GRAPHICS

The End of China's Real Estate Boom Means Changes

Mar 9, 2015 | 18:34 GMT

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(Stratfor)

China's decadeslong housing construction boom began to decline in early 2014 and will continue to do so for the next several years. This changes things. With home prices and sales falling, demand for land is declining. So, in turn, are land sales volumes and values — a dynamic that will profoundly affect local government revenues in 2015. The effects will be especially profound if Chinese authorities successfully stop local government-affiliated companies from buying land from their own governments to artificially prop up demand and prices. In this new economic environment, China's leaders are pushing through a set of reforms to rebuild the fiscal foundations of local governments around new local taxes and municipal bond sales rather than land sales.

This change makes creating rural land markets and strengthening farmers' land ownership rights politically feasible for the first time. On March 4, a day before opening its annual session, the National People's Congress announced that the government would launch a rural land reform pilot program. For China's leaders, these reforms will mean two things: First, they will help alleviate rising tensions between farmers and local governments and solve the underlying problem of widening income gaps between rural and urban regions. Second, they will facilitate the next phase of urbanization by better ensuring that rural residents moving to cities receive adequate payment for their land.

Beijing has not yet released a detailed description of the program or a full list of the counties involved. The pilot project, however, follows and will likely build on a 2013 initiative in Guangdong province. This initiative allowed rural landholders to sell their land directly to other residents of the same township, rather than only to local governments. The Guangdong initiative itself was an extension of prior piecemeal reforms that allowed residents of the same village — the lowest of China's administrative divisions — to trade land, raising that threshold to the second-lowest level, the township. The government's current pilot project appears to follow this pattern by raising the threshold one step higher to the county level, albeit on a highly limited scale.

Nonetheless, as the small scale of the newly announced pilot program makes clear, strengthening farmers' land-use rights and creating rural land markets in which landholders can sell to each other or to urban buyers without first selling to local governments will take time — years, not months. For starters, reform cannot be implemented on a significant scale until Beijing is confident that local governments' revenue streams are adequately diversified to absorb the loss of revenues from land sales. That process will take years and, more important, will require a thorough reworking of the fiscal structure that has shaped the Chinese political economy since the mid-1990s. Rural land reform comes in response to deep-set forces in China's society and economy — from rising rural social unrest to the need to modernize agricultural production — and thus will continue in the years to come. Like the other key components of Beijing's "reform and rebalancing" plan, however, it will proceed neither quickly nor cleanly.