Yuan Xiao on Land Quota Markets in China
Kaufman Management Center
44 West 4th Street
New York, NY 10012
Thanks to Yuan Xiao for leading the most recent brown bag discussion at the Urbanization Project. Xiao presented her work on the impact of land quotas on urbanization in China.
Xiao explained that Chinese municipalities face limits on the amount of agricultural land that they can convert to urban use. Municipalities can only convert so much cultivated land into urban use and each parcel of cultivated land that a municipality converts must be offset by bringing a parcel of equal size into cultivation elsewhere. Municipalities can work around this limit by converting unused non-agricultural land into urban use — for example by using land reclamation to generate urban land on coastlines. Because unused non-agricultural land is in somewhat scarce supply, the land use quotas that apply to agricultural land create a binding constraint on urban growth in China.
The municipalities of Chongqing and Chengdu are now piloting a new way to work around the central government’s agricultural land quota. To do so, the municipalities allow private developers to enter into agreements with village collectives in their jurisdiction. The agreements consolidate the residential footprint of the villages while expanding their agricultural footprint.
Here’s how it works: The villagers agree to exchange their detached single-family dwellings for units in a presumably more amenity-rich apartment complex located in the village. The developer then destroys the detached homes and brings the underlying plots into cultivation. Because the apartment complex takes up less land than the previously dispersed dwellings, the redevelopment scheme results in a net increase in cultivated land—an increase that the developer captures as a tradable land quota.
In order to develop new urban land in Chongqing or Chengdu, real estate developers are required to purchase land quotas on an open market. In other words, the land freed up for agricultural use in the villages effectively increases the amount of agricultural land (over and above the central government’s limit) that the municipality can convert into urban land.
Xiao’s preliminary findings suggest that requiring real estate developers to purchase land quotas on the open market ends up reducing the lease prices that Chongqing and Chengdu can charge for developable land. As a result, the land quota market may act as a transfer from municipal government to the village collectives that agree to enter into the village redevelopment schemes.