auction, tender and bidding, refer to Guotu ziyuanbu ling document no 11 (2002), “Zhaobiao paimai guapai churang guoyou tudi shiyong quan guiding” (“Regulations on the conveyance of land use rights of state-owned land through tender, auction and bidding”); Guotuzifa document no 114 (2006), “Guanyu yinfa ‘zhaobiao paimai guapai churang guoyou tudi shiyongquan guifan’ (shixing) he ‘xieyi churang guoyou tudi shiyongquan guifan’ (shixing) de tongzhi” (“Regarding the notice to promulgate ‘Regulations on the conveyance of the land use rights of state-owned land through tender, auction and bidding’ (tentative) and ‘Regulations on the conveyance of the land use rights of state-owned land through negotiation’ (tentative) ”)

12 Guowuyuanling document no 55 (1990), Chapter 7, Article 43; Caizong document no 68 (2006), Chapter 3, Article 22, No 1; See Yang Peichuan, Huang Meng and Song Haiou, “Lun woguo huabo tudi shiyongquan zhidu de biduan ji qi wanshan” (“The shortfalls and correction of China’s system of state

allocated land”), Chongqing daxue xuebao (Journal of Chongqing University), Vol 10, No 6 (2004), pp

146

13 Guowuyuanling document no 55 (1990), Chapter 3, Article 19

14 Ibid

for which the lessee pays a rent to the leaser.15 Land use rights may also be

mortgaged or used as collaterals (diya) on the secondary market.16

According to an analysis by the State Council’s development research centre,

proceeds from the leasing of land use rights comprises more than 60 percent of local governments’ extrabudgetary revenue and is the major force driving growth in local investment.17 In 2004, revenue from land was estimated to be 589 billion yuan.18 This,

together with the rest of the 470 billion yuan of extrabudgetary funds, amounted to

almost 90 percent of total local revenue in 2004.19

At the bottom of the hierarchy, land leasing had also become the main income

source for county and township governments’ extrabudgetary revenue, leading to the

practice of “yidi shengcai, yidi xingzhen” – literally, using land to grow wealth and

invigorate towns.20 Some Chinese scholars estimate that income from land leasing might constitute up to 80 percent of a township governments’ extrabudgetary

revenue, and 20 to 60 percent of some county-level governments’ revenue.21 In three

15 Ibid., Chapter 4, Article 28

16 Ibid., Chapter 5

17 Chang Hongxiao, “Xinyilun tudi tiaokong chengsuan jihe” (How much success for the new round of

land control and management), Caijing (Finance), No 168, 18 September 2006.

18 Dong Ya, “Yusuanwai shouru naru zhengfu shouru fenlei tixi xianshi yueshu fenxi” (The incorporation

of extrabudgetary revenues into the classification system of government revenues: an analysis of the

realistic constraints), Caijing luncong (Collected Essays on Finance and Economics), No 21 (2007), pp

21

19 The total local revenue was 1189.3 billion yuan in 2004; see Zhongguo tongji nianjian 2006, pp 286

In 2004, extrabudgetary fund is refers to “financial fund of various types not covered by the regular government budgetary management, which is collected, allocated or arranged by government agencies, institutions and social organizations while performing duties delegated to them or on behalf of the

government in accordance with laws, rules and regulations.” Refer to Zhongguo tongji nianjian 2005, pp

295

20 Wen Tiejun and Zhu Shouyin, “Tudi ziben de zengzhi shouyi ji qi fenpei” (“The appreciation of land

value and its distribution”), Diaoyan shijie (World of Survey and Research), No.1 (1996), pp 39.

21 Wen Tiejun and Zhu Shouyin, “Tudi ziben de zengzhi,” pp 39; Wu Liping, “Difang zhengfu zai tudi

shichang shang de juese yu diwei” (“The role of local governments in the land markets”), Tongji yu juece (Statistics and Policy Decision), April (2004), pp 52; Zhang Fei, Chen Chuanming and Kong Wei,

“Difang zhengfu jingzheng, nongdi feinonghua yu jingji zengzhang” (“Competition among local

governments, the non-agriculturalization of land and economic growth”), Ziyuan chanye (Resources and Industries), Vol 7, No 5 (2005), pp 88 According to a survey of 13 provinces and 12 cities including

Shanghai, most of the land revenues accrue to prefecture, county, town and township governments The land conveyance fee alone comprised 30 to 70 percent of the prefecture and county governments’ financial revenue Refer to Baohu gengdi wenti zhuanti diaoyanzu, “Woguo gengdi baohu mianlin de yanjun xingshi he zhengcexing jianyi” (“The dire straits of China’s arable land preservation and policy

suggestions”), Zhongguo tudi kexue (China Land Science), Vol 11, No 1 (1997), pp 4

county-level units in Zhejiang, for instance, income from land leasing alone made up

58 to almost 70 percent of the local governments’ extrabudgetary revenue.22

Table 3.1 Revenue from the Conveyance of Land Use Rights, 2006

Land Area (hectare) Conveyance Fee

(million yuan) Net Profits*(million yuan)

Source: Guangdong guotu ziyuan nianjian 2006, pp 501.

Revenue-Sharing Below Provincial Level: Constricting Local Revenues

The growing importance of land income has to seen in the context of the revenue squeeze on local coffers in the post-1994 context Table 3.2 illustrates China’s tax-

sharing system today On top of implementing the tax-sharing system to replace the

pre-1994 fiscal-contracting system, local governments’ discretionary power in

granting tax breaks was curtailed and tax collection was centralized.24 A Chinese analyst suggests,

22 Zhang Hong, “Tudi zhengyong guocheng zhong de difang zhengfu xingwei fenxi” (“An analysis of

local governments’ behaviour in land expropriation”), Zhonggong Zhejiang shengwei dangxiao xuebao (CCP ‘s Zhejiang School of Party Committee Journal), No 4 (2007), pp 68.

23 Refer to “2007 nian zhengfu shouzhi fenlei,” (“Year 2007 classification of government revenue and expenditure”), item no 103013301, “tudi jingshouyi.”

24 Wang Shaoguang, “China’s 1994 Fiscal Reform: An Initial Assessment,” Asian Survey, Vol 37, No 9

(1997), pp 803; Becky P Y Loo and Sin Yin Chow, “China's 1994 Tax-Sharing Reforms: One System,

Differential Impact,” Asian Survey, Vol 46, No 2 (2006), pp 216.

The tax-sharing system drives local governments to seek revenue growth mainly through extrabudgetary and off-budget funds – administrative fees are the mainstay for the former while principal sources for the latter are

agriculture-related retained funds (tiliu) and fees (tongchou), and land sales

revenue related to land development.25

The sections that follow summarize the major changes – expanding expenditure responsibilities and the cancellation of agricultural taxes that constitute a revenue squeeze on local finances at the county level and below.

Table 3.2 China’s Current Tax-Sharing System

Business tax and urban

maintenance and construction

tax of railways, head offices of

banks, head offices of insurance

Income tax of central enterprises

Income tax of local banks,

foreign-funded banks and

non-bank financial institutions

Tariff

Vehicle purchase tax

Vessel tonnage tax

Interest income tax

Value-added tax: central 75%, local 25%

Stock trading stamp duty:

Business tax (other than that of railways, head offices of banks, head offices of insurance companies)

Urban land use taxFixed asset investment adjustment tax

Urban maintenance and construction tax

Property taxVehicle and vessel license taxStamp duty

Arable land use taxContract taxLand appreciation tax

Sources: Tsang Shu-ki and Cheng Yuk-sing, “China’s Tax Reforms of 1994: Breakthrough or

Compromise?,” Asian Survey, Vol 34, No 9 (1994), pp 779; Jean C Oi, Rural China Takes Off

(Berkeley: University of California Press, 1999), pp 217; Sui Xiao, “Goujian guifanhua he xiangdui duli

de defangshui tixi” (“Building a standardized and relatively independent local tax system”), Shuiwu yanjiu (Tax Research), Vol 201, No 2 (2002), pp 35; Guofa document no 85 (1993), “Guowuyuan

guanyu shixing fenshuizhi caizheng guanli tizhi de jueding” (“Regarding the State Council’s decision to implement the tax-sharing finance management system”); Guofa document no 37 (2001), “Guanyu yinfa suodeshui”; Guofa document no 26 (2003), “Guanyu mingque zhongyang yu difang suodeshui”; Wang Yongquan, Ji Zhendong and Li Bing, “Woguo zhengquan yinhuashui fenxi” (“An analysis of

China’s stock trading stamp duty”), Luhang jingyuan xuebao (Luhang Economic School Journal), No 2

(2003), pp 69-70

25 See Zhou Feizhou, “Fenshuizhi shinian: zhidu ji qi yingxiang” (“Ten years of tax sharing: the system

and its impact”), Zhongguo shehui kexue (China Social Sciences), No 6 (2006), pp 112-13 He

observes that county and township governments in central and western China rely on agriculture tax, retained funds and fees levied on villagers, whereas governments in the east on land-related revenues

1) Growing Expenditures and Diminishing Revenues

Besides allocating different revenues to the central and provincial governments, the

1994 tax-sharing system clearly designates expenditure responsibilities between the top two levels of governments Between any two tiers of governments at the

provincial level and below, however, leaders at the higher level have the upper hand

in the assignment of revenue and expenditure responsibilities As a result, fiscal power has shifted upwards while work responsibilities has cascaded downwards

(caiquan zaishang, shiquan zaixia), meaning that revenues converge in the hands of

upper level governments whereas expenditures are passed down to lower level governments.26

The 1994 tax-sharing system has already disadvantaged local governments with a smaller share in the major tax revenues Yet provincial governments often retain a substantial part of the local share, leaving subordinate levels with a further reduced portion.27 As some scholars suggest,

Under the current system, revenues from the VAT, business tax, consumption tax and income tax, which are closely tied to economic progress, mostly accrue to the central, provinces, and prefectural-level cities The portion shared by the county and township levels is very small, and tax collection and administration are assigned to higher level tax departments; local taxes controlled by counties and townships are minor, unstable, and weakly linked

to economic growth Both the elasticity and growth potential of the revenues are low.28

26 Shi Yuping, “Nongcun shuifei gaige hou jiceng zuzhi jianshe de jige wenti” (“After the village tax

reform: some problems for the building of grassroots organization”), Baoji wenli xueyuan xuebao (Journal of Baoji University of Arts and Sciences), Vol 24 No 6 (2004), pp 27; Jin Taijun and Shi

Congmei, “Xiangzhen caizheng zhidu bianqian de lujing yilai ji qi pojie” (“Changes in the fiscal system of

towns and townships: path dependence and solutions”), Xuexi yu tansuo (Study and Exploration), Vol

4, No 165, pp 86

27 For example, the central apportions 75 percent of the VAT, the province takes up another 15 percent, leaving a balance of 10 percent to be shared between the county and the township Furthermore, a lower proportion of the local taxes is allocated to townships, such as 60 percent of the business tax accrues to the province while the county and township share the remaining 40 percent Refer to Liu Shanghe and Jiang Shilong, “Fenshuizhi hou xiangzhen caizheng mianlin de tiaozhan yu duice”

(“Challenges for town and township finances and countermeasures after the tax-sharing system”), Jilin caishui (Jilin Finance and Taxation), No 8 (1994), pp 29-30.

28 Jiang Haichen and Yan Yan, “Qianxi fenshuizhi xia xianxiang caizheng shouru de guanli” (“A

preliminary analysis of county and township revenue management under the tax-sharing system”),

Caihui yuekan (Finance and Accounting Monthly), No 7 (2006), pp 26.

The upper level government, with its relative superiority in political power and

position, often indiscriminately transfers the resources of its subordinate level to its own coffers.29 “Lucrative” departments are assigned to higher level governments while cumbersome ones are to townships.30 Revenue drain at lower levels is

exacerbated by cascading workload and expenditures This is most evident in the case of compulsory education in villages After the tax-sharing reform, only 2 percent

of the expenses for compulsory education come from central coffers The remaining expenditure for this item is broken down as follows: 11 percent from provinces and prefecture, 9 percent from counties and a hefty 78 percent are borne by townships.31

Situated at the lowest rung of the hierarchy, county and township governments, especially the latter, have borne the brunt of this divergence in fiscal power and workload, so much so that their finances have fallen into dire straits Between the county and the township, most revenues accrue to the former.32 In other words, the township coffer is but an empty shell and lacks relative autonomy since most of its revenues are remitted to the county

The late 1990s saw the decline of county-owned enterprises – the mainstay of county revenues – changing the counties’ main tax sources to small-scale commercial and industrial enterprises, the construction and tertiary industries To allay its financial difficulties, county governments vie with townships for revenue, making the

government at the bottom of the five tiers the biggest loser under the tax-sharing

29 Ba Zhipeng, “Woguo fenshuizhi gaige dui xiangzhen caizheng de yingxiang” (“The influence of

China’s tax-sharing system on town and township finance”), Dangshi Bocai (Party History Discovery),

No 12 (2006), pp 37; Yan Yongbo, “Woguo xiangzhen caizheng de kunnan yu wenti fenxi ji zhengce

jianyi” (“Problems and analysis of China’s town and township finance and policy suggestions”), Jinrong jingji (Finance and Economy), No.14 (2006), pp 154; Zhou Feizhou, “Fenshuizhi shinian,” pp 102.

30 Hu Xiaoqin, “Shui wei xiangzhen jianfu” (“Who to cut down the liabilities of towns and townships”),

Xiangzhen luntan (Town and Township Forum), No 10 (2005), pp 7

31 Han Jun, “Caizheng tizhi yu xianxiang caizheng” (The financial system and finances of counties and

townships), Shuishou yu shehui (Tax and Society), No 9 (2003), pp 2; for other township expenses,

see Yan Yongbo, “Woguo xiangzhen caizheng,” pp 153

32 Chen Huagui and Liu Kewen, “‘Fenshuizhi’ dui xiangzhen guoku de yingxiang chu tan” (“The

‘tax-sharing system’ and its influence on town and township coffers: a preliminary analysis”), Jinrong jingji (Finance and Economy), No 7 (1995), pp 45-46.

arrangements For instance, agricultural taxes formerly collected by townships were subsumed into county coffers, leaving to townships only part of the four agricultural taxes and petty revenues from industrial-commercial taxes.33 In another township, all

takings from tongchou, business tax, VAT, and some agricultural taxes were remitted

to the county The township was left with paltry revenues from minor agricultural

taxes such as contract tax , arable land use tax (gengdi zhanyong shui), and

miscellaneous income from fines and administrative fees.34 On top of that, all towns and townships had to bear the cost of staff remuneration.35 The lack of revenue has also affected the operations of village grassroots political organization After the abolishment of village fees and taxes, some villages cannot even pay for basic expenditures such as the cadres’ allowances, salaries and operational expenses, resulting in villagers’ reluctance in taking up cadre posts.36

2) Cancellation of Agricultural Taxes

After the implementation of the tax-sharing scheme in 1994, most of the revenues of governments at the county level and below derived from agriculture, such as the agricultural taxes, the arable land use tax etc.37

33 Ba Zhipeng, “Woguo fenshuizhi gaige,” pp 37

34 Among the four agricultural taxes (nongye sishui) classified as local taxes – the rest being the special

agricultural product tax, arable land use tax and contract tax– agriculture and livestock farming tax generated the most revenue, close to 40 percent all agricultural taxes in 2003 Refer to “What are

agricultural taxes?,” Renmin ribao (People’s Daily), 21 March 2004; Caishui document no 120 (2004),

“Caizhengbu guanyu quxiao chu yanye wai de nongye techanshui youguan wenti de tongzhi” (“A Ministry of Finance’s notice on the relevant issues regarding the abolishment of the special agricultural product tax with the exception of tobacco leaves”); “Woguo jiang zai mingnian quanbu mianzheng

nongyeshui” (“China to abolish agricultural taxes nationwide from next year”), Nongcun caiwu kuaiji (Village Finance and Accounting), No 4 (2005), pp 6.

35 Cao Liqun, “Butong leixing xiangzhen caizheng shouzhi ji qi pingheng wenti de shizheng yanjiu” (“The revenues and expenditures of different types of towns and townships and the problem of financial

balance: an empirical study”) in Nongyebu nongcun jingji yanjiu zhongxin, Zhongguo nongcun yanjiu baogao 2004 nian (China Village Research Report 2004), (Beijing: Zhongguo caizheng jingji

chubanshe, 2005), pp 555

36 Shi Yuping, “Nongcun shuifei gaige,” pp 27; Liu Guochun, Lin Zhonggeng, Xu Xiaohua, and Ma Yaxue, “Nongcun shuifei gaige dui jiceng zhengquan jianshe yingxiang de diaocha yu sikao” (“The impact of village tax reform on the building of grassroots political power: a survey and some thoughts “),

Zhonggong Sichuan shengwei dangxiao xuebao (Journal of Sichuan Party School), No 1 (2005), pp

98

37 Zhan Mingfang, “Fenshuizhi tiaojian xia xianji caizheng de chulu” (“Seeking a way out for county

finances under the conditions of the tax-sharing system”), Hubei caishui (Hubei Finance and Taxation),

No 12 (1994), pp 13

The reclassification of local enterprise and personal income taxes as shared taxes from 1 January 2002 spurred the growth of other local taxes, attesting to the

observation that a fall in a tax revenue source is compensated with a rise in another

to make up for the shortfall in earnings Urban land use tax and urban maintenance and construction tax registered a faster growth after 2001 Agricultural taxes, which

were on the decline from 1999 to 2001, spiked by 47 percent to 42 billion yuan in

2002 (see Figure 3.1) In the less-developed central and western China where township-level revenue from industrial-commercial taxes were marginal, special

agricultural product tax, animal slaughter tax, tiliu tongchou and other ad hoc fees

grew rapidly to equalize the tax burden.38 The resulting burden on villagers was the main reason for the village taxes and fees reform of 2002.39

From 2002 onwards, the animal slaughter tax (tuzhaishui), special agricultural

product tax (nongye techan shui) and agriculture and livestock farming tax

(nongmuye shui) were scrapped in a piecemeal reform of village taxes and fees (nongcun shuifei gaige) On top of taxes, non-tax revenues such as the town and township fees (xiangzhen tongchou), miscellaneous administrative fees and

government funds levied on villagers were also abolished.40 From 2003, agricultural taxes began to dip again (see Figure 3.1) Concomitantly, the same period saw an annual growth of over 30 percent in the takings from arable land use tax It may be deduced that the drop in earnings from agricultural taxes was compensated by a rise

in arable land use tax.

38 Han Jun, “Caizheng tizhi,” pp 2

39 Zhou Feizhou, “Fenshuizhi shinian,” pp 113

40 Among the four agricultural taxes (nongye sishui) classified as local taxes – the rest being the special agricultural product tax, arable land use tax (gengdi zhanyong shui), and contract tax (qishui) –

agriculture and livestock farming tax generated the most revenue, close to 40 percent all agricultural taxes in 2003 Refer to “What are agricultural taxes?”; Caishui document no 120 (2004); “Woguo jiang zai mingnian quanbu mianzheng nongyeshui,” pp 6

Figure 3.1 Some Local Taxes (100 million yuan)

Sources: Zhongguo caizheng nianjian 1998 (China Finance Yearbook 1998) (Zhongguo caizheng zazhishe, 1998), pp 469; Zhongguo caizheng nianjian 2005 (China Finance Yearbook 2005), Zhang

Shaochun et al (eds.), (Zhongguo caizheng zazhishe, 2005), pp 368

Land Revenues

Left with a small piece of the carved-up revenue pie, local governments are

constantly seeking alternative sources to meet growing expenses As mentioned previously, these sources derive mostly from land through the leasing of land use rights, and attendant development in the construction and real estate industries, which will be explored in depth in Chapter Five

Whereas other revenue sources such as the VAT and income taxes have been recentralized with the 1994 reforms, revenue from the leasing of state-owned land had bucked the trend After the PRC Constitution was amended in 1988 to sanction the transfer of land use rights, the State Council circulated a notice to strengthen the management of income from such transfers The income, which was to be used for urban building and land development, was to be shared by the central and local governments in the ratio of 40:60.41 In 1992, the land income was further divided into

income from the conveyance (churang) of land use rights and that from the

41 Guofa document no 38 (1989), “Guowuyuan guanyu jiaqiang guoyou tudi shiyongquan youchang churang shouru guanli de tongzhi” (“The State Council’s notice on strengthening the management of the revenue from the conveyance of land use rights of state-owned land”)

Arable Land Use Tax

secondary transfer (zhuanrang) of land use rights, five percent of each was to be

remitted to the central government.42 Despite the declining proportion that was to be remitted to the Centre, local governments still tried ways and means to retain all land proceeds, such as by under-declaring the sum of land revenue or charging rental for attached structures on land.43 After the implementation of the tax-sharing system in

1994, local governments no longer have to remit land proceeds to the Centre.44From 1 January 1999, however, the land use fee for newly acquired land for

construction (xinzeng jianshe yongdi tudi youchang shiyongfei) – was to be split

between the central and the local governments in the ratio of 30 percent and 70 percent respectively.45 The fee is determined according to the location and grade of

land, ranging from the lowest rate of 10 yuan per square metre in places such as Inner Mongolia counties to the highest rate of 140 yuan per square metre in parts of

Shanghai.46 Current rates, adjusted from the pre-2007 rates, were raised by 100 percent in January 2007 (see Table 3.3) According to an estimate based on 2005 figures, after the adjustment, the total payment for the use of newly acquired land

would increase to nearly 43 billion yuan, which is still lower than the total profit of 76.3 billion yuan from newly acquired land nationwide.47

42 Caizongzi document no 172 (1992), “Caizhengbu guanyu banbu ‘guanyu guoyou tudi shiyongquan youchang shiyong shouru zhengshou guanli de zanxing banfa’ he ‘guanyu guoyou tudi shiyongquan youchang shiyong shouru ruogan caizheng wenti de zanxing guiding’ de tongzhi” (“The Ministry of Finance on the promulgation of ‘provisional measures on managing the collection of revenue from the conveyance of the land use rights of state-owned land’ and ‘provisional regulations on some financial issues relating to the revenue from the conveyance of the land use rights of state-owned land’”)

43 Baohu gengdi wenti zhuanti diaoyanzu, “Woguo gengdi baohu,” pp 6

44 Chan Kam Wing, “Urbanization and Urban Infrastructure Services in the PRC” in Christine P W

Wong (ed.), Financing Local Government in the People’s Republic of China (Hong Kong: Oxford

University Press, 1997), pp 109; Zhang Hong, “Tudi zhengyong guocheng,” pp 68

45 For a definition of the fee, refer to Caizong document no 48 (2006), “Guanyu tiaozheng xinzeng jianshe yongdi tudi youchang shiyongfei zhengce deng wenti de tongzhi” (“Regarding the notice to modify the policy and other issues on the land use fee for newly acquired land for construction”)

46 Refer to Caizong document no 48 (2006), appendix 2

47 Sun Rongfei, “Caizhengbu, guotu ziyuan bu, yanghang lianhe fabu tongzhi: xinzeng jianshe yongdi shiyongfei tigao yi bei” (“A Joint Notice from the Finance Ministry, MLR and the Central Bank: payment

for newly acquired land for construction to be doubled”), Diyi caijing ribao (Top Financial Daily), 21

November 2006

Table 3.3 Standard Rates of Payment for Newly Acquired Land for

Construction (yuan per square metre)

Source: Caizong document no 48 (2006)

The entire sum was to be used for the development of agricultural land.48 A 2004 document clarified that the fee was to be paid to national coffers at all levels, after which 30 percent would be remitted to the Centre, and 70 percent shared among provinces, prefectures and counties accordingly to agreed rates.49 Control over this fee was tightened again from 1 January 2007, from which all 70 percent of the fee accruing to local governments would be centralized and paid to the national coffers at the provincial level.50

These regulations, however, had not diminished the importance of land to local treasury as reflected in the popular saying that “the first coffer banks on industry, the

second coffer banks on land” (diyi caizheng kao gongye, di’er caizheng kao tudi).51 In Shenzhen, for instance, revenue from land leasing comprised as high as 80 percent

of total local government revenues in the 1990s.52 As of 2006, the municipal’s

revenue from land leasing was 12.9 billion yuan, the third highest in the whole of

Guangdong province after Guangzhou and Foshan (see Table 3.1).

48 Refer to the Land Administration Law, Article 55

49 Caizong document no 85 (2004), “Guanyu jinyibu jiaqiang xinzeng jianshe yongdi tudi youchang shiyongfei zhengshou shiyong guanli de tongzhi” (“Regarding the notice to further strengthen the collection, usage and management of land use fee for newly acquired land for construction”) The division of the remaining 70 percent of land conveyance fee varies from place to place According to Hsing You-tien, provinces and prefecture-level cities get 20 percent each whereas counties keep the remaining 30 percent Townships’ share is determined by county-level governments, which can be as low as 5 to 10 percent See Hsing You-tien, “Brokering Power and Property,” pp 108

50 Land Administration Law, Chapter 5, Article 55; See also Caizong document no 48 (2006); Caizong document no 68 (2006), Article 18, No 3

51 Zhou Feizhou, “Shengcai youdao: tudi kaifa he zhuanrang zhong de zhengfu he nongmin” (“Money- spinners: government and peasants in land development and the transfer of land use rights”),

Shehuixue yanjiu (Sociological Study), No 1 (2007), pp 11.

52 Peterson, “Land Leasing and Land Sale,” pp 6

The numerous fees accompanying land development further enhanced its

profitability.53 Although the arbitrary levying and collection of fees is illegal, a

substantial part of the government’s takings from land was derived not from direct taxes but from ad hoc fees under various pretexts (see Table 3.4).54 In the Nanhai district of Guangdong, for instance, to convert 6.7 square metres of land to non- agricultural use by a transfer of land use rights incurred the following costs: arable

land use tax of 4,000 yuan, land expropriation administrative fee of 1,500 to 1,800

yuan, cultivation and reclamation fund of 10,000 yuan, agriculture insurance of 6,000 yuan, and irrigation construction fee of 1,333 yuan; to convert the same land area by

a conveyance of land use rights incurred the preceding costs and an additional

amount for buying over the rights, which was in the range of 10,000 to 25,000 yuan for conversion into industrial use, 12,500 yuan for commercial use, and 80,000 to 100,000 yuan for housing development.55 It was estimated that the income generated from land leasing can be as high as 18 times the cost of acquiring land.56

Moreover, land leasing sets off a “domino effect” that increases governments’

takings As a land bureau official in Beijing’s Daxing district suggests, Daxing district, which had around 100 development zones before 2003, earned hundreds of million

yuan every year from land leasing After leasing land and attracting investments, the

government earned revenue from providing water and electricity, on top of tax

revenues from industrial development and the subsequent taking off of the tertiary industry.57

53 See Zhang Hong, “Tudi zhengyong guocheng,” pp 68, for the miscellaneous fees pertaining to land transactions collected by various government departments

54 Lin Shumin and Yang Xilian, “Woguo tudi shuishou tizhi gaige de sikao” (“Some thoughts on the

reform of China's land tax system”), Xiangzhen jingji (Town and Township Economy), No 3 (2006), pp

58

55 Zhang Fei et al., “Difang zhengfu jingzheng,” pp 88

56 Wang Jun, “‘Tudi caizheng’ de dongli jiegou” (“The incentive structure of ‘land coffer’”), Liaowang xinwen zhoukan (News Watch Weekly), No 37 (2005), pp 26.

57 Chen Xiao, “Kaifaqu shoudi: yi pan meiyou xia wan de qi” (“Enclosure of land for development zones:

an unfinished game of chess”), Xinwen zhoukan (News Weekly), No 11 (2004), pp 38-41.

The real estate industry, in particular, is an attractive source of revenue In many cities in Beijing, Tianjin, Guangdong, Hunan, Shaanxi and other provinces, fees from real estate development are subsumed under the miscellaneous land administrative fees.58 Moreover, local governments have the incentive in promoting real estate development as most of the tax revenues related to real estate development are local taxes.59 Local governments raise large sums of revenue through land speculation.60 Government officials and property developments often collude to manipulate land and property prices through hoarding land or properties.61 Rebuking the claim of land shortage, the MLR clarifies that the land available for real estate development had in fact grown by 4 percent in 2004 despite a moratorium on the approval for land use conversion in the same year In 2005 alone, developers were holding on to 400,000

mu of land that was overdue for development.62 Land speculation by state agents and developers has been widely cited as the cause of high property prices in China.63

Table 3.4 and 3.5 list the multitudinous revenue sources from land development, including a variety of taxes classified under the within-budget funds, miscellaneous and ad hoc fees as well as land conveyance fee that constitute the extra-budgetary funds.

58 Guotu ziyuanbu tudi liyongsi diaoyanzu, “Chonggou tudi shouyi fenpei tixi, shixian tudi peizhi xiaolü yu gongping” (“Restructuring the system of land proceeds distribution to achieve efficiency and fairness in

land allocation”), Guotu ziyuan tongxun (Land and Resources News), No 4 (2002), pp 64.

59 Chen Xiao, “2005 nian: fangjia gongjian nian” (Year 2005: tackling high housing prices”), Zhongguo xinwen zhoukan (China News Weekly), No 1-2 (2006), pp 22.

60 Zhang Xiaojing and Sun Tao, “China’s Current Real Estate Cycle,” pp 64

61 Luo Tao, “Shui zhenzheng chengzhe gao fangjia?” Difang zhengfu!” (“Who is propping up high

property prices? Local governments!”), Xinhua meiri dianxun (Xinhua Daily News), 22 March 2005, pp 1; “Ren Zhiqiang biaoshi: zhengfu chaodi shi fangjia maodun de zhuyao yuanyin,” Tianjin jingji diantai (Tianjing Economic Station), 19 October 2005; Liu Shan, “Zhengfu kaifashang shi chaodi de hengha erjiang” (“The government and property developers are partners in land speculation”), Zhonghua gongshang shibao (Chinese Industrial and Commercial Times), 5 June 2006, pp 003 ; Xu Shuangmin

and Mo Guangcai, “Fangdichan ‘re’ zhong de difang zhengfu ‘jingjiren’ xingwei” (“The economic

behaviour of local governments in the property fever”), Changjiang luntan (Changjiang Forum), No 5

(2007), pp 45

62 Dong Wei, “Guotu ziyuanbu boche ‘dihuanglun’” (“The Ministry of Land and Resources rebuked ‘land

shortage allegations’”), Zhongguo jianshebao (China Construction News), 6 July 2007, pp 007.

63 Luo Tao, “Shui zhenzheng chengzhe gao fangjia ?”