Making Land Fly: The Institutionalization of China's Land Quota Markets and Its Implications for Urbanization, Property Rights, and Intergovernmental Politics
By MASSACHUSETRS W PTU OF TECHNOLOGY Yuan Xiao
M. A. in Political Science University of Toronto, Toronto, Canada (2005) LIBRARIES B. A. in International Politics, B. A. in Economics Peking University, Beijing, China (2004)
Submitted to the Department of Urban Studies and Planning in partial fulfillment of the requirements for the degree of
Doctor of Philosophy in Urban and Regional Planning
at the
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
September 2014
0 2014 Yuan Xiao. All Rights Reserved
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Making Land Fly: The Institutionalization of China's Land Quota Markets and Its Implications for Urbanization, Property Rights, and Intergovernmental Politics
by
Yuan Xiao
Submitted to the Department of Urban Studies and Planning on August 19, 2014 in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in Urban and Regional Planning
ABSTRACT
This dissertation investigates China's land quota markets, a recent land policy innovation that virtually transfers urbanization permission from the countryside to cities. To circumvent national government's quota restrictions on converting agricultural land to urban land, local governments have created new land quotas by demolishing sparsely located farmhouses, and resettling peasants into high-density apartments. These quotas are then sold in new land quota markets to real estate developers.
I find that China's land quota markets alter the traditional calculus of location and land use theory: the rural hinterlands have suddenly become valuable to urban land markets, particularly for industrial projects. In fact, the more distant a village is, the more likely it will be involved in land quota markets. Remoteness becomes a spatial advantage. These dramatic changes are the result of reconstructing property rights in land. The quotas traded on the market are a right to convert land use from rural to urban, separate from development rights to invest in specific properties. These institutional changes were initiated by recalibration of inter-governiental relationships: the Central Government delegates more autonomy to local governments and the municipality centralizes control over land from subordinating district and county governments.
The implications of the new land quota markets are profound and many. The quota markets further draw land resources away from the rural areas to urban areas, and reinforces the imbalances between big and small cities. Since these institutional changes are driven by public finance at its core, the scale of our analysis needs to be regional rather than at the scale of the city. Lastly, quota markets have mixed welfare impact on different types of peasants. For peasants on the urban fringe, the scale of land taking is likely to increase, displacing more peasants than without the quota markets. For peasants in the deep rural areas, their housing conditions and access to infrastructure and public services are improved. However, their transition to urban lifestyle takes place before their transition to urban mode of production, therefore their long-term economic prospect is dismal. Thesis Supervisor: Annette M. Kim Title: Associate Professor
Thesis Reader: Jinhua Zhao Title: Assistant Professor
Thesis Reader: Lily. L. Tsai Title: Associate Professor
4 Acknowledgements
Writing this dissertation has been an empowering experience. My deepest gratitude to the following people for making this project possible:
Professor Annette M. Kim, my advisor, for her never failing confidence in me; for holding up the highest academic standards while being the most understanding and caring person; for being my mentor, inspiration and role model.
Professor Lily L. Tsai, for shaping my research methods and way of thinking in critical ways; for opening up the world of rural China to me as a researcher - I will not forget the hot summer days which we spent together interviewing peasants.
Professor Jinhua Zhao, for challenging me to bring out the best of my research and for leading me to find my passion in teaching. His dedication to nurturing students has left an important mark on me.
Being parents themselves, all three professors of my dissertation committee have given me enormous support at times when I struggled to find a work-life balance.
Mr. Victor M. Vergara of the World Bank, for single-handedly shifting my career path to urban planning; for continuing to be a mentor and guiding me at every critical step; for showing me how to be humble and curious and to keep a good sense of humor even in the most challenging situations.
Professor Karen R. Polenske, for supporting me emotionally, financially and academically throughout my doctoral studies. Her genuine care has made the impossible possible for generations of students.
Professors Diane Davis, Yu-Hung Hong, and Yasheng Huang, for their guidance and support at various stages of my study and research.
Ms. Sandy Wellford and Ms. Kirsten Greco, for helping me clear many administrative hurdles with ease, especially when I was in non-residence and away from campus.
My dear friends and colleagues at the Department of Urban Studies and Planning and from other parts of MIT - Li Xin, Fang Wanli, Chen Yang, Xu Jingsi, Hou Yue, Xue Lulu, Atul Pokharel, Amit Prothi, and Kyoung Shin, for sharing good laughter as well as frustrations, and for providing great help to me with my research.
Jie Dalei, Chen Ling, Fang Fang, Li Shuai, Gao Xuesong, and Yang Xinyue, for helping me establish key contacts in various Chinese cities-my fieldwork was fruitful thanks to them.
5 My key informants -the many government officials, real estate developers, rural investors and villagers that I had interviewed, for introducing me to their worlds, for sharing invaluable insights about China's rural-to-urban transformation. This dissertation is about them.
Ms. Susan Spilecki, for her prompt and first-rate editing, and for teaching me the psychology of writing.
Stephen Kennedy, Zou Linyi, and Liu Liu, for their indispensable help with graphics, GIS mapping, and data cleanup.
Lastly, my family-my parents Long Qunynig and Xiao Mansheng, my in-laws Li Bingyi and Qi Guoxin, my sister Xiao Ping and the family, my uncle-in-law Li Jiansong and the family, for their unconditional love and support in all aspects. I am deeply indebted.
My daughter Qi Mulan, for being mom's sunshine, and for injecting so much energy and positivity into me.
My dear husband Qi Haotian, for his love, trust, and support through the ups and downs of this long journey; for sharing intellectual pursuits and enriching my life.
6 Dedicatedto my parents, Long Qunying and Xiao Mansheng &(1$$$$]$: aN, 14*-t
7 Table of Contents List of Tables...... 10 List of Figures ...... 11 Chapter 1 Introduction: The Emergence of the Land Quota Markets ...... 12 1. 1 M otivation of R esearch ...... 12 1. 2 Literature Review and Theoretical M odel...... 17 1. 2. 1 Fiscal Socialism 2.0: De-spatialized Land Transfers and Spatialized Politics ...... 17 1. 2. 2 Revisiting Urban Spatial Economics ...... 22 1. 2. 3 Land Policies, Property Rights Evolution, and Chinese Politics ...... 24 1. 2. 4 Research Questions ...... 29 1. 3 Research Design and Data Collection ...... 30 1. 3. 1 C ase Selection ...... 30 1. 3. 2 D ata Collection ...... 34 1. 3. 3 Interviewing Government Officials ...... 35 Chapter 2 Institutional Context of the Land Quota Markets: Public Finance, Land Use Planning, and Inter-governmental Relations in China ...... 41 2. 1 Land Commodification and Public Finance in China...... 41 2. 2 Land Use Planning and Urban Growth Control through Quotas...... 44 2. 2. 1 Land Use Planning and Arable Land Preservation ...... 44 2. 2. 2 Inter-governmental Relations in Land Use Planning ...... 51 2. 2. 3 The Annual Land Use Plan and Operationalization of the Quota System...... 53 2. 2. 4 Problems with China's Land Use Planning and Quota System...... 57 2. 2. 5 The "Municipality Over County" Governance Structure and the Demand for Land .60 2. 2. 6 Negotiating for M ore Quotas ...... 65 2. 3 Overcoming the Quota Constraints...... 68 2. 3. 1 The Spatial Mechanism of the Land Quota Market Experiment ...... 70 2. 3. 2 The Justification of the Land Quota Market Experiment ...... 3...... 73 2. 4 Chapter Conclusion ...... 76 Chapter 3 The Industry for Creating New Tradable Land Quotas: The Demolition and Reconstruction of the Rural Countryside ...... 78 3. 1 The Story of Dazhu Village...... 79 3. 2 The New Quota Developers ...... 86 3. 3 Altered Properties,Changed PropertyRights ...... 88 3. 3. 1 Alienating Development Right from the Rural Collective ...... 89 3. 3. 2 Altering Peasants' Ownership of Housing ...... 91 3. 4 A Typology of China's Quota Developers ...... 95 3. 4. 1 Government as Investors and Developers...... 97 3. 4. 2 Private Entities as Quota Developers and Investors ...... 99 3. 5 C hapter Conclusion...... 102 Chapter 4 Who Uses the Quotas? Market Demand for the Newly Created Land Quotas ..104 4. 1 CreatingDemand in the PrivateSector ...... 106 4. 1. 1 The Chongqing Case: Giving Real Estate Developers Special Leverages ...... 11 4. 1. 2 The Chengdu Case: Imposing Quota on Real Estate Developers ...... 123 4. 2 Real Demandfrom the Public Sector ...... 133 4. 2. 1 New Quotas for Industrial Development in the Suburbs ...... 133 4. 2. 2 Municipal Investment Corporations as Quota Buyers ...... 136 4. 2. 3 Industrial Land Users as Quota Buyers ...... 138 4. 3 IndustrialDevelopment as the Beneficiary of the New Quota Market...... 140 4. 3. 1 Limited Increase in Land Supply ...... 140 4. 3. 2 Same Focus on Industrial Projects, Different Ways of Allocating Quotas...... 143 4. 4 ChapterConclusion...... 146 Chapter 5 The New Quota Trading Markets and Politics of Institutional Design...... 150 5. 1 The Precedentof Linking Programs ...... 151 5. 1. 1 W hat is a Linking Program ...... 152 5. 1. 2 Quota Trading: An Upgraded Version of Linking Programs ...... 156 5. 2 The Chengdu Case...... 157 5. 2. 1 Trading Quota Certificates in Chengdu ...... 157 5. 2. 2 The Demand for Quotas, the Reactions from Sellers and Buyers, and Price D eterm ination ...... ----...... 162 5. 2. 3 Inter-governmental and Intra-governmental Politics of Quota Trading in Chengdu 167 5. 3 Chongqing ...... ------... -----...... 177 5. 3. 1 Planning and Assigning Quota Generation in Chongqing ...... 177 5. 3. 2 Manipulating Quota Trading in Chongqing ...... 181 5. 3. 3 Inter-governmental and Intra-governmental Politics of Quota Trading in Chongqing ...... 188 5. 4 ChapterConclusion...... 95 Chapter 6 The Implications of China's New Land Quota Markets: Reconfiguring Space, Property Rights and Intergovernmental Relationships ...... 199 6. 1 Making Land Fly: Spatial Changes in Rural and Urban China ...... 200 6. 2 Reconceptualizationof PropertyRights ...... 205 6. 2. 1 Changing Property Rights in China's Transformation ...... 206 6. 2. 2 Land Conversion Quota as Property Right ...... 209 6. 3 The Politics and Evolution of the Quota Market ...... 213 6. 3. 1 Local Governments and the Central Government...... 214 6. 3. 2 Conflicts inside Local Governments: Municipal and County Governments ...... 219 6. 3. 3 Local Governments and Businesses: Reinforcing Differential Treatment ...... 225 6. 3. 4 Local Governments and Peasants: Deepened Rural-Urban Divide ...... 227 6. 4 Chapter Conclusion...... 235 Chapter 7 Conclusion: Lessons from the Land Quota Markets ...... 237 7. 1 Findings about the Land Quota Markets ...... 238 7. 1. 1 Tracing Institutional Changes ...... 238 7. 1. 2 Interpreting Institutional Changes...... 242 7. 2 Research Implications:Turning Our Attention to the Hierarchyof Cities ...... 246 7. 3 Policy Implications:Planning Is Not Engineering ...... 248 Annex: List of Interviews...... 252 Bibliography ...... --...... ------...... 257
9 List of Tables
Table 1-1 Conceptualization of Land Rights and Land Politics ...... 21 Table 2-1 Gaps between Land Supply and Land Demand in Different Kinds of Districts and C ounties...... --...... ------...... 65 Table 3-1 Combinations of Land Quota Investors and Developers...... 96 Table 4-1 Procedure of Using Quotas in Chongqing, before and after the Establishment of the Q uota M arket ...... 122 Table 4-2 Procedure of Using Quotas in Chengdu, before and after the Establishment of the Quota M arket ...... 125 Table 5-1 Breakdown of Rural Development Land Reclamation Tasks Assigned to District- and County- Governments of Chongqing, Year 2011...... 178 Table 5-2 Breakdown of 2012 Minimum Protection Price of Land Quota in Chongqing ...... - --- -. ------...... 186 Table 6-1 Distribution of Quota Generation Projects across County-Level Jurisdictions in Chengdu (2006 - 2011) ...... 203
10 List of Figures
Figure 1-1 Key Relationships in Fiscal Socialism 1.0 ...... 20 Figure 1-2 Key Relationships in Fiscal Socialism 2.0 (Land Quota Markets) ...... 20 Figure 1-3 Selection of Case Cities ...... 31 Figure 2-1 Relative Political and Economic Positions of Districts and Counties in a M unicipality ...... ------...... 65 Figure 2-2 Spatial Mechanism of "Linking the Decrease of Developable Land in Rural Areas with the Increase of Developable Land in Urban Areas" ...... 71 Figure 3-1 Demolished Farmhouses ...... 84 Figure 3-2 Residential Land Reclaimed for Farming ...... 85 Figure 3-3 New Apartment Buildings for Peasants ...... , ...... 85 Figure 3-4 Cover Page of a Sample Land Quota Certificate Issued in Chengdu ... 94 Figure 3-5 Inner Page of a Sample Land Quota Certificate Issued in Chengdu...... 94 Figure 4-1 Districts and Counties Grouped into Three Development Zones in Chengdu ...... 1099...... Figure 6-1 Number of Quota Generation Projects By County in Chengdu ...... 203 Figure 6-2 Distribution of Official Quotas ...... 221 Figure 6-3 Flows of New Quotas in Linking Programs...... 221 Figure 6-4 Flows of New Quotas in the Quota Market ...... 223 Figure 7-1 Decentralization and Recentralization of Land Control...... 244
11 Chapter 1 Introduction: The Emergence of the Land Quota Markets
1. 1 Motivation of Research
On December 4, 2008, in Chongqing, a metropolis in Western China and also the largest municipality in the country, a special kind of auction was going on. Real estate developers were raising bids for something called "land quota certificates." After the first developer won the bid, people in the room gave "thunder-like" applause. Among the clapping audience were the Mayor and Deputy Mayor of Chongqing, and more importantly, the Party Secretary of Chongqing who was also a member of the Central
Politburo of the Communist Party of China, Bo Xilai, and Deputy Minster of Land and
Resources of the Central Government, Lu Xinshe.' What is a "land quota certificate"?
Why has it attracted such high-level political attention in China?
A land quota certificate represents a recent land policy innovation by Chinese local governments. Real estate developers holding land quota certificates can use them to convert agricultural land into urban development projects. But to create this certificate
'Author Unknown. 2008. "Chongqing Nongcun Tudi Jiaoyisuo Guapai Chengli ( A 3Z ) [Chongqing Rural Land Exchange Established] ." Chongqing Chenbao (_/fMkR) [Chongqing Morning Post], December 4. http://cqcbepaper.cqnews.net/cqcb/html/2008- 12/05/content_290252.htm.
12 involves a drastic process of densification in the rural areas. Sparsely located farmhouses are demolished, and peasants resettled in high-density apartments. The reduced built-up footprint in rural area is then turned into a "quota" and transferred to the urban area. Such a transfer does not trade actual land parcels, but rather virtually transfers development permission from the countryside to cities. The local governments have established a new market, the land quota market, to facilitate the exchanges.
Why has the quota market attracted such high-level political attention? It promises to solve some of the most challenging land use issues facing China. To be sure, policy makers and urban planners around the world strive to find a balance between competing uses of land. In China, this balance is especially hard to strike. Local economic growth, industrial development, housing provision, farmland preservation and peasants' livelihood all hinge on what the government allows and does not allow people to do with land.
The current model of land management in China has produced some stark results. Rapid economic growth has been taking place with a set of property rights institutions that distinguish and disconnect urban and rural worlds. While urban land is owned by the government and its use rights are transacted in open markets, rural land is owned by collectives, which are not allowed to transfer it freely. Peasants cannot sell their land to urban users without going through a government taking process first. Local governments acquire land cheaply from peasants and leverage it to attract businesses and investment.
This "land grab" has been an important source of revenues for local governments since
13 the late 1990s. The costs of growth and urban expansion are borne disproportionately by peasants through depressed labor prices and dispossession of land. Social instability is exemplified in repeated and fierce confrontations between peasants and the government
(Guo 2001; O'Brien and Li 2006; Yu 2007). At the same time, urban land development has been inefficient. Land investors, rather than land users are driving uses, resulting in waste of land in some cities, and severe land shortage in others (Zhu 2002). When the
Central Government seeks to regulate land uses at the local level, local governments decry the top-down control that does not appreciate local differences in the demand for land. Within China's current institutional setup, it has been hard to find a solution that will provide land efficiently to the market while protecting the rights of peasants.
Land quota markets seem to offer promising solutions in several aspects: first, it may relieve the high demand for developable land in cities through densifying sparsely used rural residential land, and transferring the land to urban periphery. Second, it may improve the welfare of peasants in the deep rural area who were previously not benefiting from urban growth. Last but not the least, land quota markets could potentially reduce government-peasants conflicts-unlike in typical land takings by the state, peasants can make decisions about whether or not to sell their land rights on an individual and voluntary basis.
This high-profile experiment has attracted wide attention. Local governments of pilot cities, such as Chengdu and Chongqing, have hosted numerous delegations from other local governments across the country, to learn about their "advanced experience."
14 Academia has turned its attention to this issue and organized conferences discussing the
design and implications of quota markets. Economists such as Zhou Qiren of Peking
University advocated for it to expand from a few pilot cities to an integrated land quota
market covering the entire country.
At the same time, controversies and confusion about the land quota markets have
emerged. It is unclear whether the quota markets provide a new mechanism to share the
benefits of urban development with peasants, or is just another way of grabbing land that
further weakens the property rights of peasants. Some criticize that the quota market is
against the will of peasants, a "taking in disguise." Peasants in Tianjin, one city in
northern China running a similar quota market, openly voiced their discontent by sending
2 the government a petition with more than two hundred signatures from a village.
Others worry about its implications for the real estate industry. Since developers now
have to buy quotas before they buy actual land parcels, quota trading has added new
complexity and uncertainty to land transactions, potentially increasing already exorbitant
real estate prices. Inside the pilot cities, officials' opinions vary too. Some express
confusion about the concept of quotas: what kind of right does a quota represent and who
holds this right? Who should be compensated and how much should they be compensated?
With these questions, at county and township levels, governments hesitate to promote this
new policy designed by the municipal government. The Central Government, which
2Wang (ii), Xiaoqiao (/JT). 2008. "Tianjin 'Tugai': Yichang Zishang Erxia De Gaige ()TC' ': Jyj r Ilf J~F ) [Tianjin 'Land Reform': A Top-down Reform]." Nanfang Zhoumo (WhN'$) [Southern Weekly], April 9. http://www.infzm.com/content/114.
15 initially allowed and endorsed the practice, has been back and forth in its opinion, and has been watching local experiments carefully. Nobody has a clear answer as to whether the quota market is innovative and efficient, or deceptive and distorting.
The new phenomenon of the land quota market and the opposing opinions about it piqued my interest. To me, this is a story of fundamental institutional change. The confusions and controversies around the quota market demonstrate people's disorientation to this change. Between 2008 and 2013 in Chongqing, nearly 670,000 rural households were involved in quota generation projects; 390,000 mu (about 64,250.4 acres) of rural residential land was consolidated.3 By 2013, 29 provinces out of China's total 34 had been allowed to run some variations of the quota program. The quota market is affecting land use patterns and peasants' welfare in a vast number of Chinese cities at a historic moment.
By now, we are very familiar with stories of drastic institutional changes in China's enormous economic and social transformation in the past decades. The quota market epitomizes the "China speed" and "China scale" of urbanization. Changes in China are not just quick and vast, but happen in the most unimaginable ways. Using a government officials' own words, the quota market is about making land fly from the countryside to the cities. How can something as immobile as land fly? What happens when land is flying?
The potential impact of land quota markets triggered my imagination about China's
3 Yan (4), Yinchan (VO). 2014. "Chongqing Dipiao Wunian Kao: Shanwei Wanquan Bianxian de Sheji Chuzhong (S_E-Jiiit% JI) [Five-Year Evaluation of Land Quota Certificates in Chongqing: Original Intentions Not Fully Realized]." Dichan Zhongguo Wang (AtP'n111 M) [Real Estate in China].http://house.china.com.cn/home/view/716208.htm.
16 future transition. Would the land quota markets lead to better clarification and protection of peasants' individual rights? Or, would it perhaps hasten dispossession of land by peasants, leading to their final exodus from the countryside? The literature review below explains the significance of the new phenomenon and how it requires us to expand our understanding of urban economics, property rights, and Chinese intergovernmental relations.
1. 2 Literature Review and Theoretical Model
What is unusual about quota markets is "the flying land" phenomenon it has created: land rights generated in the rural areas "fly" to cities and suburbs. Land rights have always been a highly contentious topic and competing claims to land result in tense politics.
While my dissertation focuses on China and one of its particular institutional innovations, it has implications for literature about property rights, planning, and urban economics. By reconfiguring the spatial dimension of property rights, land quota markets have changed the calculus of land values, and the inter-governmental relationships around land conversion.
1. 2.1 Fiscal Socialism 2.0: De-spatialized Land Transfers and Spatialized
Politics
Quota markets take place in the broader context of decentralization and urbanization in
China. What my dissertation about quota markets contributes to the literature is to show thoroughly that local land development and institutional changes are driven by public
17 finance at its core and that the scale of our analysis needs to be regional rather than at the scale of the city. The model of Fiscal Socialism (Kim 2008) had already turned our attention to the link between land development and local public finance in transition countries. Fiscal Socialism posits that under political and fiscal decentralization, local governments provide land development rights to the market and in exchange they ask private developers to fund infrastructure and public services. This helps local governments meet citizens' demand for public goods provision, which local governments are responsible for, but often lack the fiscal capacity to provide. The model of Fiscal
Socialism emphasizes the coordination of interests in both government and society.
I term my theoretical framework "Fiscal Socialism 2.0." The "de-spatialization" and
"re-spatialization" of China's land development rights transfers have connected actors that were previously not included in the earlier generation of the land game. In addition, while before we treated local governments more or less as a whole, now we need to dissect the local government, and examine the internal conflicts and cooperation.
Fiscal Socialism (the 1.0 version) is most relevant when describing the dynamics of a single city in the context of urbanization and decentralization. For example, the cities in my study, regardless of their size and political importance, are all short of fiscal resources sufficient to provide public goods after decentralization. Local governments capitalize on land conversion, taking advantage of the increasing land value in rapid urbanization. In this process, the main interests to be balanced and aligned are between the government
18 and the real estate developers, as well as between governments and the peasants around
the very piece of land to be converted.
However, with the emergence of the quota market, different levels of jurisdiction are
involved in land-trading relationships. The theory of Fiscal Socialism needs to be further
developed in order to unpack the complicated phenomenon. I argue that we should focus
on the system of cities, rather than a single city as the unit of analysis. In my study, big
cities are not just economically more advanced than small cities, but also politically more
powerful, due to the "municipality over county" structure. The politics around land development now are more about intergovernmental relations, as reflected in contestations around changing the size of land conversion quotas and the distribution of quotas among competing counties and districts. My observation concurs with a group of researchers conducting empirical studies in Asian transition countries that also found that the fiscal tensions between higher and lower levels of governments are the most important factor shaping property rights changes (Kim 2011 a; Kim 2011 b; Zhao and
Webster 2011; Po 2011; Whiting 2011), The following two figures summarize the key relationships in Fiscal Socialism 1.0 and 2.0 respectively.
19 Figure 1-1 Key Relationships in Fiscal Socialism 1.0
Figure 1-2 Key Relationships in Fiscal Socialism 2.0 (Land Quota Markets)
To sum up, the different focuses of Fiscal Socialism 1.0 and Fiscal Socialism 2.0 derive from different conceptualizations and practices of land rights and land uses. When land
20 rights are conceived as untradeable local rights, the land politics are contained within a city. When land rights are conceived as something that can be detached from their location and used in another, the trading of rights has led to land politics across city boundaries.
Although my focus is on the relationships in the hierarchy of cities, land rights theoretically could be traded among parallel cities. Researchers have also examined a model where municipalities within a province are trading surplus official quotas with each other. Using Zhejiang Province in China as a case, Wang Hui and his colleagues
(Wang and Tao 2009; Wang et al. 2010) conclude that it is improving efficiency. Meina
Cai (Cai 2012) characterizes this trading relationship as collaborative between municipalities. The table below summarizes how the conception of land rights is connected to the different kinds of land politics and researchers' efforts to study them and where my study fits it.
Table 1-1 Conceptualization of Land Rights and Land Politics
Transferability of Land Politics about Land Research on Empirical Rights Cases in China 1 Land rights as local, +Land politics are location- E.g. (Hsing 2010; Po untradeable rights based, contained within a 2008; O'Brien and Li locality 2006) 2 Land rights as rights traded -Land politics are across across jurisdictions jurisdictions Land rights traded +1nter-governmental E.g. (Cai 2012; Wang and 2(a) among parallel collaboration among Tao 2009; Wang et al. jurisdictions municipal governments 2010) 2(b) Land rights traded +Big city dominance My study among hierarchical (municipal government over jurisdictions counties) (Compiled by the Author)
21 1. 2.2 Revisiting Urban Spatial Economics
The most surprising contribution this dissertation makes to the literature is that the core assumptions about urban spatial theories need to be re-visited. Much of the above public finance dynamics are driven by the fact that a land parcel's location drives most of the market value of land and that local governments have more control over leveraging that value because it is proximate to the land. However, with a few but significant institutional changes, land quota markets may have rewritten this calculus.
Proximity to city center has been considered the core factor influencing land values and land use decisions in the classical mono-centric model of urban spatial structure- developed as early as in the 19th century by von Thunen (von Thunen [1826] 1966), and formalized by urban economists in the 1960s (Alonso 1964; Muth 1969; Mills 1972).
Lately, more nuanced explanations of city growth and spatial structure have incorporated factors such human capital and employment opportunities (Glaeser and Saiz 2003;
Glaeser and Gottlieb 2009; Glaeser 2011). But these factors still work under the assumption that proximity to the economic activities is what matters most to people's decisions regarding location. Even in a metropolitan area or a polycentric city where economic activities group into more than one centers, the fundamental relationships between proximity and land value has not changed (White 1976; Helsley and O'Sullivan
1991). What is more, the growth of the metropolitan area is supposed to lead to depopulation and de-investment of surrounding rural areas. Remoteness is supposed to be a disadvantage (Baldwin and Martin 2004b; Henderson, Shalizi, and Venables 2001).
22 What is unusual about the land quota market is that land in hinterland suddenly becomes valuable to urban markets. As a result, the countryside is being spatially reconfigured and invested in. In fact, as I will show later, the more distant a village is, the more likely it will be involved in land quota market. Remoteness becomes a spatial advantage.
To be sure, classical models of urban spatial economics were previously challenged by empirical cases from non-market systems. Bertaud and Renaud (Bertaud and Renaud
1997) have pointed out that in a typical socialist city, land on the periphery is developed more intensely than in the urban core. This is because administrative decisions, not market decisions govern land uses and suppress land values in a socialist economy.
What is surprising is that land quota markets emerged after China had undergone significant economic reform for more than three decades, and land has long been a commodity traded on the market. Supposedly land use in Chinese cities is subject o market forces and proximity is driving land value. But, land quota market seems to be making proximity irrelevant, at least in the rural area: it makes land farther away from urban centers more valuable and results in a densification of the countryside.
The land quota market may also be rewriting the relationships between rural and urban areas. As we will see, the reconfiguration of the remote areas is to ultimately channel more investment into the urban periphery; investing in "building a new socialist countryside" is to enable the growth of the capitalist cities. When land is flying from rural jurisdictions to urban jurisdictions, the changes are not just about spatial structure,
23 but also the calculus of land values, and at the same time, realignment of inter- government relationships.
1. 2. 3 Land Policies, Property Rights Evolution, and Chinese Politics
Planners intervene in land markets and development projects. Primarily, they do this through land policies, plans, and regulations. Although the goal is clear-to manage land uses for the public good-conditions change and so the focus and implementation must also evolve.
How are innovations in land policies achieved? Essentially by tweaking property rights in land, by packaging and repacking different bundles of rights in property (Ingram and
Hong 2008). For example, for the public goals of environmental protection, historic preservation, public transportation and so on, a landowner may be restricted from doing certain things with their property. To readers familiar with western planning history, the quota market may sound similar to other land tools that work through reconfiguring property rights, such as the land readjustment technique, growth boundaries, and transferable development rights. Of the limited existing studies of the land quota markets, scholars in China try to interpret and conceptualize the quota market as a Chinese variant of the transferable development rights (see for example, Luo, Luo, and Jiang 2010; Wang and Tao 2009; Wang et al. 2010; Yang 2010). Indeed the concept of de-spatialization and transferability-that property rights can be detached from one piece of land and then used on another-is comparable between the quota markets and transferable development rights.
24 Another similarity between quota markets and transferable development rights (TDRs) are that they are in response to high real estate market demand conditions. Improving land use efficiency and reducing built-up footprints are the common goals of quota markets and TDRs. Early theories of property rights identify that changing external conditions can drive property rights changes (Douglass C. North 1994; Alchian and
Demsetz 1973), but they overlook the process of change. Current property rights researchers term this kind of explanation the "simple model" of property rights evolution.
Not only is it simple, but it could be also overly optimistic (Levmore 2002). It cannot, for example, explain why inefficient property rights exist (Libecap 1986; Libecap 1989). Nor does it assess whether the change is beneficial to the public.
The recent development in theories of property rights evolution calls for a "complete model" which focuses on the process and the politics of institutional change (Merrill
2002). Some scholars take a step further towards studying the interactions between institutions and the social political environment around it (Pistor 2014). In this light, the differences between quotas and TDRs seem much more critical than their similarities.
The two have evolved out of different political economy systems. TDRs are usually introduced in advanced economies with established real estate markets and legal property rights institutions, and their impacts make minor adjustments to the already built up inner city. The implication of China's property right institutional innovation is much more than a question about marginal efficiency gains. To those involved, it has immense but unclear redistribution effects with implications for shifts in political alliances and opposition.
25 It is amazing that such a fundamental change requiring the coordination of multiple levels
of government and private parties could happen so quickly. While some view China as a
strong state, monolithic in its power, China experts have also written about the lack of
control between different levels of government particularly the farther one is away from
Beijing (Lieberthal 2003; Mertha 2009; Su, Tao, and Wang 2013). And much of the
research on inter-governmental politics revolves around control over key resources.
Therefore, my dissertation extends the literature on property rights evolution by studying
the political process of making a significant change in property rights institutions. This
dissertation asks how the "land conversion quota" as a property rights institution emerged
and developed in China's economic transition and rapid urbanization. Studying the
change process requires historical institutional analysis, rather than simple cost and
benefit analysis.
China is a great test field for further developing theories about state and property rights
because the Chinese government is both the owner of significant portion of the land and a
granter of property rights. Classic property rights literature has approached the
connections between state and property rights in two directions: the state as property right
grantor (Locke 1653; Blackstone 1870; Weber 1921), and the state as property owner
(Marx 1867; George 1920). Most empirical research of the emergence of property rights
treats the state as a property granter.4 There is still a lack of reconciliation between the
two concepts: what happens if a state is the owner of a property? How does it grant rights
to itself and how does it regulate these rights?
4 For example, in studying how airport time slots became a property right, (Riker and Sened 1990) have treat the government as a granter, and corporations or individuals as nght holder.
26 China specialists have compiled rich empirical studies about land and politics at the local level that inform this research. First, we know that land ownership in China is fuzzy in practice. The governance over land is spread over multiple levels of governments in
China. This phenomenon has been the topic of a few major studies, including Peter Ho
(Ho 2001; Ho 2005) who asked "Who Owns China's Land?" Essentially, because land is immobile and location-specific, the real control resides with local government (Zhu 2004;
Shin 2009; Rithmire 2013).
Second, we have learned that the politics around land are location-based. When the force of urbanization sweeps across China, land politics are played out in different forms, depending on if the land is in the center city, suburb, or more rural areas (Hsing 2010). In center city, it is mostly about redevelopment and resettling urban residents (for example,
Shih 2010). In the suburb, it is about changing land uses from rural to urban and often involve intense peasant-government confrontation. In the rural areas, many conflicts happen when peasants dispute about farming rights and rights to residential land, and the main conflicts are between peasants and village leaders (Yu 2007; Yu 2008; O'Brien and
Li 2006).
The phenomenon of my study is significant because once land development rights are transferable, location-based politics are being altered. While Hsing separates land politics by types of locations-center city, suburb and rural area-with the quota market, they are
27 connected through trading. This must alter the politics of land control that were previously location-based.
During my fieldwork, I have also found significant conflicts between the municipal governments and county governments. In China, a city is not a straightforward concept- it does not correspond to a political jurisdiction. Municipalities in China govern both urban areas and rural areas, and consist of urban districts, suburban counties and rural counties. Many scholars have examined problems with this "municipality over county" structure from the perspective of fiscal relationships, discussing how it has hindered the development of counties, and created the dominance of center cities. But no one has made an explicit connection between this hierarchical structure and land conversion and urbanization. Studying the quota market offers an opportunity to do so: municipal government and the county governments in this case should not just be understood as higher-and-lower governments in a hierarchical structure, but competing jurisdictions that both govern certain urban areas. Municipal governments' urban interests are vested in the large, economically more advanced center city, while county governments' urban interests lie in county seats or towns that are industrializing but much smaller and poorer than the center city. I have found in my fieldwork that municipal governments and the county governments have many disagreements about quota allocation and the design of the quota market. Studying this conflict and competition will add to our understanding about resource allocation in the Chinese political economy system.
28 In sum, surveying the existing literature has revealed that the current gaps about property rights evolution are not so much about studying external conditions, but rather the more pertinent questions are about the process of changing property rights, the interactions among key actors, and the internal conflicts. Property rights changes may benefit specific interest groups, but rather than a rational agent solution, the institutional change is constrained by political bargaining and the ability to convince and coordinate a wider social reconstruction of property rights. The literature has also pointed us to key variables in land rights configuration--changes in land use value, local public finance, and intergovernmental relationships. The most promising part of my research is that in quota markets the spatial dimensions of land are different, and it brings municipality-county relationships into focus.
1. 2. 4 Research Questions
Studying the formation and the impact of China's land quota market offers a rare opportunity to study one of China's dramatic institutional changes in progress. I ask two over-arching research questions:
1. How was the institution of China's new land use conversion quota market formed?
a) How were the various levels of government and different bureaus
involved?
b) How did they coordinate, given that some would lose some or face
uncertain changes in bureaucratic and fiscal control?
29 c) What were the strategies used to encourage the participation of private
developers and peasants into this institutional change? What discourses
were used to institutionalize these changes to the broader public?
2. What are the impacts of the introduction of a land quota market?
a) How does the de-spatialization of land transfers affect the urbanization
pattern in China?
b) How does it affect the welfare of peasants?
c) How does it alter the allocation of land resources among local
governments?
d) How does it change the real estate market and urban land development?
1. 3 Research Design and Data Collection
To answer my research questions I have adopted case study as the primary approach in this dissertation. Case studies are well suited for analyzing organizations, institutional relationships and processes (Yin 2003).
1. 3. 1 Case Selection
To identify suitable cases of land quota markets, I collected secondary materials on innovative land policies across China. From my preliminary reviews of media coverage, policy reports, and academic studies, I identified at least 20 Chinese cities that claim to have land quota trading programs. In 2011, 1 visited five such cities where I could establish key contacts. Geographically, these cities are categorized in three groups: the first is Tianjin Municipality in northern China, the second is Wenzhou Municipality and
30 Jiaxing Municipality in the east coast, and the third is Chongqing and Chengdu in western China. These cities vary in abundance of land resources as well as demand for land. They also vary in political rank.
STianjin Three Scenes: Institutional Evolution
VARIATION IN SAMPLE / INSTITUTIONAL SETUP UNIVERSE
Chengdu Official quota limit 1 / Many (no experiment) Jiaxing 0 Chongqing > Wenzhou Quota linking 2 / 29 programs provinces
* Quota markets 2/2
Figure 1-3 Selection of Case Cities
I conducted a first round of fieldwork in the five cities in January 2011 to examine these programs up close. I found out that in Wenzhou, there was no active quota experiment, but the city was extremely short of quotas. I use Wenzhou as my null case. The other four cities had quota programs and varied significantly in program design. Tianjin and Jiaxing were running quota linking programs, a preliminary form of the quota markets.
31 Chongqing and Chengdu stood out as pioneers in this policy experiment. They both had a comprehensive set of policies designed around quota trading, a mature quota market, and a large volume of quotas traded and applied to actual projects. In fact, they were the only two cities approved by the Ministry of Land and Resources to run full-fledging quota markets.
My most important analysis is within-case comparison, or a process of tracing the institutional evolution. In order to see the impact of the land quota market on a city's development, I compare my case cities' conditions after the quota market was established with their situations before it was established. I also conduct between-case comparisons.
Although both Chengdu and Chongqing have quota markets, the institutional designs and the political processes vary along important dimensions. Furthermore, I compare
Chengdu and Chongqing with the cities that only have linking programs, drawing from my fieldwork in Jiaxing and Tianiin, as well as to cities that are short of land but do not have any quota experiments, such as Wenzhou.
Chongqing and Chengdu have many differences in their institutional design, a key focus of this research. While Chengdu allows private businesses to invest in developing quotas for the quota market, in Chongqing, quota generation is directly arranged by the government. In Chengdu, quotas are uniformly imposed on developers, whereas in
Chongqing developers can decide to buy quotas or not. Trading in Chengdu is organized routinely twice a week, while Chongqing trades only several times throughout a year.
Chongqing's quota market was established earlier and enjoys good relations with the
32 Central Government. Chengdu's experiment started two years after Chongqing and was once stopped by the Central Government.
What might explain their differences in institutional design? The two cities vary in many aspects. Chongqing is much larger than Chengdu, and therefore the market area of quotas is much larger. Even before the quota market was created, Chongqing had a much larger income gap between urban and rural areas than Chengdu; Chongqing's rural counties also have relatively weaker fiscal capacity than their counterparts in Chengdu. Their geographies and land use patterns are also different. Chongqing is in a mountainous area, with already compact rural settlements. In contrast, Chengdu sits on a plain, and rural houses are more sparsely located. These factors might explain the different supply and demand dynamics of the markets.
My first set of research questions focus on the political process of instituting the land quota markets. Chongqing and Chengdu are different in political ranking and importance.
Chongqing is a provincial-level municipality, directly administered by the Central
Government. Chengdu is a prefecture-level municipality, one level below Chongqing.
Since establishing a quota market depends a lot on the Central Government's authorization, their difference in political power provides material with which to examine whether "being close to the center" is an important factor in institutional evolution.
Despite their differences, Chongqing and Chengdu have one important political factor in common: both municipalities govern a number of counties under them. Although the
33 counties in Chongqing are one level higher than counties in Chengdu along political ranking, they nevertheless are subject to the governance of the municipal government.
Therefore, by comparing the two cases we can study whether absolute political power
(that is, political ranking) or relative political power (that is, counties being subject to municipalities) plays a role in shaping the institutional changes of quota markets.
1. 3. 2 Data Collection
Although the land quota market has received media and political attention, data about it is sparse. The widespread media coverage mostly touted the official line about improvements in land use efficiency and peasants' welfare, and talked much less about potential adverse impacts and risks. Moreover, they lacked the details of the institutional evolution-they showed the result of the policy design, but not the process of its making.
Policy documents and official reports are hard to access from public channels. Even if I get them, they provide even less details than news stories and reading them alone leaves me with only very dry and general impressions. Therefore, fieldwork and interviews is key to this project.
My most important data were collected from semi-structured interviews. I have conducted 63 interviews with key informants in my case cities. My informants include government officials in related departments at various administrative levels, different types of local developers, and peasants who have participated in the quota generation programs. I have also interviewed media professionals and rural investors who were not involved in the quota market but were alert witnesses of the changes. No single source
34 had the perspective to understand how quotas are generated, sold, and then applied to actual land development projects, and how the different parties perceive and respond to the changes in property rights reconfiguration. So it is important to synthesize and triangulate the data obtained from various interviews.
I have also visited the rural land exchange centers in both cities where land quotas are transacted openly. I have collected a wealth of market data about quota transactions, including the land size of quotas sold, selling prices, and more. I have collected key policy documents, government reports on the quota market, and land development project documents from my key informants. In Chengdu, I also got access to an official database of 735 quota generation projected planned between 2006 and 2011, with detailed information such as location of projects, size of quotas generated, project funding source, number of peasants resettled, compensation standards, and size of new settlements and so on. These quantitative data allow me to draw more systematic and nuanced conclusions about the characteristics of the quota markets.
In addition, I have visited villages in both cities. Wherever I could, I -selected both villages that were participating and not participating in quota markets in one locality, to gain a sense of the change in land use and peasant welfare as a result of the market.
1. 3. 3 Interviewing Government Officials
35 Policy makers have played a decisive role in the establishment of quota markets, so they were an important group to interview. However, I was not confident at the beginning of my fieldwork if I could get any information-interviewing officials is not an easy task in
China. They are not only hard to access, but also very careful answering questions about their work. They often give interviewers no more than the official lines.
Therefore, instead of contacting key informants through formal channels, such as contacting the front office of a govemment, calling the official number or sending emails to the official accounts, I mobilized my personal network and tried to be introduced to officials through classmates, friends, and relatives. Introduction through personal connections, albeit very distant in some cases, opened up many opportunities and amazingly candid conversations.
Once introduced by personal contacts, my obvious status as a student researcher relaxed my interviewees. I also did my homework beforehand-gathering all the media coverage and official publications related to the experiment. Policies can read like puzzles and the experiments are developing fast. Once I showed the officials that I knew the basics as well as the latest, they began to skip the official cliches and tell me something new or personal. In a few unfruitful interviews, the sensitivity of land issues inhibited discussion.
But in most of the cases, because it is a sensitive issue that evokes people's personal emotions, my informants were eager to tell me things that they could not talk about openly.
36 Quite many of my interviewees were recruited using a snowball sampling strategy. Most of the time, I only needed one initial key contact in a local government. After a fruitful interview and gaining the trust of my interviewees, they would refer me to more of their colleagues in different government departments. When I interviewed developers in some cities, I also asked them to refer me to their friends who did businesses in other cities I would be visiting.
The study also benefited from repeated interviews during two rounds of fieldwork.
Repeated interviews not only allowed me to further gain trust from my interviewees, but also gave me an evolving and dynamic perspective about the development of quota markets. For example, my two rounds of fieldwork in Chengdu corresponded to two distinct phases of the development of Chengdu's quota market. I could capture reflections of policy makers at different key moments of the institutional evolution.
The most interesting and informative interviews took place when people were relaxed and off guard. Interviews initially took place in offices, then in restaurants and teahouses, first as one-on-one interviews, then with groups of interviewees. I was allowed to observe government officials in both formal and informal settings. For example, I was sitting in meetings between township officials and planners. I was allowed in banquets a local government hosted for a visiting delegation from another city to learn about the experiences of quota markets. In several occasions, I was able to observe the interactions
37 between government officials and developers, when they were having tea, eating dinner, or playing ma-jong together.
In sum, I did not just read the official documents, but talked with the real people involved in the drastic changes. I did not just tour the model apartments built for peasants and watch the official promotion video, but also talked to the peasants about their personal experiences. Interviewing key informants helped me triangulate information I collected from other channels. I could better read between the lines and more critically parse the official documents. For example, when asked about what a specific article meant in a policy document, officials would be so candid in saying, "We put it there for the Central
Government to see. We ourselves do not care so much about it." Such insights about intergovernmental relations would not have been possible to obtain without talking to key people involved in the process.
This dissertation discusses land changes, but it is more about changing relationships between the people behind the institutional changes that shape land uses. I met entrepreneurs eager to invest in quotas. I learned how hard the bureaucrats had worked to design the trading rules. I saw bewildered peasants being overwhelmed by the changes around them. I also heard about the worries and the hesitations of the Central
Government officials.
China's urbanization is a historic political economy transformation. This dissertation about China's new quota markets is an opportunity to see some of these fundamental
38 changes in the social contract, governance, and the rebuilding of the socialist countryside and cities. In Chapter 2, 1 start with the institutional background that the quota market arises out of, showing that rigid, top-down land use planning motivated the local quota market experiment in order to get around central government constraints. In Chapter 3, 1 examine the supply side of the quota market-illustrating the complicated and painstaking process of quota generation in the rural areas, and the new profession of
"quota developers" it has created. In Chapter 4, 1 discuss the demand for quotas-who buys quotas, and what kind of projects use quotas, and where these projects are located. I recount how the local government embarked on a campaign to sell quotas as a new institution among private developers, but find that the real demand for quotas is from the government itself. Then in Chapter 5, 1 discuss how supply and demand is coordinated through the quota market, and how the transaction rules affect both quota sellers and quota buyers. In Chapter 6, 1 gather the evidence documented in the previous chapters to theorize about the institutional change and China's urban future: de-spatialized land transfers have produced re-spatialized politics: it pitches the urban areas against rural areas, and big cities against small cities.
The land quota markets solve some short-term problems: it could provide more developable land and increase the overall wealth of the society, improve peasants' welfare and allow small cities to access more resources. But, from the longer-term perspective, the economic prospect of resettled peasants is dismal, and the relative positions of small cities may be further weakened. Quota markets make the pie of "land development" grow and everyone's slice is bigger, but the distribution may be even more
39 unequal, with big cities being the winner. The land quota market is essentially a market- like mechanism that reinforces the political logic of resource allocation in China.
40 Chapter 2 Institutional Context of the Land Quota Markets: Public Finance,
Land Use Planning, and Inter-governmental Relations in China
Quota markets are a new and unusual institutional invention. This chapter examines the background of their emergence by discussing fundamental institutions that have shaped
China's land development and urbanization. These include rigid land use planning by the
Central Government, heavy reliance on land conversion by local governments to generate fiscal revenues, and central-local inter-governmental relationships characterized by cycles of control and counter-control. We will see that the quota markets are in fact an unintended local consequence of the well-intentioned Central policy.
2.1 Land Cmmodification and Public Finance in China
Land policy has played an important role in China's economic growth and rapid urbanization. In the planning era, land had no market value and therefore land use was not subject to market forces. Since the late 1990s, land has become a commodity traded on the market. However, this marketization is at best partial. Only urban land, not rural land, is tradable.
Further complicating the matter is the dual land ownership structure in China. According to the Constitution, rural land belongs to rural collectives while urban land belongs to the
41 state. However, who represents the state in allocating urban land is ambiguously defined
(Ho 2001; Ho 2005). It is often the local government that has real control over land in its
jurisdiction. The marketization of land means that local governments suddenly have a
valuable asset at their disposal.
Local governments in China have disproportionally large spending mandates but limited
budgetary revenues. They are responsible for providing over 70% of all public services,
but their budgetary revenue accounts for only 48% of the national total (Ding 2007;
Lichtenberg and Ding 2009). The problem is exacerbated by the rapid urbanization. Local
governments have to invest in infrastructure and social welfare, but hardly ever have new
revenue resources. Land is potentially an important resource to alleviate the fiscal crunch
for local governments.
How do local governments leverage the valuable asset of land? In many countries,
property tax is the main source of revenues for local governments, but it is not practiced
in China (Bahl and Bird 2008; C. Wong 2013). Instead, Chinese local governments do
two things with the state-owned urban land to raise revenues. First, there is an established
urban land market for buying land use rights for residential and commercial projects from
local governments. Developers have to attend auctions and bid for land (more specifically, they are buying land use rights for a certain period: 70 years for the residential, and 40 years for the commercial). Although the size of residential land is only about than 10% to
20% of all urban land consumed every year, the land sales generate sizable revenues for
42 the local governments. It is extra-budgetary revenue, and can be as much as 60% of
budgetary revenues in some cities (Ding 2007; Lichtenberg and Ding 2009).
Another way that local governments leverage urban land is to give it to industrial users at
a very low price or even for free. Industrial projects do not generate much windfall
revenues, but they can provide long-term benefits, such as tax revenues, job creation, and
overall economic growth. Local governments are going after industrial investors.
Industrial land use in the form of development zones and industrial parks account for
more than half of newly increased urban land every year (D. Y. R. Yang and Wang 2008).
Therefore, the local governments have an incentive to get more urban land and lease it
out, either for immediate revenues or for longer-term benefits. How can they get more
land? They do so by converting agricultural land to urban use. As mentioned earlier, by
law rural collectives own rural land. At the same time, the Constitution also grants the
state the power of land taking in public interests. Although it is controversial to take land
to develop commercial and industrial projects, this has been the practice for more than a
decade. Compensation to peasants is only a very small fraction of the selling price to
developers. Local governments are essentially buying low and selling high. Such
aggressive land taking has resulted in large-scale farmland loss and intense social
conflicts between peasants and the government.
Although the social conflicts and farmland loss puts some pressure on the local
government, this pressure alone cannot stop the aggressive land taking. Local officials are
43 not elected but appointed by higher-level governments, and therefore the accountability is not from below, but above. To curb aggressive land conversion, the hard constraint came from the Central Government. In 2004, the Central Government imposed a "Land
Conversion Quota" on local governments. This quota sets the upper limit of agricultural land that a local government can convert to urban use every year.
To understand the logic and the effectiveness of Land Conversion Quota Control, I will put it back into the context of overall land use planning in China. A careful reading of the plan would reveal how the land conversion quota constrains the behavior of the local governments, and how much room there is for local governments to negotiate with the
Central Government. Examining the control over different dimensions of land use is the key to understanding why land quota markets would emerge at the local level.
2. 2 Land Use Planning and Urban Growth Control through Quotas
2. 2.1 Land Use Planning and Arable Land Preservation
Since the 2000s, the central concern of China's national land use planning' has been to preserve agricultural land. This was a shift from expansive land development for industrialization in the early reform era, to remedy the rapid loss of farmland. Based on the use, China categorizes its land into three broad categories: agricultural land,
5 Note that in China, land use planning is different from urban planning. The land use plan balances agricultural land protection and urban expansion, while the urban plan targets the built-up area prescribed by the land use plan.
44 construction land (or developable land)', and unused land. Land use planning is to coordinate and balance different uses of land among these categories.'
The country's basic assessment is that China's agricultural land must be preserved in order to feed a populous country. This is especially important given that quality arable
land has been disappearing quickly while the built-up area has been expanding quickly.!
In the official language, the China's land use planning is "fundamentally a planning
system that upholds the strictest arable land protection and the most frugal land use."'
The concern for agricultural preservation has direct implications for urban expansion. In
the planning process, the country sets up a target for the size of arable land to be
preserved. The projection of the size of new urban land development is based more on the
target of arable land protection than a projection of economic and population growth.
Therefore people concerned about how much urban land there is to use have to look at
the flip side of the issue-how much arable land they must preserve.
6 "Construction land" is the literal translation of the Chinese term "jianshe yongdi" (lti)i 4), which correspond to "developable land" or "land for development" in Western countries. I will use developable land or land for development to refer to "construction land" in the Chinese context in the rest of this dissertation. 7 Note that "Land Use Planning" and "Urban Planning" are not the same in China. Land use planning is the basis for urban planning which further regulates use of land already categorized as construction land/land for development. Administratively, they are managed by different entities. Land use planning is managed by the Ministry of Land and Resources and local land bureaus, and urban planning by the Ministry of Urban and Rural Planning and Construction and local planning bureaus. 8 State Council of China. 2008. "Quanguo Tudi Liyong Zongti Guihua Gangyao, 2006-2020 Nian (A I AfJM,6%EidjM E2006-2020-) [National Land Use Master Plan, Year 2006-2020]." Article 1, Chapter 1. Accessible at http://www.mlr.gov.cn/xwdt/jrxw/200810/t2081O24_111040.htm. 9 Source: Ministry of Land and Resources of China. 2009. "Tudi Liyong Zongti Guihua Bianzhi Shencha Banfa, Zhonghua Renmin Gongheguo Tuotu Ziyuan Bu Ling Di 43 Hao (iP J )j%)JdjtJJ )t}& r-AK-A*Q W 43 -g) 'Measures on Drawing Up and Auditing of Land Use -Master Plans', Order No. 43 issued by the Ministry of Land and Resources." Article 4. Chapter 1. http://www.mlr.gov.cn/xwdt/zytz/200902/t20O90211_1 14407.htm
45 The numeric target for arable preservation is highlighted in China's national land use
plan.-The current one, China's National Land Use Master Plan Outline (2006-2020)
specifies that by Year 2010, the country should preserve at least 121.2 million hector (or
0 1.818 billion mu), and by 2020, 120.3 million hector (1.805 billion mu)' This is set
against the base year of 2005 when the national sum of arable land is 122.0827 million
hectares (1.83124 billion mu). " In other words, the Land Use Master Plan has prescribed
that in a period of 15 years, the country's total amount of the country's arable land should
reduce only slightly, and remain a little over 120 million hectares or 1.8 billion mu.
How did this arable land preservation target come about? According to my key informant
from the Ministry of Land and Resources, when drafting the land use master plan, the
Ministry calculated for how much arable land must be preserved for the country to ensure
food security. The estimation was in the range between 1.7 billion mu to 1.8 billion mu.
The political atmosphere then was "tight"-the Central Government put a lot of emphasis
on arable land protection, as officially emphasized in the country's Five Year Plan (for
2005-2010 it was the 1 1hFive Year Plan), the county's most important and overarching
national plan which establishes guiding principles for economic and social
development. To respect the Central Government's priority, the Ministry of Land and
Resource picked 1.8 billion, the upper limit, as a guiding number and formalized it in the
National Land Use Master Plan Outline. Since then, "preserving the redline of 1.8 billion
10 Source: Article 2 Chapter 2 of National Land Use Master Plan Outline (2006-2020) " Source: Annex 1 of National Land Use Master Plan (2006-2020) 12 State Council of China. 2006. "Zhonghua Renmin Gongheguo Guomin Jingji He Shehui Fazhan Dishiyige Wunian Guihua Gangyao(r A n [A P9I9? K 4 tW M-t a I AMMW) [The Eleventh Five-Year Plan for National Economic and Social Development of the People's Republic of China]." http://www.gov.cn/ztzl/2006-03/16/content_228841.htm.
46 mu arable land" has become a slogan in China's land use policy.13 In the various cities I
visited and researched during my fieldwork, central and local government officials alike
cited it as a sacred numberlbuzzword. It appears on important official documents and
become a justification for all land protection policies.
Of course, there are many doubts about the accuracy of this number, and deeper questions
about the effectiveness of preserving agricultural land for food security. My informants at
the local level said that in reality, the implementation of agricultural land protection is
problematic. Focusing on the size of arable land at its best prevents the land from being
used for other purposes, but it does not necessarily ensure that the land will be farmed
productively. Because agricultural production has been unprofitable in China, it is not
rare that peasants would rather let the land go wild than waste their labor. In addition,
preserving a certain amount of agricultural land does not necessarily lead to increased
outputs, if the productivity is low. Reasonable or not, the target of arable land
preservation is the backdrop for China's land use planning, and has a direct impact on
how lTIuch rural-to-urban land conversion is allowed in the country.
The numeric target of preserving arable land affects the availability of developable land.
According to the National Plan, the country's arable land would decrease only by 0.025
billion mu between 2005 and 2020. The short-term decrease, that is between 2006 and
2010, only 0.8827 million hectare (0.01324 billion mu). To put these numbers in
perspective, in 2005, the country's existing developable land was about 4.788 billion mu.
13 20110809-BJ-M
47 Does the 0.025 billion mu reduction in arable land mean that Chinese cities will almost not grow during the planned period? No. Preserving arable land and at the same time expanding urban land is balanced through two means, as prescribed by the Land Use
Master Plan: limiting urban expansion and creating more arable land.
First, to limit the increase of newly developed land, the national land use master plan projects targets for total size of built-up area and the newly added developable land for the country in the years to come. In the base year 2005, the total size of built-up area of the country is 31.92 million hectares. In 2010 it should be no more than 33.74 million hectares and by 2020, no more than 37.24 million hectares. This is saying that between
2006 and 2010, the entire country's built-up area would increase by 5.69%, and in the 15 years between 2006 and 2020, by 16.66%.
The plan also prescribes that between Year 2006 and Year 2010, only 1.95 million hectares (or 29.25 million mu) of developable land would be allowed to be added to cities. The newly developed land is created by converting other types of land--unused land and agricultural land. The plan is very specific as to detail that out of the 1.95 million hectares (or 29.25 million mu)'4 newly added developable land, 1.57 million hectares (or 23.50 million mu) is added by converting agricultural land, and the rest by
1 Note that there are some inconsistencies in the numbers: according to the targets of total size of developable land prescribed in the land use master plan, the calculated increase in developable land is 1.8176 million by 2010 hectares and 5.3176 million hectares increase by 2020. But the targets of newly increased developable land, by 2010, the increase is 1.95 million hectares, bigger than 1.8176 million hectares as calculated. This may be due to the fact that not only will there be newly added developable land converted from arable land, but the existing developable land will also decrease (for reasons like abandoned factories. de-industrialization etc.) Therefore the net increase is smaller than the newly added developable land. It is important to single out the newly added developable land however, because it is created by converting other types of land, mostly arable land.
48 converting unused land. Furthermore, out of the 1.57 million hectares (or 23.50 million mu) of agricultural land converted, 1 million hectares (or 15 million mu) is arable land- the most protected type of land, and the rest is other kinds of agricultural land such as
garden land, forest land, and so on.15
Even under such strict control, by 2010, the plan expects the newly added developable
land to convert at least 1 million hectares (or 15 million mu) arable land, far more than
the predicted deduction of 0.8827 million hectares, 0.01324 billion mu arable land by
2010. How can the loss be remedied? There comes the second aspect of China's strictest
land preservation approach: local governments are required to create more arable land
every year.1 6 The goal is summarized as "take one, create one"-that is, for every one mu
of arable land taken for development, there must be one mu of new arable land created
somewhere else. The country says explicitly that the goal is to keep the total amount of
arable land the same. This also comes as a numeric target. The same plan says that
between 2006 to 2010, the country aims to create new arable land of 1.14 million
hectares (or 17.1 million mu)
How is arable land created? It is through a combination of techniques including land
consolidation, land reclamation and land cultivation. Land consolidation means
1 Source: Annex 6 of National Land Use Master Plan, Year 2006-2020 16 It is important to note that agricultural land and arable land are different concept&. New development will convert agricultural land and unused land. But within agricultural land, there are also other types of land, such as gardens, forests and so on. Therefore, to keep the same amount of the arable land, the arable land created is smaller than the agricultural land converted for development. 7 People's Congress of China. 2005. "Zhonghua Renmin Gongheguo Tudi Guanli Fa (43*AMAfa m JMIM) [Land Administration Law of the Peoples Republic of China." Article 33, Chapter 4. 89 http://www.gov.cn/banshi/2005-05/26/content_9 .htm.
49 defragmenting small plots by removing field ridges and so on. Land reclamation means treating and recycling land previously polluted and/or used for construction and bringing it back to arable conditions. And land development means turning unused land such as mudflat, wild grass ground and barren land into land suitable for farming (Lu et al. 2011, p. 2). Since land consolidation is used more often than the other techniques, people in general use "land consolidation" to mean the general process of creating new arable land.
To sum up, the country on the one hand recognizes that urban expansion will inevitably continue to consume arable land, and therefore sets a control target on how much and how fast this conversion should happen. But on the other hand, it insists that preserving a certain amount of arable land is critical to maintaining the country's food security. Since the projected urban expansion will consume more arable land than is safe for food security, the remedial measure is to create new arable land through land consolidation to make up for the loss. The National Land Use Master Plan Outlines specifies that the quotas for "size of arable land preservation," "size of total built-up area," and "size of newly created developable land and target of arable land" are hard constraints. They must be enforced and cannot be exceeded.'" Urban scholars have advocated for long-term plans to be guiding, rather than binding, and the plans should adjust to changes during its planned period (Bertaud 2014). However, this is not the case in China.
18 Back to the early discussion on how the target of arable land preservation was set, the Ministry of Land and Resources could have picked 1.7 billion mu, the lower limit of arable land preservation target, which would still ensure food security according to the Ministry's own calculation. If 1.7 billion mu, rather than .8 billion mu, i tobepreserved, then duringth plannedperiod,-consuming another 100 million mu would still be safe. Since the plan's projected increase in newly added developable land is only 79.764 million mu, this is to say that if the lower limit were picked as the arable land preservation target, there would be no need to create new arable land if urban expansion went at the expected speed of the plan. In other words, such a tenuous task of creating new arable land could have been avoided altogether.
50 2. 2.2 Inter-governmental Relations in Land Use Planning
Like many other kinds of top-down plans, the hard constraints set out in the national land
use master plan-including targets of "arable land preservation," "size of built-up area"
and "new arable land creation"1 9--are broken down and then assigned to each level of
local government along the administrative hierarchy, first to provincial governments, and
then to municipal, county, and eventually to town (township) level governments. Each
level of local government draws up a Land Use Master Plan, based on the plan of their
higher-level government.20 For example, the provincial level land use master plans are
based on the national plan. The specific numeric targets included in all provincial plans
should sum up to correspond to the national plan.2 ' The five levels of Land Use Master
Plans from national level, to provincial level, down to municipal, county and township
level constitute the long-term planning of land use in China. The local plan is a part of the overall plan. It is managed primarily in the fashion of numeric control.
How are the distributions of land use quotas determined among different levels of government? From the national level to the provincial level, the Ministry of Land and
Resources works with the National Development and Reform Commission, the macroeconomic planning and management agency of China, to make the decision.
19 Article 16 of "Measures on Drawing Up and Auditing of Land Use Master Plans," Order No. 43 issued by the Ministry of Land and Resources 2 0Article 18, Chapter 3 of Land Administration Law of the People's Republic of China 2 1Article 6, ibid.
51 Officially, the breakdowns are based on "overall consideration of factors such as economic and social development levels, development trend, resource and environmental conditions, current status and the potential of land use."" From provincial levels downward, the Ministry provides some guidelines and references, but provincial governments themselves make the decisions. In reality, how the quotas are distributed is less clear and to a certain extent subject to negotiation and lobbying, as I will discuss later in this chapter.
In addition to numeric control, Land Use Master Plans have a component of spatial control at the local level. The numeric targets set by the higher levels of government are eventually to be realized on specific land parcels. At the lowest two levels of government, the county level and the town (township) level, land use master plans draw out these
spatial details -according to the Land Use Management Law, a county-level land use master plan should divide land into zones and specify the use of a zone; a township (town)
land use master plan should further specify the use of each parcel of land. 3 The contrast of numeric control at higher level and spatial control at lower level reveals an
important feature of China's land use planning: while the numeric dimension of the
plans-how much land to be developed and how much arable land to preserve-are
more controlled by higher-level governments, the spatial dimensions of the land use
master plan-where to develop urban uses, and where to preserve arable land--are more
22 Chapter 6 of Land Administration Law of the People's Republic of China 23 Article 20, Chapter 6, ibid of Land Administration Law of the People's Republic of China 24 Article 10 of State Council of China. 1998. "Zhonghua Renmin Gongheguo Tudi Guanlifa Shishi Tiaoli, Guowuyuan Ling Di 256 Hao Fabu ( F,- l _f2, 56ft 'IQAlA,* R4 $ )256$90A) [Implementation Guidelines for Land Administration Law of the People's Republic of China, Order No. 256 Issued by the State Council]." http://www.mlr.gov.cn/zwgk/flfg/tdglflfg/200406/t20040625_369.htm.
52 controlled by lower-level governments. This an important feature; because land is physical and immobile, the real control of land use comes from local governments that can use their control over space to fight against the Central Government that can only control "numbers" (as represented by quotas) from a distance. Land is hard to centrally plan and manage. It is essentially local.
2. 2. 3 The Annual Land Use Plan and Operationalization of the Quota System
The long-term land use planning in the Land Use Master Plan is realized through short- term land use planning, the Land Use Annual Plan. The main purpose of the Land Use
Annual Plan is to decide how much quota out of the total in the Land Use Master Plan
(which plans for 15-20 years) is to be used for a particular year. In other words, it adds a
temporal dimension to land use planning- when to carry out land development and
arable land protection generally prescribed in the long-term planning.
According to the Land Management Law, "all levels of governments should strengthen
the planning and management of land use, controlling the overall size of developable land.
5 The annual land use plan ... once approved and assigned must be implemented strictly.
The measures on implementing Land Use Management Law have further specified that
the Land Use Annual Plan should include the following elements: (1) planned
25 Article 24, Chapter 3, Land Administration Law
53 agricultural land conversion quota for the year, (2) planned arable land preservation target for the year, and (3) planned arable land creation and consolidation target.26
The various kinds of targets and quotas in the short-term Land Use Annual Plan correspond to those in the long-term Land Use Master Plan. Although all quotas and targets are "hard constraints" on land use, what the local governments care about the most is the planned agricultural land conversion quota for the year or "conversion quota" in short, and less so the other quotas. This is because the conversion quota is used first to approve land development projects, and then arable land preservation and creation is handled after the fact as remedial measures. Although there will be consequences and possible punishments for local governments that cannot make up as much arable land as taken for development, without conversion quotas, development projects cannot be initiated. Therefore local governments are more concerned about how much conversion quota is allocated in an annual plan.
In a nutshell, the preparation of the annual plan is to decide how much quota out of the quotas in the Land Use Master plan is to be used in a particular year. Theoretically the annual plan is an annual installment of Land Use Master Plan. For example, if the land use master plan has prescribed 1 million mu urban expansion in a period of ten years, then every year, the expected quota for newly added land for development is about 1/10 of the total target, or 0.1 million mu/year.
26Article 13 Implementation Guidelines for Land Administration Law of the People's Republic of China
54 However, if annual quotas are allocated evenly and statically, there is almost no point in making annual plans. The purpose of annual plans is to control the speed of land development-in some years, it would be more than the annual installment, in other years less. Quotas are allocated in a top-down fashion from national level downward at the end of a year for the land development next year. (I will discuss shortly how the allocation is determined and its impact on local land use.) Quotas eventually reach district-level government (in an urban area) or the township-level government (in an rural area), which then uses them on specific construction projects/land development projects.
When local governments draft Land Use Master Plans, the numbers prescribed, though binding and constraining, are less "biting" since it is after all prescribing tasks to be completed in the next 5 to 15 years. But the numbers in annual plans are "immediate threats" and "real controls"-- it matters how much land can be used for urban development and how much new arable land must be created in the next 12 months. No wonder that local governments take the Land Use Master Plan somewhat less seriously than the annual plans.
The local level is where land development is actually taking place. The Land Use Master
Plan and Annual Land Use Plan work together to regulate development at the local level-the former regulates the spatial dimension of land development, and the latter the temporal. The Land Management Law says explicitly that "when development takes place, if the land to be converted is agricultural land, it must be abide by the Land Use
Master Plan and has been assigned agricultural land conversion quota as per the annual
55 land use plan."17 One of my informants summarized these two requirements in a concrete
example, "When a county governor wants to convert a certain area of agricultural land to
build a factory, he asks two questions: 'Does it fall into the plan?' and 'Do we have quota
for it this year?' 28 Fitting the plan means that the land is designated for future development in the Land Use Master Plan, and having the quota means that there is enough quota left in the pool as allowed by the annual land use plan. Abiding by the
spatial plan is not a big deal, but having quota for it is. As explained earlier, in the Land
Use Master Plan, the spatial details are drafted by local governments themselves, and therefore are easier to change and they are indeed often overwritten at the will of local leaders. But the numeric dimensions of the plan are prescribed by the higher-level of governments and more difficult to alter. Local officials summarize this contrast in a vivid way, "Land Use Master Plan is something you draw on the desk, and then hang on the wall. The drawings are not binding; Annual Land Use Plan is different--getting the numbers (quotas) from higher level government is a real headache."
Implementation of the quota is realized through administrative review and approval process. For any parcel of land to be added to the urban land supply in China, the local government must go through a taking process which changes the ownership of land from collectively owned by peasants to state-owned. If any part of it is agricultural land, there must be annual quotas assigned.29 The municipal or county government should draft an agricultural land conversion proposal, arable land creation proposal, and land-taking proposal. These proposals are submitted together to the higher level of government for
2' Article 19, Chapter 5 of Land Administration Law 220110517-CD-Y 29 Article 44, Chapter 4, Land Administration Law
56 approval.30 Once proposals are approved, the higher-level government issues an official quota certificate for each project. At project level, the quota certificate must be included in the final package of documents submitted for land taking and conversion. Only then can land taking and conversion take place.31 Issuing and examining Land Conversion
Quota Certificate sets a concrete procedural control of quota use in projects. It also helps the higher-level government track the overall amount of quotas assigned.
Monitoring of quota use is conducted annually. At the end of a year, the Ministry of Land
and Resources checks if the quotas are used properly. If a local government approves
projects that use more than assigned quotas, it will be given smaller quotas for the next
year as a sanction. Technically, monitoring is through remote sensing and satellite
imagery. My local informants confirmed that this technique is frequently used and the
accuracy is very high-it is the "hard evidence" on land use changes, and local
governments have little room to argue after the fact." Therefore, getting a quota
beforehand is critical to legitimize their development, rather than lobbying afterwards.
2. 2. 4 Problems with China's Land Use Planning and Quota System
As explained above, the most important aspect of China's land use planning is the
numeric control. Long-term planning is realized through an annual allocation of quotas.
Quotas are allocated administratively in a top-down fashion, and each locality is required
30Articles 19 and 20, Chapter 5, Implementation Guidelines for Land Administration Law of the People's Republic of China ' 20121109-CD-Y 32 20121108-CD-L
57 J
to create arable land at the same time that urban expansion is consuming land. Such a system leads to several problems.
First, the original targets set in the Land Use Master Plan are questionable. The allocated amount of quota barely meets the demand for land during urban expansion. The Plan is supposed to forecast long-term development in the next 10 to 15 years. It is hard to accurately project for future land expansion, given China's rapid and transformative economic changes and their impact on the demand for land. "We could use up the quotas prescribed for 15 years in just 3-5 years," my local informant told me." If Land Use
Master Plans worked only as guidelines and the numbers prescribed were not hard constraints, the problem would be less severe. However, the contrary is true. Unrealistic targets translate into real difficulties in policy implementation.
Second, distribution of the limited amount of quotas is problematic. According to my key informants, the quotas are not assigned to localities according to actual demand. Those with faster economic growth and higher demand for land do not necessarily get more land conversion quotas. For example, in Rui'an, an city in Zhejiang Province which is known for its booming private sector and rapid economic growth, the local land bureau said that the assigned quotas do not meet even 1/10 of the actual demand for land. Other cities in the same province, which do not grow as fast, are given just about the same amount of quotas.
3320110303-RA-C
58 Lastly, the remedial measure of creating new arable land while converting arable land for development is further limiting local governments' ability to use the limited and ill- allocated quotas. Local governments question the efficiency of preserving agricultural land indiscriminately across the country. Some localities have fertile land, while others have only barren land; some boast relatively abundant land resources and others extremely limited. The implementation costs and opportunity costs of saving agricultural land thus vary distinctly by locality, depending on their geography and stage of economic development. This difference is not taken into consideration by the Central Government when assigning quotas.
Enforcing the same standards regardless of local variations is quite common in many policy areas in China, and land conversion control is no exception. The often-cited reason is political equity -granting differential policies might lead to discontent. Practicality is another reason-the huge costs to investigate the local situation may be burdensome, and if not carefully studied, may lead to more discontent among competing localities. An official from the Ministry of Land and Resources explained to me, "So many factors would matter in allocating quotas that considering all of them would make planning extremely difficult, if not altogether impossible. Although with many problems, the current quota system imposed indiscriminately is at least the most feasible one politically."34
1 20110809-BJ-M
59 The one-cut command and control approach means inflexibility on the local level. The costs of implementing the central government's requirements are different-for those cities that develop very fast and have relatively little potential new agricultural land to create, the costs are much bigger than those, which are growing relatively slowly and more abundant land resources. There had been market-based policy attempts to correct the strict policy; for example, in Zhejiang Province, localities once traded official quotas among themselves, and those that have relatively abundant land resources can sell their quotas to those lacking quotas (See for example, Wang and Tao 2009; Wang et al. 2010).
However, by the time of my field visits, local informants told me that this model had long since died, because with faster than ever urbanization, no city is willing to sell the precious quotas now. Each city I visited cried out for a lack of quotas.
2. 2.5 The "Municipality Over County" Governance Structure and the Demand
for Land
Although all cities are crying for quotas, I found during my fieldwork that small cities governed by county governments are most short of quotas. Why is that? Before we go further, we have to pause here for a moment and explain a critical concept: what is a "city" in China? What are the differences and connections between a city and a municipality, and a city and a county? Without clarifying these concepts, our understanding of the land
60 quota markets and even of China's general development pattern would not just be incomplete, but could be wrong.
Unlike American or European cities, a "city "in China does not correspond to a political jurisdiction, but rather a rough area that is the urban core of a jurisdiction. A municipal government in China governs not only urban districts which constitute the center city, but also the suburban counties and rural counties around it. For example, when people talk about the "city of Beijing," they are referring to the urban area of Beijing, more or less corresponding to the 6 core urban districts that are home to a population of 11.7 millioni
However, the Municipality of Beijing includes another 10 suburban districts and rural counties supporting an additional population of 7.8 million. In my case cities, Chengdu
Municipality has 19 districts and counties, and Chongqing Municipality 38. In terms of geographic area, the center city is only a small portion of a municipality; the rest are counties. A municipality in China is more comparable to a metropolitan region in the US, and in most cases, even bigger.
3s For example, even urban experts like Edward Glaeser mix up concepts of city and municipality in China. When Glaeser describes how Shanghai and Beijing are much less dense than New York City and Los Angeles in his 2011 book, he wrongly uses the density of a municipality that include large rural areas, rather than the built-up density of an urban area. See below the excerpt from his book.
"Shanghai and Beijing, with their 20 million and 17 million inhabitantsrespectively, are vast places about one tenth as dense as New York City and less than half as dense (about 2,600 people per square mile) as Los Angeles."
Glaeser, Edward (2011-02-10). Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier (Kindle Locations 3806-3807). Penguin Group US. Kindle Edition.
61 Making counties part of a municipality is only recent history in China. Until the 1950s, shortly after the People's Republic of China was founded, both counties and municipalities were still directly under the jurisdiction of a provincial government. The structure of "municipality over county" 36 evolved during a period of 30 years, and became an established political structure by the early 1980s.
The rationale for this change in political structure was an urban-biased development strategy. The focus of the People's Republic in the early years was to industrialize. In the
"municipality over county" structure, a municipal government could easily access resources from the counties to support the development of the center city. Agricultural products, mineral resources, and even cheap labor flow from counties to the center city.
To counties, being subordinate to municipality leaves them little independence and authority. First, county leaders (both of the government and of the party) are directly appointed by the municipal leaders. This implies that county leaders have no incentives to oppose municipal policies even if they don't agree.
Second, county public finance is under the management of the municipal government. On the expenditure side, the divisions of responsibilities were often unclear in China's fiscal system; with its authority, the municipal government tends to shift larger responsibilities toward the counties. On the revenue side, the municipal government cuts off a share of revenues from the counties in the name of "centralization of revenues." Without the
36 Some authors use similar terms such as "city governing county" or "city over county." I intentionally use "municipality" rather than "city" to emphasize the formal political jurisdiction.
62 autonomy to levy tax, fiscally crunched counties often seek extra-budgetary revenues as a counter-measure (Feng 2012). As explained earlier, land leasing fee are often the most important extra-budgetary revenues for local governments, especially for county governments.
Lastly, the municipal government also tends to give more public investment and administrative resources to center cities than counties. The quality of infrastructure and public services in counties is often much poorer than in center cities. The political dominance of municipal government over county government allows the center city to grow at the cost of limiting the development of the counties. This phenomenon is described as "city eating up counties." While urban districts are the favored kids, counties are like the forgotten stepchildren.
China's transition from an agrarian society to an industrialized, urban society has an impact on the municipality-county relationships. When the "municipality over county" structure was just instituted, the center city and the counties had very different development focuses. The center city was to develop industries, the counties agriculture.
But now both center cities and counties are entering the age of urbanization. County seats and large towns are becoming cities. The tension between municipal governments and county governments to a certain extent has evolved to city-to-city competition. As cities, they compete for similar kinds of resources: capital, skilled labor, and not the least, developable land.
63 From the previous section we know that the supply of developable land depends on how much land conversion quotas a locality gets. How would the "municipality over county" structure affect the allocation of land quotas? How then would it affect the gap between supply and demand of land in different types of districts/counties?
Politically, urban districts are more important to the municipality, and suburban and rural counties much less so. Economically,. both the center city and suburban counties have fast-growing urban areas. When allocating quotas, urban districts get proportionally more, and counties much less. To rural counties, this is less problematic, because they do not have so much demand for urban land anyway. But for the politically less important but economically fast-growing counties, the gap between quotas and real demand for land is severe. The graph and the table below are a stylized presentation of the relative economic and political positions of center cities (urban districts), suburban counties, and rural counties.
64 1:4
c Center City (Urban Districts) co
Cl)
* Urban area
Rural County Suburban County 0 -j
LOW HIGH Economic Development
Figure 2-1 Relative Political and Economic Positions of Districts and Counties in a Municipality
Table 2-1 Gaps between Land Supply and Land Demand in Different Kinds of Districts and Counties
Urban District Suburban Counties Rural Counties Land Demand High Medium Low
Amount of Official Quota Allocated Large Small Small
Gap between Supply and Demand Small Big Small = Demand for New Quotas (Compiled by the Author)
2. 2.6 Negotiating for More Quotas
The last section concludes that a quota shortage is prevalent. How can local governments get more quotas? Although the quota control system looks rigid on paper, there is always
65 room for negotiation. My informants from local governments say that the quota allocated to a locality at the beginning of every year as prescribed in the annual plan is only an initial allocation. The higher-level governments often have reserved some quota as
"contingency quotas" for land use projects that are "special cases" not included in the annual plan. But how much contingency quotas are there and what projects can be considered special is subject to negotiation.37 If the formal planning (as reflected in Land
Use Master Plan and Annual Land Use Plan) is about how to slice a very small cake, for local governments, then the informal negotiation for contingency quota is about trying to touch the extra pieces of cake that the higher-leveler of governments have "hid" somewhere.
Negotiations take place between various levels of government. For example, Chengdu has built up a new economic development zone, the Tianfu New District, which is categorized as a provincial-level key project. This categorization is critical because then
Chengdu Municipality could claim that the land converted for this new district should not be counted towards Chengdu's annually allocated quota, but rather that the provincial government should assign quotas from the provincial pool. Chongqing's new district, the
Liangjiang District, is categorized as a national-level key project, with the land quota given directly by the Central Government. As a more general example, if a planned national highway will go through a city and require land conversion, the municipal government, with the help of its provincial government, would lobby the Central
Government that a special quota arrangement be made there, not counting towards either
" 20121108-CD-L
66 the municipal or the provincial total pools of quotas. In sum, the trick lies in lobbying the higher-level governments that might have contingency quotas and convincing them that
the importance and impact of the project go beyond a locality."
Local land bureaus are the ones who have to work out the negotiations. The bureaus
often complain that they are under a lot of political pressure. Local leaders care most
about economic growth and "visible" projects (such as building new factories, expanding
business areas) which all require significant area of land. The land bureau becomes the
specialized division of the government to help the local leaders achieve the goal by
getting more quotas. My key informant from a municipal land bureau said, "Our main job
is to network and develop guanxi with the Provincial Land Department and Ministry of
Land and Resources. Getting more quotas is the measurement of how capable we are in
the eyes of the mayor and the party secretary. If the head of the land bureau is not
39 aggressive enough in getting quota, the municipal leaders will appoint someone else."
The local land bureau is caught in an awkward position--in addition to being pressured by
municipal leaders, local land bureaus are also regulated by the Ministry of Land and
Resources. The political system of China is characterized by a tiao-kuai or matrix
structure (Lieberthal and Oksenberg 1988); the state is authoritarian, but also fragmented
(Lieberthal 2003). A specialized administration, such as the land bureau, is managed both
"horizontally" by the same level of government and "vertically" by the line ministry.
Horizontally, the land bureau is managed and funded by the municipal government, and
38 20121029-BJ-B 39 20121109-CD-Y
67 the appointment of key officials of the bureau is by municipal government. But vertically, the Ministry of Land and Resources monitors land use and can directly punish local land bureaus should they exceed the limits of quotas and/or violate land use laws. While vertically the line ministry's emphasis is on abiding by land use law and limiting land use; horizontally, the municipality 's emphasis is on economic growth and expanding land use.
The land bureau has to answer to different entities and fulfill contradictory policy goals.
"You can listen to the Ministry and let go of development projects that you don't have quotas for; soon you'll be removed by the municipal leaders. Or you can help the municipal leaders and go against the Ministry, hoping that you are not caughtiin projects without quota approval. Either is a bad situation. The institutional constraints are driving us crazy !",40 What can local governments do in this meager situation?
2.3 Overcoming the Quota Constraints
Since official quotas are never enough, and political negotiations do not always work, local governments have to think out of the box to get more quotas for land development.
The more innovative way, and the phenomenon to be studied in this dissertation, is the quota market experiment. "The invention of the quota market experiment helps us catch our breath."' It is an unconventional way to meet the dual challenges of urban expansion and farmland protection. This local policy innovation taps into the existing built-up area in the rural areas. The reasoning of local governments behind creating this policy is that that urban built-up area is bound to increase, but the Central Government also requires
40 20121109-CD-Y 41 20121109-CD-Y
68 that the farmland does not decrease, so the only way to meet both conditions is to
"transfer" the existing built-up area from the countryside to the city.
China's separated urban and rural land markets provide a basis for such transfers. In the same Measures that enforce land quotas, there is an article stating, "Provincial government should plan for the rural and the urban areas together, with the principle of linking the increase of developable land in the urban areas with the decrease of developable land in the rural areas." The article is written against the background that rural developable land in China is used sparsely, whereas land in cities is now "as expensive as gold" and developed densely. One reason for this disparity is that unlike urban land, rural land is still not tradable, and therefore cannot be transferred to uses of higher value. This institutional condition is combined with the fact that there is natural outgoing of population in the rural areas-many villages have become the so-called
"hollow villages" with large built-up areas, but few people living there.
Localities desperate for quotas find space for maneuvering in the policy explained above which advocated for the "linking" principle. Local governments interpret the principle of
"linking" as "so long as the same size of agricultural land is preserved, the built-up area in cities can increase when a built-up area of the same size is demolished in the rural area."
Using this article as an excuse and a shield, local governments have designed various programs trying to consolidate rural land.
42 Article 13 of Measures on Drawing Up and Auditing of Land Use Master Plans
69 2. 3. 1 The Spatial Mechanism of the Land Quota Market Experiment
The "linking" principle sounds straightforward, but the practice is painstaking. First, how could a rural area reduce its built-up areas? Some localities have land used for factories from rural industrialization in the past-the so-called era of township and village enterprises (TVEs)-which can be demolished and cleared. But most of them do so by consolidating peasants' residential land. People who used to live in one- or two-story farmhouses are moved to high-rises (often 5- to 6-stories high, and in extreme cases like the City of Tianjin, peasant resettlement buildings are 10 to 20-stories high). By moving people from low-density dwellings to high-density ones, the local governments have
"saved" land.
Second, what do they do with the "saved land"? Such pieces of saved land do not necessarily have good locations, and may even be quite fragmented if they were previously scattered farmhouses. Local governments demolish the houses, clear the land and turn it back to agricultural land (the process of which is termed "reclamation"). In this way, they have created more agricultural land than they are required to preserve.
They register this amount as "locally created quotas."
Lastly, local governments do not create new agricultural land for the sake of agriculture.
Their goal is to increase their count of agricultural land in order to increase the amount of
land they are allowed to convert from rural into urban land in more desirable locations, often near the city. In this way, the amount of agricultural land is kept the same, but the
development is transferred from scattered locations in the rural areas to concentrated
70 places in the urban areas. These new quotas do not count in the official quotas assigned annually by the Central Government, but operating totally outside. In this way, local governments can expand urban areas beyond the limit set by official quotas.
Before After
0 C 0. (D W SU- New Quotas
Figure 2-2 Spatial Mechanism of "Linking the Decrease of Developable Land in Rural Areas with the Increase of Developable Land in Urban Areas"
Figure 2-2 shows the spatial mechanism of the quota market experiment. To sum up, quota generation takes place in rural areas by demolishing sparsely located farmhouses and reclaiming the land for farming; and then by resettling peasants into apartment buildings of higher density that occupy a smaller area of land. This process has saved developable land, thus generating quotas. The quota use process takes place on the urban fringe by converting agricultural land of the same size as developable land saved in the rural area using the quotas. The end result is that the amount of total agricultural land is
71 the same, and the amount of developable land is also the same. The difference is in distribution: more developable land is concentrated in the rural area, while more agricultural land in the rural areas.
The "linking" principle also has another meaning that is very specific to quota projects.
The quota generation project (residential land consolidation in the rural area) and the quota use project (new development in the urban area) are directly linked-they must be designed and approved as a package. In other words, each quota generation project has a corresponding quota use project that is predetermined before any construction can take place. The pairing is determined administratively.
Linking programs are widespread. In 2006, the Ministry of Land and Resources had approved a first batch of 5 provinces as pilots to run linking programs. By 2009, another
19 were allowed. By 2013, the Ministry of Land and Resources had approved a total of
29 out of China's 34 provincial level jurisdictions to run linking programs (Zhang 2013;
Wang and Bai 201 1). These programs have different names, for example, the Rural
Land in Exchange for Urban Housing Program in Tianjin Municipality, and the
Residential Land for Housing, Agricultural Land for Social Security Program in Jiaxing
Municipality. Although the fundamental mechanism of these projects is more or less the same, the impact is associated with the exact program design.
" If we exclude Taiwan where the People's Republic of China is not in fact governing, and Hong Kong and Macau Special Administrative Regions where the Central Government's land use planning does not apply, the ratio then is even higher: 29 of 31 provincial jurisdictions covered by the national land use plan are running some variations of the linking program.
72 Two of the pilot sites, Chongqing Municipality and Chengdu Municipality, took the experiment a step further-in addition to quota generation and quota use, they created a step in between, the quota market. In the quota market, quota generation and quota use projects no longer need to be administratively paired up. Rather, quotas are sold on the open market through bidding. Both municipalities have also considered creating a secondary market for quotas. Quota trading has implications we do not see in simple quota linking programs.
2. 3. 2 The Justification of the Land Quota Market Experiment
The quota linking and market programs are an astonishing institutional innovation. In order for these programs to be permitted by China's strict land quota management program, local governments needed to convince Central Government bureaus. They did this by framing quota programs as conforming to the Central Government's policy priorities.
Rural China has been gaining importance on the Central Government's policy agenda.
While urban China has been going through transformative changes during its economic reform and urbanization, rural China is lagging behind. The Chinese Central Government has initiated various policy campaigns to address this issue. The most prominent one is
called "Building the New Socialist Countryside" launched in 2005. This was a
comprehensive campaign to "promote agricultural production, increase rural income,
improve rural culture and ethics, clean up village environment, and democratize rural
73 administration." 44 The Building the New Socialist Countryside campaign is only a guideline that lacks implementation details and corresponding funding. Local governments rarely have incentives and the resources to really invest in the countryside.
However, a couple of years later with the creation of linking programs and quota markets,
Building the New Socialist Countryside suddenly became popular, because local governments could use it to justify the policy innovation. Quota programs label themselves as pro-peasants, and emphasize better locations and qualities of peasant houses and the new infrastructure and improved services. Local governments also claim that through quota programs peasants will have diversified income sources rather than just relying on farming; they will have a new lifestyle and will be gradually urbanized.
An overarching policy campaign, titled "Integrating Urban and Rural Development" has been the Central Government's new approach to addressing the issue of urban-rural imbalance. One key aspect of this campaign advocated by the Central Government is integrating urban and rural planning. In 2007, China issued the Urban and Rural Planning
Law to replace the previous Urban Planning Law, emphasizing integrated spatial planning. Local governments claim that quota transfer is a good example of integrated urban and rural development and planning: transferring land for development from rural and urban areas to better allocate resources. It is a win-win situation -peasants are better off and urban development gets the much-needed land for expansion. More importantly,
" Central Committee of Chinese Communist Party. 2005. "Shiyiwu Guihua Gangyao Jianyi ( t+-E L'J ffl ik [Suggestions on the Formulation of 'Eleventh Five-Year Plan'] http://news.xinhuanet.com/politics/2005-10/18/content_3641362.htm.
74 both objectives of rural development and urban development are achieved without compromising the Central Government's concern of preserving agricultural land.
However, these rhetorical justifications should not be taken at face value. All the claimed benefits to peasants are provided under the condition that peasants give up their rural residential land. In my fieldwork, I have found that peasants who are not willing to give up land and thus cannot contribute quotas do not get new houses even if they are in the same dire situation of poor housing as those who participate in the quota experiment.
The driving force of quota programs is to get more land for urban development, rather than merely to benefit the peasants.
The problems with quota experiments have gradually come to the surface. After cautiously approving a dozen cities as pilot sites to experiment with quotas, the Ministry of Land and Resources is gradually losing control of such practices. "The original policy has been distorted and abused at the local level," my key informant from the Ministry told me." Many localities went ahead with the quota experiment without the approval of the Ministry and therefore lacked proper monitoring and necessary safeguards. At the end of 2010, the State Council issued another order to "seriously regulate the linking programs."4 6 The problems pointed out in this order include that many programs are
4 20110809-BJ-M 46 State Council of China. 2010. "Guowuyuan Guanyu Yangge Guifan Chengxiang Jianshe Yongdi Zengjian Guagou Shidian, Qieshi Zuohao Nongcun Tudi Zhengzhi Gongzuo de Tongzhi, Guofa 2010, 47 Hao ([M*yR)i99 4M!Anf Oij_ 14ff Mit fgg9ij~fl 4 ,t)) J4iiR.fl~afMJ nIUA (2010) 47 -') [State Council's Notification on Strictly Regulating Urban-Rural Construction Land Linking Pilots, Practically Implementing Rural Land Consolidation]."
75 forcing peasants to move and the benefits from land sales are not shared with peasants.
Although the Central Government has highlighted a couple of key problems, the implications of such programs go far beyond them to include potential impact on spatial patterns, land prices, as well as public finance, just to name a few. To find out the impact of the programs and create a holistic understanding of the quota program is the primary goal of this dissertation.
2. 4 Chapter Conclusion
This chapter has explained the institutional background that prompted the emergence of
the quota markets. The concern for agricultural land preservation has dominated China's
land use planning. The most salient feature of the planning is target control-the goals
and plans for agricultural land preservation, land conversion for urban use, and the
creation of new agricultural land are all assigned as numeric targets all the way from
central government down to provincial, municipal, county and township levels of
governments.
The rigid control of rural to urban land conversion can hardly accommodate the demand
for land in Chinese cities during rapid economic growth. Quota linking and market
experiments, a local policy invention, have helped bring local governments out of this
dilemma--in essence, these experiments swap faraway, scattered rural land for
consolidated, well-located land for urban development, while maintaining the same size
of agricultural land. However, the end results may be contrary to the central
76 government's intentions, leading to large-scale resettlement of peasants, and more aggressive land conversion.
How exactly does the quota market work, and what are the impacts on rural and urban areas? And we learned that both the center city and the counties would want to have more land quotas, but suburban counties especially want more. How would that affect the institutional design and evolution of the quota markets? The next three chapters will examine the quota generation, the quota use, and the quota trading respectively, teasing out the new institutional processes it has produced and how this has affected the old model of land commodification and inter-governmental relationships in China.
77 Chapter 3 The Industry for Creating New Tradable Land Quotas: The
Demolition and Reconstruction of the Rural Countryside
In the previous chapter I explained the institutional background of the emergence of quota markets, and introduced the general scheme of the quota program, which consists of quota generation, quota trading, and quota use. In this chapter I delve into the actual practice of quota generation using real cases and statistics from Chongqing and Chengdu.
The cases reveal that the current quota generation system is a new industry with the invention of new quota developers and auctions and new intergovernmental and public- private collaborations, which has helped local governments circumvent major constraints in the previous mode of land taking. The significant difference in this phenomenon is that land density rather than its location is the key value for quota generation. Thus, quota generation demonstrates a new kind of spatial logics, the "de-spatialization" and "re- spatialization" of land transfers.
In the rest of the chapter, I will first examine the changes in a Chinese village as a result of quota generation. I examine the case to see how property rights are changed in the process. I then study the key actors who facilitate quota generation, the "land quota developers." I ask how they work to profit, who they are, and how this new business has emerged and evolved.
78 3.1 The Story of Dazhu Village
The government taking land from peasants and relocating them is not something new in
China. During rapid urbanization of the country, many villages have been incorporated into city boundaries, rural land has been converted for urban use, and peasants no longer farm. Typically, land in villages on the urban fringe is taken. But the story of Dazhu
Village, which I will introduce, is different. Dazhu Village is located on the outskirts of a major city, Chongqing. In fact it is 80 kilometers away from the city, more than one hour's drive. Usually land in such a remote location would not be in much demand, but
Dazhu Village is going through a special process of land transfers.
When I visited Dazhu Village in winter 2012, 1 met Grandma Wu47 who was standing next to the land where her old farmhouse had sat. Her house had been demolished and the land was now leveled. An inspection team from the Land Consolidation Center of the
Qiantang District Government came to inspect the land. They selected random spots to plough to ensure that gravel and the ruins of the house had been completely removed.
Dazhu village where Grandma Wu lived was participating in a "land quota generation" project. Grandma Wu was asked to give up her old house and the residential land, in exchange for an apartment in the newly built village center.
When chatting with me, Grandma Wu said that she had no idea what her residential land would be used for. At the time of our conversation, the inspection team had various comments and questions about her land but were all directed to the village and the deputy
47 Pseudonym.
79 township heads, who met and accompanied the team on the site. Nobody talked to
Grandma Wu as if it had nothing to do with her.
The officials knew too well about the future use of the land. Unlike in typical land taking on the urban fringe, Grandma Wu's residential land per se would not be used for urban development. Rather, the local township would turn it back to farmland. It then could claim to the higher-level government that the township had saved developable land in
Dazhu. And under the current policy framework of "linking the decrease of built-up area in the rural area with the increase of built-up area in the urban area," the township government could use land of the same size in a desired location for development.
Local governments use the term "land quota" to represent the developable land saved in one location but would be used in another. In this case, the land quota generated by reclaiming the housing land of Grandma Wu's and others' in the village would be used in a future industrial park in another part of the town.
The practice of "land quota generation" was so new that the township designed a pamphlet detailing the whole plan.4 8 The first section of the pamphlet explains that that seven villages in the township, including Dazhu, are participating in a quota generation project. About 600 households in these seven villages would be resettled into new apartment buildings, releasing 462 mu of residential land previously occupied by old farmhouses.49 These parcels would then be cleared to grow crops and vegetables. 0 The
48 People's Government of Qiantang Township of Hechuan District, Chongqing. 2010. "Qiantangzhen Tudi Guagou Xiangmu Xuanchuance (H tjAWN l'[1l) [Pamphlet on Land Linking Program in Qiantang Township]." 49 1 mu= 0.165 acre
80 construction of the new apartment buildings in the town would take 100 mu of land, or
362 mu less than the sparse farmhouses previously occupied. The "saved" 362 mu would be used for six different industrial and development projects at various locations throughout the town. As claimed in the pamphlet, the end result would be that scattered rural residential land parcels would be concentrated for more efficient use. The government's justification for doing this is that industrial and urban development projects would get the land they need, and peasants could get better housing-which would be a win-win situation for both rural and urban development.
After inspecting Grandma Wu's land, the village head drove me to the new apartment complex for peasants. During our ten-minute drive through the village, we passed vegetable gardens and tangerine farms. The village head pointed to them and said that the reclaimed residential land would be merged into those existing farms.
Once we arrived at the new village center, the village head proudly talked about how the new center represents the " the new socialist countryside": "Building the New Socialist
Countryside" is a policy campaign that the central government of China has been promoting for the past few years, but had limited funding to support. Local governments cite the policy to lend more legitimacy to the controversial practice of quota generation.
Since funding for building the new village comes from selling the quotas, a local initiative, the local governments could claim that they are doing the Central Government a favor-fulfilling its goal of modernizing the countryside without requesting fiscal resources from the Central Government.
50 For example, in Dazhu Village, the various residential land reclaimed will be integrated into existing vegetable and tangerine gardens.
81 I walked through the village center with the head. The new housing is mostly three-storey apartment buildings with a uniform design of grey roofs and white facade, in contrast to the old, unique one-storey farmhouses currently dominating the village. The village center also included a public square, a community center, a clinic, various storefronts and paved roads in and around the center. When I visited, only a small number of the apartments were occupied-looking from the outside, most of them had empty balconies and no window curtains. Few people were hanging out in the public area, and only a couple of storefronts were open for business.
The village head explained to me that peasants made their own decisions about whether to participate in the project. Some households had agreed to move into the new compound and others were still considering. This supported one of my earlier observations-I saw that the house of Grandma Wu's neighbor stood next to her vacant land. It looked newly renovated. Earlier, the village head had mentioned this renovation as the reason that the neighbor decided not to give up their house.
This individualized decision of resettlement is substantially different from what happens in typical land takings on the urban fringe. Normally converting rural land to urban use implies wiping out entire villages. To developers, residents who refuse to move are creating holdout problems and can stall an entire development project. In China, these holdouts are called "stubborn nails." Pressured by township governments, village heads are responsible for getting the whole village to move and cleaning up the stubborn nails.
This often becomes the flash point for confrontations and violent conflicts. But this is not
82 -A
what happened in the resettlement process in Dazhu. Because every household makes its own decisions, the village head had walked from door to door, and negotiated with each.
Although getting more households to participate would be better for the village head, he did not target particular households. This is because the total size of land reclaimed, rather than the specific locations of the land parcels, is important to him. If one household said no, he would go to the next one.
During my visit, I also collected various documents about Dazhu. These include land use plans for the quota generation project, architectural design of Dazhu's new village compound, and plans for attracting commercial agricultural corporations to invest in the farmland reclaimed after quota generation projects.5 '
The village had contracted professional planning, design and consulting firms and even universities to prepare these plans. Identifying these professional services, providing data and information to them, and supervising the production of these plans and designs requires a lot of effort from the village head.
The village head did not do all this work for nothing. One township document shows that for each mu of residential land reclaimed, while the household gets about RMB 120,000
5 Author Unknown. Date Unknown. "Chongqing Hechuanqu Qiantang Zhen Dazhucun Guihua Xiangmu(C)1& )II E IMA)##IP AH) [Project Plan for Dazhu Village, Qiantang Township, Hechuan District of Chongqing I." - - -. Date Unknown. "Chongqing Hechuanqu Qiantangzhen Dazhucun Shifandian Jieshao (I-L -J)I EX A * A r) [Introduction to the Demostration Project of Dazhu Village in Qiantang Township, Hechuan District of Chongqing]." People's Government of Qiantang Township of Hechuan District, Chongqing. 2010. "Qiantangzhen Tudi Guagou Xiangmu Xuanchuance (WWH 9 H A ) [Pamphlet on Land Linking Program in Qiantang Township]."
83 yuan of compensation (either in cash or in kind of new housing) for their loss, the rural collective also gets RMB 21,000 yuan as overhead. In addition, the village gets RMB
15,000/mu to cover construction and engineering costs, and another RBM 11,000/mu to cover capital costs. The official document has stated that if actual costs are less than allocated, the saved funds go to the village as additional management overhead. 2 The village head has an incentive to persuade more peasants to participate, and to manage the project well to reduce operational costs. In essence, the village head is like a developer, a land quota developer. It is not the typical land developer that we are familiar with who turns agricultural or unused land and builds houses on top. Quite the opposite: land quota developers profit by undoing the process-houses are demolished and developed land is reclaimed for farming.
Figure 3-1 Demolished Farmhouses
2Author Unknown. Date Unknown. "Dipiao Jiakuan Fenpei Goucheng Biao (tuN )lIZ ) [Breakdown of Costs of Land Quota Certificate]." Official document collected from the Qiantang Township Government.
84 Figure 3-2 Residential Land Reclaimed for Farming
Figure 3-3 New Apartment Buildings for Peasants
85 3. 2 The New Quota Developers
The story of Dazhu epitomizes a new industry of quota generation that has emerged since the invention of quota programs. A quota developer who is the key organizer and operator has to manage a complicated process and has to deal with many relationships.
The process of the quota generation may vary depending on the specific policy and program design. But in general, the activities of quota developers can be summarized into a few major steps:
A quota developer first has to plan the project. Since the essence of quota generation is to move peasants from scattered houses to concentrated residences to save land, the project planning involves siting and design of the new residence, demolition of houses and reclamation of land. This plan is built on some initial stocktaking of peasants' willingness to participate, in order to know how many households will move and how many new apartments to provide. The quota developer often hires professional planning and design companies to do the work. In some cases, even surveying peasants is outsourced to survey companies (Lu, Gu, and Li 2011). Then, the quota developer would have a rough idea about how much land can be saved, that is how much quota is likely to be generated, based on the number of households participating and the change in their housing density.
The next step is to negotiate compensation packages with peasants. This is the most laborious step. The quota developer will first have to work to agree on compensation standards with the peasants. Compensation could be based on a number of factors: the size of the lot, construction material of the house, age of the house, and size of the household and so on. The quota developer and the peasants also need to agree on the
86 form of the compensation. Do the peasants want an apartment or cash compensation or a combination of both? If the peasants want a bigger apartment than their compensation package can cover, how much do they have to pay? The quota developer walks from door to door to persuade peasants to participate, and all these nitty-gritty details need to be worked out with each individual household. For assessing the house value, the quota developer may hire a professional construction appraisal company.
The above is for peasants who will move in order for their houses to be demolished and land reclaimed for farming. But the new apartments built for them will also occupy land that is currently either farmed by some households or used for housing. A similar negotiation needs to be carried out with these peasants too.
Once terms are agreed upon, contracts are signed between the developer and the household. The quota developer has to submit a project application to the government with all the project details. The application and approval step involves some uncertainty too. From the peasants' side, some who originally agreed to participate may change their mind. In other cases, when peasants who initially did not want to participate see the new apartments being built, they instead want to do it. Quota developers have to modify their application and submit it again.
Construction is relatively straightforward. The new apartments are built first. Once they are completed, peasants move, and their old houses are demolished. Ruins are removed,
87 an irrigation system put in, and the land is reclaimed. This is outsourced to engineering and construction companies.
Quotas are officially approved after the government's inspection team, often consisting of the land bureau and the agricultural bureau, checks the quality of the reclaimed land.
Since the soil has its own recovery cycle after being used for construction (which is at least three to five years to be fertile enough for farming), the main criteria the inspection team uses is that land is leveled, and proper irrigation infrastructure built. Once inspection is passed, a land quota certificate is issued. The certificate looks like a banking book, with the name of the quota holder (in this case, the quota investor, unless they sell the quota to another entity), quota owner, the size of the quota, the list of land plots-- identified by lot number--that were reclaimed to generate the quota. This is the end of quota generation and the whole process takes two to three years.
3. 3 Altered Properties, Changed Property Rights
The visible spatial changes during the process of quota generation embody the intangible changes of property rights. A land quota is essentially a special kind of right to land that is severed from its original owner and transferred to a new owner through the steps of demolition, construction, and reclamation in rural areas. This section examines what rights of the peasants and the rural collectives are altered in order to generate quotas. This will also helps us understand what the quota is a right to.
88 3. 3.1 Alienating Development Right from the Rural Collective
Let's first look at what rights are changed in Location A before and after the quota generation process. I will take one farmhouse, Grandma Wu's house, as an example.
Like any peasants in China, Grandma Wu's family is entitled to a piece of land to build their house on. This kind of land is termed "rural residential land", to differentiate it from another entitlement peasants have, the "contracted farmland." All rural land in China is owned by rural collectives. In this case Dazhu Village Collective owns the rural residential land under Grandma Wu's house, and the use right is assigned to her family by the collective, on the basis that they are members of the collective. Grandma Wu's family has the ownership of their farmhouse. The rights the family has in the land and the house are formally represented by a Land Use Certificate and a House Ownership
Certificate, issued by the Municipality of Chongqing. Dazhu Village Committee also has been issued a Land Ownership Certificate of the whole village. The certificate details the size of rural developable land and the size of farmland in the village. Grandma Wu's rural residential land is counted towards the village's developable land. 3 Other types of rural developable land include land used for rural enterprises and land used for rural public facilities such as roads, rural clinics, irrigation systems and so on.
It is important to note here thatthe Land Ownership Certificate of the village specifies the size of developable land versus the size of farmland land for a reason. These categorizations not only indicate different types of land use, but also embed in them
53 This is the result of recent "Defining Property Rights" campaign in many cities in China. Before the campaign, land cadastre was not updated and rights in land and housing lacked legal representation. Chengdu is a pioneer of this campaign and it is promoted nationwide by the Central Government.
89 certain property rights and property obligations. In farmland, the right to farm and the obligation to farm both exist, but the obligation is more dominant. Grandma Wu can farm her land, and whether she gains or loses from farming are her own stakes. However, if her farmland is not preserved, for example, either used by her family or Dazhu for construction, the local Land Bureau will find out and punish them. In contrast, in rural developable land, the right to development is dominant and there is no obligation to develop. Rural collectives fight for getting more developable land from the local bureau, and peasants will petition and protest if they don't get the residential land they deserve.
However, if for example, Grandma Wu's family is willing to live in a tent on their residential land or even give up the land, it would be nobody's concern.
These different property relationships are shaped by China's overall political economy.
On the one hand, farming is becoming increasingly less profitable for the peasants and food security has become a top priority for the state. Obligation to preserve farmland is stressed, and laws and policies are promulgated to punish the violators. On the flip side of the same problem, peasants try to gain livelihood through non-agricultural means, like building factories or rental houses on their land. The state is trying to avoid such sprawls of construction to preserve farmland by all means.
Before the quota generation project, the peasants own their house and they have use rights of the land under their house, the rural residential land, and the collective owns the rural residential land. After the quota generation project, by agreeing to resettle, peasants have given up both the ownership of the house and the use rights of their rural residential
90 land. Although the rural collective still owns the same piece of land, by turning it from rural residential land to farmland, the collective has severed its right to develop the land and at the same time, has been imposed the obligation to preserve the reclaimed farmland.
The right to development is alienated from peasants and the collective, decoupled from its original parcel of land, and becomes "land quota" to be used elsewhere.
3.3.2 Altering Peasants' Ownership of Housing
As discussed earlier, in compensation negotiation, peasants can be compensated either with a new apartment or by cash. A relatively small portion choose cash compensation- very likely these peasants already have a house elsewhere, for example, in the nearby town or even the city proper. In this case, peasants have given up their ownership of house and use right of rural residential land in exchange for cash compensation. However, the majority of the peasants choose to be resettled, as most of them still rely on farming.
Their right to contracted farmland in the village is intact regardless of their participation in quota generation projects. In this case, new apartments are built in the same village, but in better-located and concentrated locations for the peasants. For resettled peasants, they have obtained new rights-the ownership of the apartment, and the shared use right to the piece of land under their apartment building.
When resettling peasants, the collective also has land rights changed, because the land occupied by the new apartments is turned from farmland to developable land. As stated
1 This is to some extent similar to the scenario in the US in which people sell their house to buy a condominium apartment. The only difference is that in the US the land is privately owned, and in the case of quota generation in rural China, the land is owned by the rural collective.
91 -J
earlier, in where old farmhouses are located, the old "rural residential land" is turned to farmland. If 200 households each gives up the 0.5 mu of their residential land, the collective can transform the construction right of 100 mu into quota. Although the size of the land in the village is the same and still owned by the rural collective, the size of developable land has decreased by 100 mu, and the size of farmland has increased by 100 mu.
In the new village center, the new apartment buildings are built on a piece of farmland.
Let's suppose it is 30 mu to which the collective does not have construction right. To build the apartments, the rural collective needs to transfer the construction right of 30 mu out of the 100 mu severed from the land used for the old farmhouses. In the area to build new apartments, there is a net increase of 30 mu of developable land, and a net decrease of farmland. To add up the changes in the two locations, the net change in the land of the village is an increase of 70 mu in farmland and a net decrease of 70 mu of developable land. The decrease of 70 mu of developable is then saved as land quotas. The quota is formally represented in the Land Quota Certificate issued to the investor by the Land
Bureau at the municipal level.
When I visited Dazhu, the quota generation project was ongoing so there was no quota certificate issued yet. But I was able to get hold of a similar land quota certificate in
Chengdu, one of my other case cities. This certificate was issued by Chengdu Land
Bureau in 2012, and numbered No. 000026 (see Figures 3.4 and 3.5). It represents a quota of 283.5090 mu. The "right holder" (as addressed in the certificate) of the quota is
92 Chengdu Xiangda Land Consolidation Corporation. The certificate shows that they obtained the quota by "original generation," not trading of quotas. This means that
Xiangda Corporation is the investor of a quota generation project, rather than buying it from other developers. The certificate also lists the name of the project that Xiangda
Corporation invested in. This involves decreasing developable land in Shima and
Kaiyuan villages and increasing developable land in Heshan Township and Changqiu town-all located in Pujiang County of Chengdu. The net decrease in the construction is the size of the quota. On the second page of the Land Quota Certificate, all land parcels that are reclaimed as farmland to generate this quota of 283.5090 mu are listed here by project ID. There are 172 parcels in total.
For each parcel listed in this sample certificate, rights of peasants and the rural collectives are altered as discussed earlier. Each parcel is turned back to farmland, with the right to developing the land revoked from peasants, severed from the rural collective, and then transferred to the quota investor. By the date the certificate is issued, the construction right is not only transferred to different right holders, but also decoupled from the actual land parcels. The numeric representation is the last link of the right to its original physical existence.
93 Figure 3-4 Cover Page of a Sample Land Quota Certificate Issued in Chengdu
335,28&8090* 18, 2, 3# 4#. 53 , 6# , 7#, 88, 98, 110 12. 13, , 143. a 04:gama 13. 16, 17#, 18# , 20#, 210, 233 , 24# 250, 293 , 308, 31, 320 , S3U . 343 . 359 . 36, 378 38# . 398, 403, 413 . 423, 43#, 443 . 4#. 46-1*, 4*-2o. 47t, 48# , 81# . 523, 54*, 66#, 680, 59, G0, 613 . 62k, 638 , 65C, AM 660 , 6 # . 68#, 69C. 700 , (NC 72. 3 . 74#. 793 , 76# . 77# 78. 803. 813, 823. 838.85# 89. 900, 923 , 968 , 97, 86*8620821537. 1610, 1030 . 105. li# , 113s, 1140. 117-1#, 117-20 . 1223 , MAT !*s/il :tm PO1 130 , 152 14S, 137# , 1390, 1428, 148$, 1490. 150. 1513, VA 186 0 157, 3598 . 160-1#. 160- 2$, 16. 164 . 165#, 168, 1 169 1700 , 1711, 174# , 175. 176# , 1778. 1788. 181#, 1833. 184# , 188, 1878. 1888. 1908, 185-1S , 195-2#, 1970, 1998. *qjE14j1M Vff"(OD12) 571 200., 2013 , 2058. 206#. 208. 2188 216S , 2188 2208 , 2233, 2288 , 227, 2318 . 23M3. 239#, 2403 2413 , 2438 , 2443, 2458 , 2468 , 2478 , 2488 2498, 266-1#, 256-2t. 291-3, 286-43, 260, 23, C688. 269. 2748, 276#. 2770, 278#. 2790,eA .2W, 1, 283#, 1848S. w, 2808 191C;'9q* 3038, -V as
Figure 3-5 Inner Page of a Sample Land Quota Certificate Issued in Chengdu
94 3. 4 A Typology of China's Quota Developers
Quota generation involves huge upfront costs for compensation, construction, and capital and so on. One of my key informants in Chongqing gave me an estimate of the breakdown of project costs: 70% of the costs is on compensating individual peasants, and
12% is on compensating the rural collective. The construction and engineering costs account for 10% of the total, and the remaining 7% is spent on providing county and district land bureau with "work capital" for them to supervise the work. In Chongqing, since most of the quota generation is invested by the municipality and implemented by the county and district land bureau, the 7% of the project costs/investment retained by the country and district land bureau can be considered as the profit for their role as a quota developer. The overall costs of a quota changes from year to year. For example, in
Chongqing in 2009, the price of a quota was only 80,000-90,000. In 2010, it reached an unexpected level of 250,000. In 2011, however, the price lowered to RMB 136,000/mu.
Quota developers who do not have the financial capacity work with a quota investor, and in that case, the quota generated is handed from the developer to the investor. The investor could then decide how to use the quota-whether to use it directly for their own projects or to sell it on the market for a project. (These details on quota use and quota trading/quota market will be discussed further in Chapters 4 and 5.) Quota developers and quota investors can be the same or different entities. The quota generated eventually goes to quota investors. Quota developers, when different from quota investors, profit by reaping the difference between investment and actual costs of quotas. There could be a
95 diverse combination of investors and contractors. In Chengdu, for example, we found
55 that that there is a range of combinations, as listed in the table below.
Table 3-1 Combinations of Land Quota Investors and Developers
56 Investors Developers Are investor and (funding source and ratio) developer the same? Public Municipal governments County/district no (n=304) government (41.36%) County/district Township government no government Township government Township government yes Private Non-governmental/ private Township government no (n=207) investor (28.16%) Non-governmental/ private Private engineering yes investor companies Non-governmental/ private Private engineering no investor companies Unfunded (n=224) (30.48%) (Data source: database of 735 quota generation projects planned in Chengdu between 2006 to 2011 from Chengdu Land Bureau. Calculated and Compiled by the author.)
We found that the government has invested in 41% of all quota generation projects, the private sector 28%, and the rest is unfunded--planned and approved, but still seeking investors. For government invested projects, in some cases a higher-level government invests and a lower-level government implements or develops. In other cases, the same level of government invests and develops. For private investors, they can either develop by themselves, or work with another private company as their developer. In some rare cases, the private investor works with government, usually at township or village level as their developer. The rest of the chapter discusses how the government and the private companies became quota developers respectively, and their incentives and behaviors.
5 From a database of 735 quota generation projects. The author did the analysis. 56 The original text in the table is "1A.f{iA," which in my terminology is the developers.
96 3. 4. 1 Government as Investors and Developers
As explained earlier, quota developers need to have both in-depth local knowledge about the village and good understanding of the development process. From the table above, we can see that the majority of government quota developers are either township or village level governments. It is not hard to understand that township and village governments are familiar with local situations, such as peasants' expectation, production mode, and preferences for housing and so on. But how did they learn about the development process?
I found that there is an existing institutional process that has helped mint the new quota developers.
In 2003, the Central Government of China promulgated a land policy that requires that local governments create new agricultural land of the same size taken for urban use through farmland consolidation. The farmland consolidation process and practices have a different purpose than quota generation-it is to create a net increase in farmland rather than to save developable land and use it somewhere else. But farmland consolidation involves similar steps of negotiating with peasants, assessing the value of their property, distributing compensation, and contracting professional companies to work the land. This prior experience has given local governments the familiarity and has been building up their capacity. Although quota generation as a business is new, the process of land consolidation is not. Building directly on the existing process of land consolidation also means that the additional administrative costs to local governments are minimal.
97 It is important to note here although township and village governments are working with a "spinoff" of the farmland consolidation, their incentives are very different with quota generation. Land consolidation projects are normally considered an exacting task by local governments. Each year, they are assigned a target of a certain amount of new agricultural land to create. It is a laborious process and a big spending item in the district and county governments' budget. "Because of quota generation, land consolidation is now a good business for the district and county governments, especially those in the outer suburbs," my key informant revealed." Quota developers can profit by about 7% of total investment.
I will provide a specific example. In 2009, the Chengdu Municipal Land Banking Center invested at a predetermined price of RMB 230,000/mu in quota generation in Pujiang
County. The Municipal Center contracted the Land Consolidation Center of Pujiang
County.58 The costs of quota generation are mainly from three parts: engineering and construction costs, compensation to peasant households, and compensation to rural collectives, which are a portion of the compensation to peasant households. Since the engineering and construction costs are more or less fixed in an area (in this case,
12,000/mu), the lower the county/district governments can negotiate the compensation standard, and the more households they can persuade to participate, the more they can profit from quota generation. Therefore, local governments are enthusiastic about playing the middlemen.
" 20110523-CQ-W 58 20121112-CD-H
98 3. 4.2 Private Entities as Quota Developers and Investors
In Chengdu when the quota program was just established, investment for quota generation had been mostly from the government. But given its limited fiscal resources and many other mandates to be funded, the government has used all sorts of strategies to try to attract private funding to invest in the countryside. By late 2012, 207 projects or about 40% of all funded projects were developed by private companies. In this new industry of quota generation, there were about 20 major players.
I was able to interview the head of one such company, Mr. Liang59 , who handed me his business card with a slogan on the back: "We are dedicated to land consolidation." Mr.
Liang explained that his company was the first and is so far the largest non-governmental entity to invest in quota generation. He told me that most private companies invest in and develop quotas in order to use them for their own land development projects but his company had taken it a step further, and traded quotas on the market.60 On his business card, Mr. Liang has his title as Engineer, in addition to chairman of the board of his company. He explained that in the past couple of years, most of the private companies that became quota developers have been those with previous experience being contracted by the township governments to do the engineering, construction, and planning work for the farmland consolidation projects. From this process they have gained local knowledge that is critical in the quota development business, especially about compensation to peasants." With the local knowledge, they have turned themselves from pure contractors
9 Pseudonym. 6 20121115-CD-HL 6 120121115-CD-HI
99 in land consolidation to developers of land quotas. It is very interesting to juxtapose the private developers' experience with what I explained earlier about how local governments became quota developers -both benefited from the existing processes of farmland consolidation, which has provided local governments a sense of land development and given land contractors the local knowledge. In other words, land consolidation has prepared both kinds of investors in one process.
Local knowledge and development experiences are preconditions for any kind of quota developers, but Mr. Liang explained that sensitivity to government policy is the most important factor that distinguishes private investors from public investors. Public investors are less sensitive to policy changes, as the profit from quota generation constitutes extra budgetary revenues that they could more or less do without. But to private developers, "...all my profits hinge on the policy. I cannot but pay close attention to it," explained Mr. Liang, "Government policies about land quota are my 'princess charming'. I am thinking of her all the time."6 2 He has even established a formal strategic planning department within his company. The department is dedicated to collecting important policy information and analyzing the implications of policy changes on the business. I was very surprised to learn this, given how new the business of quota generation itself was.
"I don't spend time or money to get to know government officials for personal favors. But
I follow the political changes in the government carefully. I have to know the political
6 2 20121115-CD-HL
100 situation well, and know what the priorities are for major political leaders. I invest in where the government has needs or has been assigned tasks but does not have the money.
Often, it is in policy areas about improving the lives of the disadvantaged groups in the society."63 In other words, the government has been utilizing market-based incentives to attract investments, in order to fulfill political goals that the government lacks fiscal resources to support. In this case, although generating more quotas to solve the land shortage problem in the urban area is an urgent concern, the municipal government promotes investment in quota generation as improving housing conditions for peasants.
By attracting investors like Mr. Liang, the municipality can achieve both the implicit and the explicit political goals of improving the urban land market and improving the quality of rural life.
It is interesting for me to observe that although Mr. Liang stressed again and again that he did not care about getting personal favors from government officials, he actually had benefited from a strong relationship with key government officials. He was in fact introduced to me by a senior official in the Rural Equity Exchange Center, a government's platform for quota developers to sell quotas. Both the official and Mr.
Liang revealed that they were in constant and informal contact with each other to share information. Mr. Liang said that if he were an athlete in the run to generate quotas and make profits, then the senior official was his coach, providing valuable information and helping him understand the policies.64 The senior government official openly admitted that, and this relationship works in both ways. Mr. Liang as the private quota developer
63 20121115-CD-HL 6420121115-CD-HL
101 also provides feedback to the government official on how to better design the quota programs and policies.
3. 5 Chapter Conclusion
In this chapter, I used Dazhu Village of Chongqing as a specific example to illustrate how quota generation projects lead to changes in the rural areas. These most marked changes are in land use: scattered farmhouses are demolished while higher density apartment buildings are constructed to resettle peasants. Residential land used for old farmhouses is cleared and reclaimed as farmland. Behind the physical changes in housing and land are the changes in property rights by peasants and rural collectives. I analyzed that in the process of construction, demolition, and reclamation, peasants and rural collectives have given up the construction right in rural residential land. This right is decoupled from its originating piece of land, and has been converted to "land conversion quota" that will be used in another piece of land.
I further examined in this chapter the key actor that facilitates the alienation of construction right from peasants and rural collectives, the quota developers. As a new profession/a new business, quota developers work as a broker. They obtain funding, negotiate with peasants, and oversee the engineering process. Unlike real estate developers who profit by developing properties. quota developers profit by undoing the development: they decrease the construction area in rural areas to generate quota. I found that both government agencies and private companies are playing the role of quota developers. I also argued that an existing practice in rural China-the land consolidation
102 process to increase farmland-has molded/prepared quota developers. Both public and private quota developers have acquired not only a business sense of the land market, but also important local knowledge about peasants--their mode of production and way of living which is essential in designing the quota generation projects and in negotiating with peasants.
Since quota generation is a result of local governments' policy innovation to circumvent the Central Government's control on land conversion, this new business is sensitive to the policy environment. I have shown the political economy around the quota policy and how it affects the business of quota generation.
How are quotas generated and used in the urban areas? Who buys them? What kind of right does a quota represent once it is used in the urban area? The analysis of the quota as a property right and the examination of its impact would be incomplete without understanding the use of quotas. That is the focus of the next chapter.
103 Chapter 4 Who Uses the Quotas? Market Demand for the Newly Created
Land Quotas
The main research question of this dissertation is how the quota market has re-spatialized land development and how it has affected the key social relationships in development in
China. I hypothesize in the first chapter that the re-spatialization is played out in three aspects of the quota market-the supply side, the demand side, and the trading process.
The previous chapter examines the supply side of the market-quota generation in the rural areas -and its spatial implications. In this chapter, I turn to the demand side of the quota market, examining how quota is used in the urban areas. The purpose of this chapter is to find out whether uses of new quotas in the urban areas have created new spatial results that we have not seen before, and if so, what institutional changes have led to this result.
To study quota uses in the urban areas, we have to find out where the demand for quota comes from-who wants quota and what is the quota used for? Answering these questions seems straightforward at first-after all, the whole quota market was established because local governments repeatedly claimed that there was a shortage of land-the official quota assigned by the Central Government is "never enough." If that is indeed so, we should expect a great demand for new quotas once they are available on the market.
104 I was surprised to learn that both the local governments of Chongqing and Chengdu are trying very hard to create demand for quotas among the commercial and residential land developers. That contradicts the impression that there is a severe land shortage. If the private sector is not really demanding quotas, where does the demand actually come from?
The rest of the chapter begins with understanding the rules about using new quotas and their implications for the private sector. I want to understand if using new quotas makes any difference to the private sector developers and to urban land uses, including land planning, allocation of land, and land price.
The chapter then moves on to examine another type of quota buyers, the public sector, which has attracted much less of a spotlight but actually includes the biggest buyers of the new quotas. I track down how exactly they buy the quotas and what they use the new quotas for.
Lastly, the chapter concludes with examining the overall effect of using new quotas.
Since the rationale of creating new quotas is to remedy land shortage, I ask how much land supply has increased as a result of using new quotas and what types of projects benefit. An even more important issue to examine is what institutional changes new quotas entail in land development.
105 4. 1 Creating Demand in the Private Sector
The very function and purpose of creating new quotas is to convert more rural land to urban use in addition to what the official quota allocated by the Central Government allows for. Procedurally, how is the new quota used? Is it different from the official quota?
The old quota, or the official quota allocated by the Central Government, is free, administratively assigned to all kinds of land development projects, and procedurally to be used by the government during land taking. A quota is a number that represents how much rural land is to be converted. For a particular land development project to come to realization, the government needs to take the rural land from the peasants. Having a quota is a precondition of government taking.
The new quota, in contrast, is painfully created through a generation process in the rural area (as explained in Chapter 3) and sold on a market. Therefore whoever uses the new quota has to pay for it. The requirement of using the new quota is also very different from that of the official quota. The most striking rule is that commercial and residential projects in premier locations will no longer be assigned free, official quotas, and must buy new quotas from the market.
Why do the governments single out commercial and residential projects as targets that must use new quotas? This means that the other two main kinds of projects, public
106 projects and industrial projects are not required to use new quotas and will continue to be
assigned free official quotas. This differentiation is consistent with China's land-use and
land -easing practices. It reflects the different priorities given to different types of
projects.
First, public projects such as building infrastructure and affordable housing are always
given priority and enjoy very low land-leasing prices. In contrast, developers of
commercial and residential projects are required to buy land through a formal bidding
process and pay a market rate My informant estimates that for the same parcel of land, if
it is provided through bidding, the price will be several dozen to even one hundred times
the price if it were to leased to public projects. Although commercial and residential
projects use only 10-20% of all land leased in a year, the leasing fees from those projects
are important fiscal revenues for local governments.
Second, industrial projects are a special case. Although they are also for-profit projects
like the residential and commercial development, local governments give them special
favors by leasing land at very low prices. The rationale is that the expected benefits from
future employment and taxes outweigh the loss in land-leasing fee in the short-term.
Industrial projects consume about 60% of land.
In addition to type of land development projects, both cities also specify the locations
where new quota must be used. In Chongqing, it is the city proper, which consists of nine
urban districts where commercial and residential projects must use the new quotas. But in
107 the suburban districts and rural counties, development projects are still assigned official quotas for free. Chengdu has similar requirements: commercial and residential projects in the city proper (which Chengdu government defines as the First Development Zone) and suburban counties (the Second Development Zone) must use new quotas, while projects in the rural counties (the Third Development Zones) are exempted and can still enjoy free official quotas.65 (See the figure below for an illustration of three development zones in
Chengdu.) Both cities think that paying for quotas entails extra costs. Since commercial and residential projects in premier locations are quite profitable business, and the governments are targeting those who can afford to pay and are relatively less sensitive to increase in costs.
65 20121109-CD-Y
108 6 Jurisdictions
6 Jurisdictions
8 Jurisdictions
Figure 4-1 Districts and Counties Grouped into Three Development Zones in Chengdu
The above requirements are about projects, but who are the ones actually who go to the quota market and buy the quotas? Is it land suppliers, such as the land banking organizations who represents the local governments? Or is it the land users, that is, the commercial and real estate developers? I found out that it varies in the two cities. In
Chongqing, land suppliers (both district and county governments and the municipal investment corporations) who want to sell land parcels designated for commercial and residential projects must buy quota. In addition, real estate developers in Chongqing are encouraged to buy quotas. Chongqing's quota use rules state that if developers buy new quotas, they will have the special advantage of picking the parcel they want. In Chengdu,
109 the government is specifically targeting developers of commercial and real estate projects to buy new quotas. Unlike Chongqing, Chengdu is not encouraging developers to buy, but simply requiring that all must buy quotas before signing a land lease with the government.
Why are Chongqing and Chengdu now chasing after the developers and making them buy quotas? Aren't quotas something that local governments need to have, in order to show higher-level government that they have permission to convert rural land to urban use?6 6 In principle, any parcel on the market the developers to bid for should be what is termed "clean land" in China-land that has cleared all the necessary government procedures such as resettlement and compensation to original residents, as well as having been assigned quotas. How to get quotas for land is supposed to be a headache for the governments, not developers.
That the governments would require some projects to use new quotas is puzzling to me.
"Requiring" means that there would not be natural demand for new quotas from these projects otherwise. The very rationale of creating quotas as claimed by the governments is that there is a severe land shortage. If so, it is only natural that those who want to use more land but cannot get enough quotas would go to the market and buy new quotas- then there would be no need to require that certain projects must use new quotas. Why is it that the local governments want to artificially create demand?
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110 My informant Mr. Yang, the policy designer of Chengdu's quota system, admitted this disconnect in the concept of using new quotas. Local governments conduct the land conversion from rural to urban use, and a quota is a policy tool that the Central
Government designed to regulate local governments. Procedurally, a quota has nothing to do with end users. And we see from the earlier discussion that a lot of locally created quotas are indeed bought by local governments or their representatives to take land. "But quota purchase by governments alone is not enough," Mr. Yang pointed out. Both
Chongqing and Chengdu governments want to increase the demand for new quotas, and want the developers to pay for it. The Deputy CEO of Chongqing Rural Land Exchange stressed that "We must artificially create demand for new quotas to create a market." 67
The rest of the section will discuss how Chongqing and Chengdu respectively set rules to encourage or require developers to buy quotas, and the ramifications of these rules on urban land use.
4.1.1 The Chongqing Case: Giving Real Estate Developers Special Leverages
As explained earlier, before new quotas were established, developers were not involved in quota use at all. Now that they have new quotas in hand, what do they do? The official documents of Chongqing talk about this only briefly, saying that quotas can "land on" where it is currently agricultural land, but are intended for urban development or industrial and mining construction use as prescribed in land use master plan.68 It does not say how exactly developers can "land the quota."
67 20121129-CQ-W 68 Chongqing Municipal Land and Housing Bureau and Chongqing Rural Land Exchange. 2011. p. 47.
111 My key informants explained this to me in detail. They said that in Chongqing, new quotas bought by developers can be used to "bid for land parcels in the city proper that fall into the land use plan, outside the land provision plan, and are not yet taken and converted by the government." 69 Initially I was confused by this explanation, which had so many technical terms and sounded like a riddle. After parsing the sentence carefully, studying the technical terms, and interviewing more informants, I realized that the rules of quota use by developers in Chongqing have changed the land bidding procedure significantly, giving developers special leverage in land use. It has a major impact on land auction, land taking, annual land supply plan, and a city's Land Use Master Plan.
a) Quota and Land Use Master Plan
There are several key phrases in the instructions for using quotas to "bid for land parcels in the city proper that fall into the land use plan, outside annual land supply plan, and are not yet taken and converted by the government," as I have just highlighted. I have explained that imposing quotas on projects in the city proper is based on the government's reasoning that these land users can "afford" to pay more.
To use quotas on parcels that fall into the "land use plan" refers to the requirement that the parcel chosen by developers must abide by the Land Use Master Plan and the City
Plan of a locality. This sounded plain and straightforward to me, but an official from the
Chongqing Land Bureau said this is a "birth defect" of quotas to abide by the two plans. 0
In China, land is categorized into several types according to their geographical status:
69 20121206-CQ-U 70 20121206-CQ-U
112 Zone I is where development is allowed, and the boundary of Zone I overlaps with the boundary of the Land Use Master Plan. Zone 2 is where development would be allowed only under certain conditions, and it is outside the area covered by Land Use Master Plan.
If development is to take place in Zone 2, the Land Use Master Plan needs to be adjusted accordingly to include these areas. However, revising the Land Use Master Plan is not easy. It requires approval from very high-level government (for Chongqing it would the
State Council of the Central Government), and takes a long time. Local governments have to make a strong case to the high-level government that there is such a need to revise the plan to include more land areas and it has to be prepared that this approval will take a very long time to get through. "There are projects waiting to use land, and when the central government says yes, the potential investors are long gone."7 '
When the Chongqing official told me that quotas have a "birth defect," he was referring to the fact that quotas can only be used on parcels within the Land Use Master Plan, or
Zone 1 where development is allowed. This sounds strange to me-why is abiding by the plan something that the local governments consider a drawback? This comes back to the very motivation of local governments to create quotas: it is so designed that local governments can go around the constraints of the centrally planned quota system. As explained in Chapter 2, at least in theory the quota is an annual installment of all land areas prescribed in the Land Use Master Plan. The areas within the Land Use Master Plan will be assigned quotas sooner or later. Although the local governments want the quotas to be assigned sooner rather than later, the real dilemma that local governments face is
7' The other categories include Zone 3 of limited construction (elaborate), and lastly Zone 4 where construction is completely prohibited often for environmental reasons (for example, forestry, habitat of precious species and so on).
113 that the quotas are not enough--the total land area designated for development does not match the real demand for land. "In mere five years, we have almost used up land that is planned for the next two decades."7 In other words, they want more quotas than the Land
Use Master Plan allows for. To get that, they want the painstakingly created new quota to be used outside the Land Use Master Plan in Zone 2 where development is allowed under special conditions.
b) Quota Use and the Government's Land Supply Plan
The third key phrase in terms of what kind of land parcels developers with new quotas could pick is "from outside the annual land supply plan." The land supply plan details what parcels local governments will put out on the market. While the Land Use Master
Plan and City Plan discussed above are general guidelines regarding the locations and amount of land to be developed over a long period, the land supply plan is prepared annually by the local government. It includes specific land parcels designated for public projects, industrial projects, as well as commercial and real estate projects. The total amount is supposed to correspond with the size of Chongqing's quota allocated for the year.
Selling land parcels off a list prepared annually by the government implies that the urban land market in China is supply-driven, rather than demand-driven. Both the timing of land sale, and the location and lot size of a parcel are decided by the land supplier, the government. Developers can only choose from the list. If land parcels that developers are
72 20110517-CD-Y
114 interested in are not included in this year's list, developers will have to wait until the parcels become available in the years to come. (Although powerful developers have some leeway, the usual case is that developers have to wait.) Lot size is also controlled by the government. Developers can only design their projects according to the size of available lots. Thus, as my informant summarized, "It's like eating at a canteen. You only get to choose from the set menu."73
Allowing developers with quotas to pick parcels outside the annual plans is a significant change. Chongqing officials admit that this is giving developers the lead in land use.
They often cite real estate companies like Long Hu as a good example of how developers can benefit. Long Hu (which literally means "Dragon Lake") in Chongqing is considered a company with "unique vision." Long Hu has several successful development projects in areas that were remote and underdeveloped, but later proved to have major development.
Land parcels in these places are rarely included in the government's annual plan, as the government's judgment is very likely to be different from the company's need--the government feels that parcels in such remote locations would not be in demand. Now with the new quota system, Long Hu could choose the parcel they want, rather than being limited by the government's choice of development sites-"without new quota and the right to pick their own land, who knows when the government will put it on the market."
Ms. Wu," Deputy CEO of Chongqing Rural Land Exchange, gave me another example.
One developer developed a successful residential project and wanted to expand the
"3201 10523-CQ-W 7 Pseudonym
115 project on land adjacent to the current project as soon as possible. But the land was not included in the supply plan of this year. The developer went ahead with a new quota, and
7 requested that the government take the land and put it out for bidding. ' Again, if they did not have the new quota, they would have to wait until the government put it on the market in the future. "Developers now can order what they want to eat even if it is not listed on the menu. They no longer need to wait for the government's plan to cover what they want. They can have it now, in their desired location and desired lot size." 76
Chongqing government asserts that giving developers the lead is an improvement in efficiency -the land annual supply plan does not always reflect the market demand, and sometimes may even prove to be a big failure, leading to a waste of land.77 One key informant gave me an example of when the government made wrong judgments of the market. When planning for a major bridge across the Yangtze River which runs through
Chongqing, the local government bet on the development of the southern bank next to the bridge (which is the Ba'nan District of Chongqing), and converted vast areas of agricultural land in the area. For this, the government used a big amount of official quotas.
They expected that once the bridge was completed, the land would be in high demand.
However, the market went another way -the northern bank of the river by the bridge was actually popular among developers. The converted land in the southern bank then sat idle for years. The quotas used to convert land could have been assigned to other more productive projects.
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116 Preparing an annual plan of land supply and assigning official quotas puts burden on the local development to make a judgment of the land market. Local government officials in
Chongqing claimed that allowing developers with new quotas to pick land parcels takes the guesswork out of government planning and better reflects the needs of the market.
c) Quota and Land Taking
Although the efficiency argument for letting the developers pick land is plausible, the related legitimacy issue in land taking and fairness issue in land bidding are huge. I will first discuss how the new quota use has affected land-taking procedures.
One last key phrase in the official requirement is to use quota on "land parcels not yet converted and taken." This means that the land picked by the developer is currently owned by peasants and used for farming. Even though the developer is interested, it cannot buy the land directly from peasants and convert it for urban use. According to
China's constitution and the Land Use Law, any conversion of rural land to urban use has to go through the formal government taking process. The official document of Chongqing regarding quota use says that a developer with a new quota can "recommend" that the government take the land parcel that they are interested in.
Procedurally, having a quota is a pre-condition of government taking. Taking is usually executed by the county/district level government, which has to submit a formal "taking application" to the municipal government. After reviewing the documents, the municipal government then authorizes the taking. In this application, the county/district government
117 has to specify that it has secured the quota for the piece of land to be taken.78 In the set of documents to be submitted in the application package, there should be a formal document showing that official quota in the proper amount has been assigned by the municipal government.
Now, for the parcel picked by the developer with the new quota, the developer "lends the quota to the county/district government""9 in order for the land to be taken. Chongqing's official publication even provides a template for submitting an application with the new quota. 0 The wording regarding the quota in this template is different than the typical land taking application with an official quota. Instead of stating that the district/county government has an official quota ready for the project, the new template says that the land parcel has a new quota from the specific developer. Instead of a document showing the quota assigned by the municipal government in the application package, the county/district government literally borrows the hard copy of land quota certificate (as shown in Chapter 3) that developers have obtained from the quota market to substitute for the official quota document.
Taking land for commercial development in general has been controversial in China-- peasants and city residents alike have complained bitterly about the collusion between the government and developers. Now by allowing developers with new quotas to pick land and recommend government taking of the land, the legitimacy of land taking is further undermined. The government is under the thumb of the developer. And the government's
78 20121 129-CQ-L '9 20121129-CQ-W ' 0Chongqing Municipal Land and Housing Bureau and Chongqing Rural Land Exchange. 2011.
118 awkward position is even formally documented-it has to say specifically which developer has the new quota to lend to the government, and literally has to borrow the document that represents the quota from the developer.
The official quota is originally designed as a measure by the Central Government to curtail local governments power to take as much land as they would like. Now with new quota, the central government's control over local governments is somewhat ineffective.
Furthermore, the property rights that the new quota represents are different from that of the official quota. The official quota represents the right for local governments to convert land as authorized by the Central Government, and developers have no role in this process. With the new quota, the developers are in control of which land to take, and procedurally granting this right to local governments. This change in the content of property rights is reflected in the confusing, awkward, and problematic procedure of using the new quota system--that the developers have to "lend" the quota to the government.
d) Quota Use and Land Auction
Although taking is done because a specific developer asks the government to do so, this developer has not obtained the use right of the land yet. According to rules set by the
Central Government, all land to be used for commercial and residential purposes has to go through the formal bidding procedure, rather than being granted or given at a negotiated price by the government to a selected developer. Chongqing's official document confirms this; it says that buying a quota and then using it to take land does not
119 mean that land use right is granted to the developer. Potential land users still have to bid on the market.
The official document does not talk about what happens if the developer with the new quota does not win the bid. I found that out from my informants. They said that in the case the bidding is won by a developer other than the one who provided the quota, the developer with the quota is refunded fully for what it paid for purchasing the quota."
Even if there is a promise of refund for the quota, after having spent so much time and effort looking for a proper piece of land and lending the government the quota, not getting the land would be a big loss to the developer. That would discourage developers from buying quotas in the first place-spending money on something that they don't know will eventually lead to a concrete piece of land in their hand. Would that be a problem for the developer? The various informants I interviewed confirmed that whoever lends the new quota to the government for land taking is very likely to win the bidding once government puts the land on the market.
The reasons for the developers with new quota to win the bid are manifold. First,
Chongqing officials themselves explain that since the location and lot size are picked by the developer with the quota, the lot might not suit the needs of other developers, therefore greatly reducing the competition in the auction. 2
The second reason, as admitted by a government official, is that the government will
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120 "help" the developer. After taking, in order to prepare the land for the market, the government does what is termed "primary land development" in China. Primary land development involves resettlements and compensation, demolition of old construction, leveling of the land and putting in basic infrastructure. Normally the costs of primary land development constitute the government's base price for the land. When the government puts land on the market through listing, developers interested in the land provide nominal prices and whoever provides the highest offer price get the land. Since the developers tend to save costs, they want to provide a bidding price as low as possible but still higher than the base price to beat other competitors. The key to winning is guessing the actual base price. Deputy CEO of Chongqing says that to help the developer who lends the quota to the government win the bidding, the government involves the developer deeply in the process of primary land development, so they know the real costs pretty well and have a big chance of winning the bid.83
A candid senior media person that I interviewed gave a third explanation. He said it is too easy for local governments to pick the winner of a bid. The government can set very strict conditions of the land development project (such as type of development, floor area ratio and so on) that are tailored to the target developer, so either other developers would not be eligible to bid at all, or if winning the bid, would not make much profit.84 The Central
Government's requirement of open bidding for land parcels is to ensure the fairness of competition. But local governments can easily bend the rules, so the developer with the new quota can win the bid.
8320121129-CQ-W 84 20121128-CQ-L
121 My interviews with developers also point to a fourth reason. There is an unspoken rule in the industry that if a land parcel is of particular interest to a developer, other developers will "leave it alone" and "not touch it" by not even going to the bidding. "The particular developer probably has invested a lot in surveying the land and working with the government. We will not hit them head on. As reciprocity, when we have invested in some parcels, others will respect us and not compete with us either."" This kind of tacit rule is related to different ways of how the government can help a particular developer as discussed earlier, and it is very revealing of the political economy of the land market in
China-although there is open bidding process in place, working on the relationship with the government is still the most important factor in getting the land. We can infer that the open news about which developer lends the new quota to government is sending a clear signal to other developers that that developer has worked closely with the government on this piece of land. Others would respect this turf by not going to the bidding. The table below summarizes the procedures of using quota before and after the new quota system was established.
Table 4-1 Procedure of Using Quotas in Chongqing, before and after the Establishment of the Quota Market
Steps Before After Land Use Plan Government develops an annual Government develops an annual land use plan land use plan
Developer picks land outside the plan
Land Taking Government takes land from Developer "lends" new quota to peasants and uses official quota the government to convert it to urban use
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122 Government takes and converts land the developer picked
Land Sale Government puts the land on the Government puts the land on the market and organizes bidding market and organizes bidding
Developers bid for land Developers bid for land
The winner signs land lease The winner (most likely the with government developer who lends quota to the government) signs land lease with government
(Compiled by the author)
The above discussions reveal that in order to promote new quotas, Chongqing government has given developers a great deal of leverage in picking the land they want.
Since the current institutional setup regarding land supply and land sale in China does not allow such freedom, Chongqing government even breaks the rules, either implicitly or explicitly, to help developers. Interestingly, such major issues are not discussed in media and in academic analyses within China. In fact, the whole process of quota use is given little attention. (The bulk of discussion is devoted to quota generation and how it might impact rural China.) It may be due to the issue the total amount of new quota is limited
(this point will be discussed in detail later). Despite that, the ramifications for land use, both procedurally and substantially are huge.
4.1.2 The Chengdu Case: Imposing Quota on Real Estate Developers
Chengdu also wanted to artificially increase the demand for new quotas by targeting the developers. The rules of quota use in Chengdu have many similarities tc those of
Chongqing. For example, new quotas are required to be used on commercial and
123 residential projects, not industrial or public projects. Like Chongqing, Chengdu also makes a location differentiation -only projects in the city proper and the near suburb need to buy land quotas.
The major difference is that Chengdu does not give developers special leverage. Senior officials in Chengdu said that they "look down upon Chongqing." They think that
6 Chongqing's rules have internal contradictions and also distort the market 1 In Chengdu, developers must choose from the list of parcels that the government offers, not from outside the annual plan of land supply. Therefore there are no associated problems of
"doing favors" for developers like what Chongqing government has been criticized for.
However, Chengdu has its own challenges in the design and implementation of the quota system, both procedurally and in terms of the economic impact.
a) Duplicate of Quota: Procedural Flaws
Although Chengdu's did not want to give developers any special leverage, it has created a procedural problem for itself. As explained earlier, in China whatever land the government is able to put on the market has to be "clean land": not only is the land physically prepared, but it also must comply procedurally to all sorts of requirements, including having matched quotas." But developers, as required by Chengdu government, must buy new quotas as well.
The following table compares the procedure of using official quotas before the creation
8620121109-CD-Y 87 20121112-CD-H
124 of the quota market, and the procedure of using news quota now.
Table 4-2 Procedure of Using Quotas in Chengdu, before and after the Establishment of the Quota Market
Steps Before After - Land Use Government develops an annual land Government develops an annual land use Plan use plan plan
Land Government takes land from Government takes land from peasants and Taking peasants and uses official quota to uses official quota to convert it to urban use convert it to urban use
Land Government puts the land on the Government puts the land on the market and Sale market and organizes bidding organizes bidding
Developers bid for land and the Developers bid for land (before 2011, winner signs land lease with developers needed to have new quota in government order to participate in bidding) The winner signs land lease with government (after 2011, winner needs to have new quota to sign the lease)
(Data source: consolidated data from interviews and official documents. Compiled by the author)
From the table above, we obviously see a duplication of quotas use here. For the same piece of land, two kinds of quotas are assigned, both the official quota and the new quota.
Why such a design? Director Yang, a key senior official in designing the policy, explained that this is a compromise in the face of a dilemma. On the one hand, Chengdu wants to artificially create the demand for new quotas, so all developers are required to buy. But they also do not want to allow developers to pick land and "lend" quotas to the government as in Chongqing."
From the property rights perspective, here the nature of quotas has changed. The new
88 20121109-CD-Y
125 quotas were created to represent the rural-to-urban conversion right that was given up in the agricultural land. And the motivation of local government to create new quotas is to use them to convert more land in the urban areas. However, developers are made to merely pay an additional charge. They cannot not use it to convert land. In other words, to developers, the quotas do not represent any property right. If we look at the new quota system as a whole, the developers are simply paying for quotas, so someone else will enjoy the benefits of the quota. An official I interviewed commented that "New quotas are just imposed as a fee or tax to developers."89
Why do developers even accept a new charge like this? First, as I will discuss later, the quota is not too much of an additional cost to them. Second, developers in China are in a very weak position relative to the government, as my informants from various cities have stressed. They have no other choice but to accept what the government imposes on them.
When interviewing with me, Chengdu government officials did not even talk about the justifications of such a new charge.
The only thing that the government sees as a problem of the current rules, as Director
Yang admitted, is who gets to use the new quota that the developers have paid for. In a literal sense, the developers would buy the land quota certificate from the quota market, and when they sign the lease for land, they have to turn in this certificate to the government. Since the certificate represents a kind of right to convert rural land to urban land but that right has not been exerted, the Chengdu government has to consider where
20121108-CD-L
126 to eventually use the right. How would the government distribute the quota? Director
Yang said that there could be two potential ways: first is to distribute the new quotas just like the official quotas, assigning them to county and district governments to complement their official quotas. Second is to "return" the new quotas specifically to the county/district where the quOtas were created. By the time I interviewed Director Yang, new quotas were still held by the municipal government, and not used at all. Director
Yang explained that the rules were not finally decided yet, and without that, the quota scheme is incomplete. "It needs just one last kick." The quota market, as part of the umbrella Integrated Urban and Rural Development program, started as the political flagship/legacy of the previous Party Secretary Li Chuncheng. After Li left Chengdu, the new Party Secretary shifted his focus and now gives no priority to the quota market.
Since new policies like quotas need a lot of political momentum and support from the top leaders, without the Party Secretary's endorsement, Director Yang as the techno- bureaucrat could not do anything to push the rules forward.'
b) Quota, Land Costs and Housing Prices
Another challenge of imposing quotas on developers in Chengdu is the Central
Government's concern about housing prices. Initially, the rule in Chengdu regarding quota use was that all developers who would like to bid for land must have a quota in hand before they could enter the bidding. If a parcel of 100 mu of land is available, and
10 developers are interested, it generates a demand for 1,000 mu of quota. Since a quota
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127 is a commodity and the availability is subject to market supply, in theory the sudden demand would increase the price of the quota. This was indeed what happened in
Chengdu. Chengdu's first quota auction ended with unexpected high prices. This was partly because of the demand and supply issue, and partly because developers worried that quotas might be even more expensive in the future. The Ministry of Land and
Resources stopped Chengdu's experiment. Before it got the green light to resume quota auction six months later, Chengdu had to revise its quota use rule to require that all developers must have a new quota in hand when signing the land lease with the government. In other words, those who do not win the land bidding do not need to buy a quota. The demand for quotas then drops to about the same level as the actual demand for land. If the government has 100 mu of land to put on the market, eventually, only 100 mu of quota need to be matched the land by developers.
The Central Government worries that imposing quotas on all developers will increase the overall land costs, thereby pushing up housing costs which have already been skyrocketing in many cities. Even after Chengdu has revised its rules and the demand for quota has dampened, Chengdu still needs to defend its position.
The reasoning by the Ministry is that quota cost is something on top of land leasing fee, and therefore the overall land costs would increase. For example, if one parcel would be leased at RMB 10 million/mu during bidding, and quota costs 0.3 million/mu, then the total price would be 10.3 million/mu, which eventually is reflected in higher housing
128 prices than before. The additional costs are borne by home buyers.9 '
Chengdu government argues for the opposite. They said that developers have careful cost control measures. In order to make their development projects profitable, they have to cap land costs at a certain level. Since a quota is a new element of the land costs, they would lower the bidding price for land, so that overall costs do not increase. For example, if one parcel would be bid for RMB 10 million yuan/mu without the quota, now the developers would bid for no more than RMB 9.7 million yuan mu, given the quota costs of RMB 0.3 million yuan/mu.
It is in nobody's interest if imposing quota has a shock impact on the land market.
Chengdu official documents stress that "a smooth connection (of quotas) with the land market is the goal."92 The Central Government and the local government could not persuade each other, because their understandings of how the market works are different.
According to the theory of urban economics, both have got part of the facts right, but neither pointed out the key factor affecting land price-elasticity of demand in the market.
If the land market is very tight, and developers are willing to pay more to get land, and the quota is an extra cost to them, then the result would be in line with the Ministry's argument and housing prices will increase. But if the land market is not tight, and demand for land is limited, local governments would be willing to lease land for less, in
9' 20121115-CD-YZ, 20121115-CD-HL 92 Chengdu Land and Resource Bureau Document. 2011. No. 80. The Implementation Guidelines by Chengdu Municipal Land and Resources Bureau on Improving the Trading of Construction Land Quota to Promote Comprehensive Rural Land Consolidation
129 line with Chengdu's government's argument that housing prices will not be affected.
What goes on in Chengdu now seems to support the local government's argument, and this is the result of several factors. First, the quota price is relatively low and stable. The quota price for 2012 was fixed at RMB 0.3 million yuan/mu. This is the "minimum protection price" that the government sets, to make sure that quota developers will at least be able to cover their costs. But because there is more supply than demand now after the rules were revised and said developers only needed to have a quota before signing the lease, the quota price was not bid up and stayed at that level. "0.3 million/mu is not a big deal." Mr. Zhang, a developer I interviewed in Chengdu explained. "You have to know the land prices in Chengdu to have a perspective on the quota price. " The average land price in Chengdu's urban districts is RMB 4 million yuan/mu for commercial and residential projects. In more premier locations such the within the third ring road, it would be between 5-6 million yuan/mu; and within the second ring road, it would be more than 10 million. Land costs are the biggest portion of overall costs in real estate development. Mr. Zhang thought the current price of the quota, about 0.3 million/mu was very little compared to the overall land-leasing fee.93
Second, developers claimed that they have done careful financial analysis and therefore would count in the cost of the quota when bidding for land, even though it is only a small cost. Mr. Zhang explained that if his company anticipates that four years later when their project is completed, it is likely to be sold at RMB 8,000 yuan/square meter, then the
93 20121115-CD-YZ
130 overall land costs cannot exceed 10 million/mu for the project to be profitable. If quota price is set at 0.3 million/mu, the developer will not bid more than 9.7 million/mu. 94 Mr.
Liang, another developer I interviewed, seconded Mr. Zhang's claim and talked in a strong way about the careful financial analysis of developers, "You know, no big boss would be present at biddings, but only relatively low rank managers-because the company's maximum bidding price was predetermined based on the company's careful calculation. There is no need for the big boss to make any real time decisions as whether to raise bidding price. The costs of quota were considered when setting the maximum bidding price." Mr. Liang was so emotional when expressing this idea that he said that
"housing price will be higher" was a wrong proposition.95
Mr. Zhang further added that the procedure of buying and applying quota is straightforward; there is really not much impact on the developers. The only difference might be that before, the developer would have just one trip to the land bureau to sign the lease. Now developers have to make one more trip-to visit the Rural Equity Exchange and buy the quota. Does having an extra trip to a local government unit make any difference? Mr. Zhang said going to local government is like visiting one's mother's house. For more than two hundreds steps and approvals needed for a project, the developers are already way too familiar with the government.
Developers and government officials alike assert that in fact quotas will lower land price.
At the government's promotion of quotas, Deputy Mayor Liu Pu of Chengdu commented
94 20121115-CD-YZ 9' 20121115-CD-HL
131 that counting in the costs of quotas would lower the expectation of land prices. He guessed that the starting price of land would drop by at least 20%.96 This understanding underpins Chengdu's design of the rules, especially when it requires that only projects in the center cityand-suburban counties use quotas, not projects in the rural counties. The land price is about 0.7 million/mu in the rural counties. If we follow the logic of the
Ministry of Land and Resources', that quota is on top of land leasing fee, then with a quota of 0.3 million/mu, the overall land price would be 1 million/mu, or a 1/3 jump than without quota. Then district or county governments wouldn't be worried, because that would not change their land revenues at all. But the fact is that if quotas are imposed on developers at the price of 0.3 million/mu, they would only bid for 0.4 million/mu.
Lowered land-leasing fees means reduced fiscal revenues, which rural counties would not accept.
Both the developers and the government officials say that overall the same amount of money is paid for land. The mere difference is that part of what would go towards leasing fee is now paid for quota. More specifically, the 0.3 million/mu quota fee goes to Rural
Equity Exchange, and the 9.7 million paid to the land bureau. "It's like taking money from one pocket of the government and putting it in another."' Eventually, the housing price is affected by the elasticity of demand for housing. If demand for housing is inelastic-the home buyers' demand does not drop greatly with the increase in housing prices, indeed the costs of quota will be borne by home buyers. utif the demand for housing is low, developers bear the costs, so they profit less. We would think that
96 20121115-CD-HL 97 20121115-CD-YZ
132 housing elasticity and land elasticity would be synchronized, but it may not be. It is possible that when developers bid for the land, the demand for land was very high, and therefore developer bore the costs. But three years later when the development project is finished, housing demand is low. Consumers do not bear the costs; rather it is developers again who bears the costs.
Although Chongqing and Chengdu governments have tried so hard to artificially create demand in the private sector, surprisingly, the majority of the quota is not bought by private developers, but rather, the public sector-local governments and their representatives. The complete statistics are hard to access, but we get a rough idea from data collected from Chongqing and Chengdu. Why do local governments buy quotas?
What do they use the quota for? Let's turn to the next section and examine the behaviors of the public sector.
4. 2 Real Demand from the Public Sector
4. 2.1 New Quotas for Industrial Development in the Suburbs
As explained earlier in this chapter, quotas are something that the government needs to take land. The purpose of the new quota system is to convert more rural land to urban use in addition to what the official quota allocated by the Central Government allows for.
Among the local governments, who would need new quotas the most? Although there is an incentive for all localities to get more quotas, areas that are growing fast but have less political importance have a much bigger gap in quotas. Often this means suburban
133 districts and counties: they receive far fewer quotas than urban districts when the municipality distributes quotas based on political priority." 9 District/county governments buy new quotas from the market to complement their official quotas, so they can further expand real estate development or grow industries. This is true for both
Chongqing and Chengdu.
The demand for new quotas is complementary to the availability of official quotas. If the official quotas allocated in a particular year are relatively abundant, then district/county governments will buy fewer new quotas. In other words, new quotas are used to fill the gap between the available official quotas and the actual demand for land. What kinds of projects do county and district government use the new quotas for?
Chengdu's official word says that district/county governments can use the new quota to take and convert rural land in Zone 2 where development is allowed only under certain conditions. District/county governments could use the new quotas on any kinds of projects, industrial, commercial, or residential. It would be ideal to see exactly what type of projects use new quotas and the size of the quotas they use to understand the impact of the new quotas. But detailed statistics are not available from Chengdu; however,
Chengdu official reports do provide some general information-they admit that most of the new quotas are used to expand industrial clusters in county seats or towns.
9820121109-CD-Y 99 Liao, Yansong. 2013. "Open Bidding Enables Peasants to Get More Benefits." Accessed October 17. http://www.chengdu.gov.cn/special/template/detail.jsp'?id=343503&ClassID=02120503.
134 Why industrial projects and not others? It has to do with the Chinese government's land use strategy. In China, the use of state-owned land is categorized into three types: public, industrial, and for-profit (which includes commercial and residential projects). Public projects often use land for free, and commercial projects have to bid for land in the open market, and industrial land use is more complicated-the land use fees are often negotiated, at a price much lower than the market rate, sometimes even for free.
Therefore, although people talk about an "urban land market" in China, in fact it is only referring to the commercial and residential projects that have to go through market bidding.
Local governments leverage the different types of land uses to achieve different goals.
For the commercial and residential projects, the primary goal of the local governments is a one-time, large land-leasing fee. Although commercial projects only take about 10-20% of the land converted every year, it has contributed significantly to local non-budgetary revenues.
When leasing land to industrial users, since local governments often grant the land at a very low price, they cannot get much leasing revenue. For example, in Chengdu, the lQcal governments once tried to attract Foxconn, a big electronic manufacturer and contractor for Apple Inc. to set up a new factory. In competing with other cities in China, granting land at a very low price is a big incentive provided by the local governments. The government's expected benefits are the future tax revenues and added employment. Even without the tangible benefits, attracting industries to a locality is seen as a big
135 achievement in the effort to develop the local economy, which adds to the local leaders' political achievements. Local governments are often chasing after industrial projects.
How is land quota related to different types of land use? No matter how low the land lease fee is set by the local governments, for the projects to be implemented, there must be quotas assigned. Within a limited amount of quotas in hand, local governments have to consider what projects to use them on. Quota assignment then becomes an indicator of the local governments' priorities. Some quotas must be assigned to commercial projects, so the local governments get their immediate fiscal revenues, but a large amount of quotas are assigned to industrial projects for tax and economic growth benefits.
4. 2. 2 Municipal Investment Corporations as Quota Buyers
In Chongqing, although local governments have similar behaviors-district/county governments, and even township governments come to quota auctions-they do not have enough quotas allocated through the official channel. Local governments are represented by the Land Banking Centers, the designated branch of local governments that manage land resources. A peculiar phenomenon in Chongqing is that a special kind of state- owned enterprise also buys quotas. These are the municipal investment corporations.
Like the government, they also have a land conversion and supply function, and therefore need quotas.
The municipal investment corporations are a special financing vehicle. Because local governments in China are not allowed to issue bonds or get loans from the bank, many local governments have established public enterprises that can get loans, issue bonds and
136 leverage other financing tools for the local governments. These enterprises then invest in public utilities and services such as building roads, providing water and waste water treatment services and so on. Such a model has relieved local governments' fiscal burden while increasing the city's overall level of public service.
What is particular about Chongqing's municipal financing vehicles is their land banking function-this was once claimed as Chongqing's great innovation in public finance. It has attracted so much attention that the World Bank even conducted a special case study on it.
In addition to fixed assets and national bonds, the Chongqing government has granted a land banking function to municipal investment corporations. In other words, on behalf of the government, these public corporations can take rural land and convert it to urban use.
Once that is completed, the investment corporations can do two things with the land to raise funds. First, they use it as collateral and get loans from the bank. Second, they could also lease land to end users to get leasing fees. The revenues from land go into the companies' capital and are pooled with other resources. Land assets are considered the most important assets for the municipal investment vehicles.
Therefore, the municipal financing vehicles always need to look for new land to take and convert to increase their assets, and again face the shortage of the official quotas. Before the establishment of the quota market, Chongqing Municipal Government had to help the corporations find quotas for their land expansions, but now the corporations can buy new quotas directly from the market according to their own needs and timing. It is important to note that some of the land they take is to build infrastructure, affordable housing ,
137 projects, factories and so on that continue to be eligible for free official quotas. But there is also land to be used for commercial and residential projects. For the public and industrial projects, the investment corporations are willingly buying more. But for the commercial projects, they are required to buy quotas as the quota use rules in Chongqing specify.
4. 2. 3 Industrial Land Users as Quota Buyers
In Chongqing's quota market, we have also spotted industrial land users who buy quotas.
According to Chongqing Rural Land Exchange, by December 2012, 50.33% of all quotas were bought by industrial enterprises or industrial parks.'" Industrial projects are supposed to be given priority when assigning quotas, and continue to enjoy free official quotas. Why do they buy the new quotas?
Industrial enterprises often refer to the big companies that get land individually from the government. Industrial parks on the other hand are land designated be used for a group of smaller industrial enterprises. The management of industrial parks is often a special branch of the government. Industrial parks can be understood as the government's direct attempt at attracting manufacturing enterprises-the land, the infrastructure and even factory space is prepared. For industrial enterprises and industrial parks to expand, local governments (often at the district and county level) need to convert and take agricultural land, and therefore need quota.
'00 Statistics given to the author by Chongqing Rural Land Exchange
138 I asked the Deputy CEO of Chongqing Rural Land Exchange why the industrial enterprises and parks, the land users, are buying quotas, not the government, the land suppliers. She answered only briefly that industrial enterprises and parks have more funding available than the government. District and county governments ask the enterprises and industrial parks (as represented by Industrial Park Management
Committee which is part of local government) to go to the market themselves and look for quotas." Like commercial and real estate developers, industrial land users are buying something that local governments need, and then "lend" it to the government so the land can be converted and granted to the land users. The difference is that there is no land supply plan or bidding process for industrial projects. Projects are negotiated between the enterprise or industrial park and the government on a case-by-case basis.
The fact that land users such as the industrial parks and industrial enterprises can go look for quotas for themselves implies something unusual. Instead of governments using land as a leverage to attract investment, land users or enterprises are buying quotas on behalf of the government so their land use needs can be satisfied. This more dominant position of the industrial users versus the government probably existed before the new quota system was created, but we would not be able to observe the behind-the-door negotiations.
Now with the new quota system, this relationship is more transparent--we can infer their different positions by observing who actually buys the quotas.
The above discussion summarized the motivations and behaviors of different quota
'0' 20121129-CQ-L
139 buyers. The next section will help put these in perspective by analyzing how much they can buy and how that amount compares to a city's overall land expansion.
4. 3 Industrial Development as the Beneficiary of the New Quota Market
4. 3.1 Limited Increase in Land Supply
The very goal for which new quotas were created is to "alleviate land shortage." But to what extent has the new quota system increased urban land supply, and where are these newly supplied land parcels? Nobody I interviewed could give a clear answer, but various data point to a general direction.
First, can local governments create as much quota as they are able to tear down of rural houses? The answer is no. The No. 138 file of Ministry of Land and Resources set up a new policy measure called "turnover quota."'02 It is a "quota of quota," an upper limit of how much new quota can be created. There is also the formal Urban-Rural Linkage Plan at the local government level that details how the "turnover quota" will be distributed to various quota-generation projects.
The size of the "quota of quota" is loosely proportionate to the size of the official quota allocated to a city. In Chongqing, the "quota of quota" or the turnover quota is set at about 10% of its annual land supply. Since Chongqing gets about 200,000 mu of official
102 Ministry of Land and Resources. 2008.Implementation Guidelines on Piloting the Linking the Increase and Decease in Urban-Rural Construction Land, Ministry of Land and Resources, (Year 2008), No. 138."
140 quota annually, the maximum of new quota it can generate in a year is 20,000 mu. 0 3 10 4 In
Chengdu, the ratio between new quota and official quota is 12-13%.'05 Since 400,000mu of official quotas are assigned to Chengdu each year, it cannot produce more than 52,000 mu of new quota.
Both local governments are loath to impose the turnover quotas. "We tried so hard to establish the new quota system, in order to get around the limit of official quota. Now there is 'a quota of quota.' We are once again constrained."' 6 Both cities say that the
actual amount of new quota generated is even smaller than the turnover quota allows for.
This is mainly due to the change of will on the side of peasants-those who originally
agreed to participate may no longer be interested and quit the program. Therefore even
though the Ministry of Land and Resources has approved the projects using turnover
quotas, some projects are not implemented.' 7
Of the quota generated and sold, not all are used to convert land. Chongqing estimated
that by 2012, four years since new quota system was established, 90,000 mu of quotas
have been sold on the market, out of which only 50,000 mu are landed. Why are the
40,000 mu not used yet? Buyers have two years to use the quota and some of them are
still waiting to find proper land parcels.'0 8
103 20110523-CQ-W 104 20121206-CQ-U 105 20121112-CD-H 106 20121109-CD-Y 107 20121109-CD-Y 10' 20121129-CQ-L
141 If we look at the average, it is about 12,500 mu of new quota that is actually used in
Chongqing to convert rural land. This means that with the new quota, about 12,500 mu of land is added to Chongqing's urban land supply. If we put it in perspective, 12,500 mu is about 6.25% of the officially allocated quota. That is to say if official quotas allow
Chongqing to expand its urban area by about 200,000 mu annually, the new quota has helped Chongqing to expand an additional 12,500 mu, or a 6.25% of the official expansion size.
Of this limited increase in land supply, what is the net effect? First, for the amount of new quotas that are bought by developers, they do not result in an increase in commercial and residential land supply. Rather, new quotas are used on commercial and residential projects to save the official quota that should have been assigned to them. In Chongqing, official quotas will only be assigned to non-profit and industrial projects, and commercial projects have to buy new quotas instead. Before, about 30,000 mu is allocated for commercial projects." Now with that to be covered by new quotas, we can conclude that an additional 30,000 mu is added to public and industrial projects. In Chengdu, new quotas that are bought by developers essentially are "recycled" back to the government.
So they can be used by the governments for free for any kinds of projects they want.
Most likely those additional new quotas are used on industrial projects.
And we also learned that the majority of the quotas are bought by district/county governments or their representatives such as municipal investment corporations in
109 20121129-CQ-W
142 j
Chongqing. These quotas are used towards industrial projects. In Chengdu, this fact is openly admitted in news and government reports. For those bought by developers, and handed to Municipal Land Bureau, we can anticipate that once redistributed to district/county governments, they will very likely to be used for industrial projects, too.
4. 3. 2 Same Focus on Industrial Projects, Different Ways of Allocating Quotas
It seems that the significance of the new quota system to the urban land market is not so much in increasing land supply substantially -as previously discussed the immediate effect is not obvious due to time lag or lack of data--but in solving the problem of allocatingquotas. As discussed in Chapter 2, before the quota market was established, local governments already had ways to get around the quota limit by working on the relationships with the higher-level government. In the following discussion, I will examine how this negotiation is mainly benefiting industrial development. Now with the establishment of the quota market, the newly created quota system has offered a new source of extra quotas. In addition, although favoring industrial projects over other types has not changed, the mechanism for allocating more quotas towards industrial projects is different: with the new quota, the commercial projects are pushed to buy new quotas so more quotas can be saved for industrial use.
Chapter 2 has already explained that the Provincial Land Bureau and the Ministry have
"contingency quotas" that they have reserved, in addition to what is given to cities. Local land bureaus would bargain with the provincial government and using reasons such as
143 certain industrial projects are key to local economic development, or some residential projects are pro-poor therefore must be given extra quota.
But not all local governments are in a position to bargain with higher-level government.
Officials in district or county governments often do not have the political resources and connections to persuade the provincial government. In this case, if the developers are powerful enough, they would go get quotas from higher-level government by themselves.
The politically connected developers can talk the higher-level government into giving the county/district more quotas. Once the county/district governments receive this extra quota, they will designate it for use on the developer's project. This is called "earmarked quota." This (somewhat) backdoor measure is sometimes even institutionalized. The district/county governments would even sign agreements with the developer. For example, if the developers can lobby the higher-level government to grant more quotas, not only are the quotas earmarked for use by the particular developer, but also there will be some rewards, such as giving the land at a lower price to the developer, or giving the developer some priority in getting the land. "o
Given the relationships between the government and industrial developers, it is not surprising to see that in Chongqing's new quota market, both land banking organizations
(governments and their representatives) and land users are buying new quotas. They were doing the same thing of getting more quotas as before. The difference is that before, they used political resources and their behaviors are hard to observe. Now with the quota
"0 20121024-BJ-L
144 market, spending money could give them the same result of getting more quotas, probably with just financial resources needed (therefore even those politically less powerful governments and less connected land users can get quotas for their projects).
Purchasing and using new quota is making what used to be "behind-closed-door" deals now above board.
Another important difference is now that using new quotas creates a market mechanism for allocating quotas, combined with forced demand from the private sector. It does several things: first, it forces the private sector to buy quotas and therefore save more official quotas that the government could release for industrial use. Second, it allows the public sector to buy quotas and therefore directly use them to attract industrial projects.
Last, the quota market makes it possible for industries to buy quotas, to lead the way against the local governments.
From the perspective of local development strategy and local public finance perspective, the use of the new quota system has reinforced the differentiated treatment of commercial versus industrial projects. As explained earlier, land prices for commercial and residential projects are typically set at market rate through bidding, while those for industrial projects are negotiated at very low prices. On top of differential land-leasing prices, new quotas also come at different costs to different types of projects. Commercial and residential projects have to pay to get new quotas, while industrial projects are chased by the government and offered quotas for free (either official quotas or new quotas). In case the industrial users want to take the lead rather than waiting for the governments to give
145 them quotas, they can now do so by purchasing the new quotas and telling the government where they want to locate or how they want to expand. In other words, the quota market is a mechanism for the government to manipulate the private sector better to achieve the government's local economic development priority of developing industries.
4.4 Chapter Conclusion
In this chapter, I asked a simple question: who buys new quotas? The claim by various
local governments of having a land supply shortage would lead readers to think that the
private sector, the real estate developers, would be enthusiastic about the quotas. But we
have observed that private sector buys quotas only because of the aggressive government
measures. In Chongqing, this is done by the governments bending backwards and giving
developers with new quotas special leverage in order to entice them to buy. In Chengdu,
the government simply uses its power to impose buying quotas almost like a tax onto
developers. If the governments have tried so hard to create demand for new quotas in the
private sector, that means there is no natural demand for quotas.
The statistics show that in fact the majority of the new quotas are bought by district and
county governments or their representatives. Procedurally, this is-because quotas in
essence are an administrative permit that the government needs during land taking.
Substantially, this shows that the demand for quotas comes from somewhere other than
the private sector. We further traced down and found that the new quotas bought by local
governments are used mostly for industrial projects. Unlike commercial real estate
146 development, industrial projects do not bring the local government a huge amount of immediate fiscal revenues through land leasing. Rather, local governments are chasing after them for longer-term tax revenues and job creation and other local economic development benefits. The strong industry-oriented development strategy is further illustrated by the fact that industrial users themselves go to the quota market to buy quotas, in addition to what the governments have assigned or bought for them. In addition to the new quotas, industrial projects now also enjoy a larger proportion of the official quotas than without the quota market. This is because private sector projects are required to use new quotas, and therefore have saved some official quotas.
Overall, by using new quotas bought by the local governments or industrial users themselves, and by getting a larger share of the official quotas, more quotas are allocated towards industrial projects than without the quota market. The quota market has created a new way of allocating quota, which is a market-based mechanism for the government to manipulate the private sector to achieve the government's goal of developing industries.
From this perspective, the quota market has reinforced, rather than curbed, the local governments' use of land expansion for industry-oriented development. This shows that the real "land shortage" is a shortage of land for industrial development.
Spatially, the use of new quotas means that more land has been developed for industrial uses than without the quota market. And the locations of new industrial expansion are mostly in the suburbs. That is to say, it has created a mechanism to expand urbanization, especially urbanization through industrialization in the suburban counties, rather than
147 expanding the urban core.
However, the net increase in land supply from using the new quotas is limited, about less than 10% of a city's annual land supply. Local governments cannot use the quota market to increase land supply for industrial projects as much as they want. This is because, to control the scale of the whole experiment, the Central Government of China imposes a
"quota of quota," a limit on how much new quota could be generated and used annually.
In addition, house prices, albeit the biggest concern tor the Central Government, are not
much affected by the use of new quotas, because the cost of quota is only a very small
faction of the cost of land. And for this added cost, who really bears the cost depends on
the elasticity of the land market-in other words, whether the land market is tight. It also
depends on whether the housing market is tight. Only when both the land and housing
markets are very tight could the homebuyers potentially be paying for quotas.
In sum, the net effect of using the new quota system is not so much in increasing land
supply, but rather in allocating a bigger portion of quotas towards industrial projects. It
creates a market-based mechanism of allocating land quotas that further strengthens the
government's industry-oriented development strategy. The re-spatialization through the
use of new quotas lies in the districts and counties in the suburban areas urbanizing more
through industrialization than without the quota market.
In the next chapter, we will turn to the quota trading process that connects the quota
148 developers and the quota buyers. We want to see if quota trading reinforces any spatial patterns we already see in quota generation and quota use. In addition, we want to see what additional re-spatialization mechanisms it may produce.
149 Chapter 5 The New Quota Trading Markets and Politics of Institutional
Design
In the last two chapters I examined quota generation and quota use respectively, which correspond to the alienation and delineation of the property right that land conversion quota represents. This chapter focuses on the most critical part of Chengdu and
Chongqing's experiments, quota trading, which is exchange of quotas in established marketplaces.
Transferability is considered one of the most important of the "bundle of rights" in property. Classic property rights theory posits that the transfer of property would make it go to the use of highest value, forming the foundation for commercial traffic
(Blackstone 1870). The right to buy and sell is a sign of how secure the right is. The more secure it is, the more trade it will lead to (Besley 1998; Rose 1998). While the other cities running quota "linking programs" also have the components of quota generation and quota use, the quota transfer is conducted administratively and in a much more limited area. The extent of transferability differentiates Chongqing and Chengdu's experiments from other pilot cities.
In this chapter, I examine the institutional details of quota trading, its impact, and the evolution of this new institution. I ask three interrelated questions about each case city: (1)
150 how is quota trading conducted? (2) How do the terms of transfer and the operations of
the quota market affect the market participants? (3) Why are the institutional details so
designed; what political contracting shaped the institutional changes? Chongqing and
Chengdu take quite different approaches to quota trading, and I will show that their
approaches are influenced by both internal and external politics.
In exploring these questions I did not examine market data and policy documents as they
are, or take the configurations of quota market as static "snapshots." Rather, by
interviewing key informants who experienced and even impacted the formation of quota
markets, I seek to "go behind the scenes" and understand the process of institutional
evolution. My focus is on the municipal government, which is the institutional
entrepreneur in pushing forward the quota market. How does the municipal government
mediate with the Central Government and local actors to achieve a "balance of interests"
in quota trading? Is the quota trading so shaped really an improvement in efficiency and
driven by market forces?
5. 1 The Precedent of Linking Programs
Before examining the details of quota trading in Chengdu and Chongqing, I need to take
a step back and examine the policy predecessor of quota markets, the "Linking Programs"
which were briefly introduced in Chapter 2. Quota markets were established with the purpose to solve some prominent problems in Linking Programs and to improve the
151 efficiency of land use. We need to learn about the Linking Programs before exploring whether quota markets in Chengdu and Chongqing have fulfilled the intended purpose.
5. 1.1 What is a Linking Program
More than twenty cities were designated as pilot cities for the quota experiment by the
Ministry of Land and Resources in 2006. However, their experiment is called "Linking
Program" rather than "quota market" as named in Chongqing and Chengdu. A Linking
Program is considered a "lower version" of the quota market. The biggest difference is that there are important constraints on how a quota is transferred from one place to another in the Linking Program. First, the Central Government requires that the quota generation place and the use place must be packaged together for approval in Linking
Programs. Second, the Central Government does not allow quotas to be transferred across county boundaries in these programs. These two constraints have implications for the efficiency of quota allocation. I will discuss each in turn.
Linking the Places of Quota Generation and Quota Use
As the name suggests, in Linking Programs, a quota generation place and a quota use place are "linked" in the sense that they must be predetermined and paired up. To use a project as a specific example, to be able to "link," there are three steps. First is to build the new, more compact residence for peasants whose residential land will be taken to generate quota. This would take about one year. Second, after moving peasants to the new settlements, the old settlements are demolished and land reclaimed for agriculture.
This would take another year. After the first two steps, there is a "surplus" in developable
152 land that can be transferred to and used in another location, for example, a piece of land
near the city to build a factory. The third step then is to use the "surplus" in the form of a
quota to convert the land and build the factory.
What is particular about the linking program is that the quota use place must be
determined before any construction can take place in the quota generation place. Using
the above example again, the land use plan for the factory, and the plan for the new rural
houses must be approved together. The locations of steps. 1, 2, and 3 must be
predetermined-that is, where to build the new residence, which old farm houses to
demolish, and which farmland to convert in order to build the factory must be decided at
the same time. Building new residences and reclaiming old residential land takes at least
two years. And then for the land to be used for the factory to get necessary approvals also
takes time. This is to say that even if a factory agrees to participate in a linking program,
only about three years down the road could it use the quota generated.
The biggest problem of linking programs is that the project design is very inflexible while there are a lot of uncertainties in the process. On the generation side, peasants may change their mind and quit in the middle of the project. If so, the project would end up producing fewer quotas than planned, and the quota use project needs to be scaled back and redesigned accordingly. There are also uncertainties from the quota users -they decide to participate in the project, but have to wait for about two years for the quota to be produced. By then, the land use need of the quota user may have changed-the factory owners may decide that after all it does not make business sense to open in this particular
153 location. If they no longer want to develop the land, the quota generated cannot be used elsewhere.
The uncertainties on both the supply and demand sides add up to great risks to the investors. Their huge investment going into land consolidation is only recovered when the land development that uses the quota pays off. The long project cycle, tedious administrative approval process and great uncertainty make quota investment a difficult business. This is why indeed most of the investors in Linking Programs are governments, not private investors.
Decoupling the quota generation project and quota use project would mean much more flexibility in terms of timing and location of quota use. It also lowers the risks because now many more projects could potentially use the quotas. Quota investors can get the return for their investment much sooner- when quotas are sold, rather than not until quotas are used and development project is completed.
Transfer of Quota within the Boundary of a County
In addition to linking the quota generation project with the quota use project, the two projects must stay within the boundary of the same county -this is another requirement imposed by the Central Government on Linking Programs. In China, counties are under the jurisdiction of prefecture-level municipality-for example, the mayor of Chengdu oversees not only the city of Chengdu, but also the ten counties around it. When we say that more than twenty cities have quota experiments, we are referring to the fact that one
154 or several counties under the city's jurisdiction can each have a quota program, but not programs across county boundaries.
There are several drawbacks with making the quota transactions stay within the county. It means that for the quota to be transacted, there must be both supply and demand within the same county. First, for supply to happen locally, the density change in rural settlements through land consolidation must be big enough to save significant land and thus generate quota. This means either the original settlements are sparse enough or the newly built residences are dense enough. To generate a quota first is not practical for every county. On the demand side, the non-cross-county requirement means that in the same county some areas are growing fast but short of quota. The place that will use the quota must pay for the costs of making it. If the land value--either measured by the market rate for it or future tax revenues--does not outweigh the costs of quota, then there is no incentive to consume this quota.
The policy of generating and using quota in the same area thus has created a problem: only counties that have both the potential supply and the potential demand have quota transactions. Other counties where there is demand but no supply will not have such trading-this is very likely to be the case for fast-growing counties in the suburb, which has great demand for land and does not have the financial capacity to pay for quota.
However, their rural area is already very small, or the current density is hard to increase much. Yet other counties where there is supply but no demand will not have such trading
155 either- it is most likely to be rural counties that are relatively more abundant in rural areas that thus can produce quota, but are not developing fast enough to need quota.
5. 1.2 Quota Trading: An Upgraded Version of Linking Programs
Understanding the limitations with the Linking Programs, the Central Government cautiously approved Chongqing and Chengdu as two pilot cities to experiment with quota trading, relaxing for them both requirements of linking generation and use projects and transfer of quota within the boundary of a county.
Quota trading can be considered an "upgraded" version of Linking Programs, a market- based approach to quota transfers. First, quota generation projects and quota use projects are no longer packaged together, but rather each is set up as a standalone project. New market participants, quota sellers and quota buyers, are created. A new document, a "land conversion quota certificate," serves as the medium of exchange between the sellers and buyers. Second, by allowing quota transfers to happen cross county and within the boundary of a municipality which includes dozens of counties, the market area would be enlarged by several-fold and many more quota sellers and buyers could be included.
Demand and supply will be better matched, thus improving the efficiency of resource allocation. Lastly, the transactions of quota exchanges are conducted through established trading centers, reducing the information costs for the buyers and sellers, so they can find each other more easily. All these setups would make one think that quota trading increases the efficiency of quota allocation, because the law of market will make scarce resources go where they are valued the most.
156 Is this the case for Chengdu and Chongqing's quota trading? I will examine their
practices in detail in the following sections and demonstrate that the "markets" are not
really markets, but strongly shaped by forces of the political economy.
5. 2 The Chengdu Case
5. 2.1 Trading Quota Certificates in Chengdu
The substance of trading is quota, but the physical commodity being traded is a document
that represents the quota--rules about quota trading are reflected in how to regulate this
piece of paper. Therefore, the following section will trace the issuance, transaction, and
use of the quota certificate in order to illustrate the transaction rules and operational
details.
Issuing Certificate after Quota Generation
Quota certificate represents quotas generated in the rural area. As Chapter 3 has
explained, quotas are produced through a complicated process of densifying rural
residencies, therefore "saving" developable land. The saved land is turned back to
agricultural land, and the "conversion right" severed from actual land parcels, becoming
transferrable to other parcels.
The final product of the generation process is a quota certificate that represents the
157 transferable conversion right. This certificate is formally called a "Construction Land
Quota Certificate" and it is issued to the quota developer by the Chengdu Municipal Land
Bureau after inspecting and approving the quota generation project.
Who holds the right to the certificate? Chengdu specifies that it is the one who invests in
the quota generation project, and stresses that "all kinds of investors could invest...and
obtain quotas.""' For example, if the rural collective is able to pool financial resources
among its members or use collective funds to organize the project, the certificate goes to
the collective. Or, if a private company invests in such a project, the certificate goes to
the private company. Government investment from various levels also goes into such
projects. In such cases, the certificates belong to the government.
The certificate will have detailed information including name of the right holder, size of
the quota, how it is obtained (in this case through direct investment), from which land
consolidation project it was produced, and the date of production. The certificate also
contains a series number. According to the series number, Chengdu Government can
trace all related information about this certificate in its official database. Each certificate
would be different in the sense that it contains different information of right holder, size
of quota, and so on.
" Chengdushi Renmin Zhengfu Bangongting Zhuanfa Shiguotuju Deng Bumen Guanyu Wanshan Tudi Jiaoyi Zhidu Cujin Nongcun Tudi Zonghe Zhengzhi He Nongfang Jianshe Gongzuo Shishi Yijian ik FT-*lM$ WLX n Sr]f (Shixing) De Tongzhi (Chengbanfa (2010) No. 59) (A MAliA 1
(2010) 59 ) [General Office, the People's Government of Chengdu Municipality Forwarding The Implementation Guidelines (Trial) by Municipal Land Bureaus on Improving the Land Trading System, Promoting Comprehensive Rural Land Consolidation and Rural Housing Construction (General Office of Chengdu Municipal Government, Year 2010, No. 59)]
158 To Use or to Sell Certificate
Not all certificates produced will be traded on the market. Chengdu's local regulations state that the quota produced can either be used on a land development project directly, or to be sold on the market. This is a decision to be made by investors themselves.
Different investors have different purposes behind the decision to sell or use a quota. For private investors, profit making is the bottom line. They would weigh the profit they can make from selling the quota against the potential gains of using quota to develop projects.
One quota developer I interviewed explained, "Sometimes I collaborate with a land developer-I provide the quota I produced and my partner provides other resources.
Other times, such as when I am low in cash, I sell some of the quotas on the market."11 2
For government investors, such as county/district governments, they use quotas for their own purposes, for example, to develop industrial projects that they cannot lobby the municipal government to grant quotas for. Yet another type of government investment is from the municipal government. Its purpose is mainly to provide more quotas to the market, to get quota trading started. The municipal land consolidation center has invested extensively. Again, the investment entities make their own decisions about whether to sell or use the certificate obtained through quota generation.
Trading Certificates
If an owner of a quota certificate wants to sell it, s/he cannot sell privately, but through a
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159 government-sponsored trading center. Chengdu's designated marketplace for quota trading is the Chengdu Rural Equity Exchange Center. It was established as a public enterprise under the management of the Chengdu Land Bureau. Trading of quota certificates is held twice a week. Before hosting quota trading, the center was already conducting trading of rural land and housing, as well as forest rights and so on. Quota trading was something new to the government, and housing quota trading in this existing
Exchange Center had reduced administrative costs of establishing the institution. It is important to note that Chengdu has another Land Trading Center that is trading urban land exclusively. Placing quota trading in the Rural Equity Exchange Center, not the one for urban land, also shows that the government makes it clear that a quota is a kind of property coming from the countryside. One urban developer said, "Before (establishing the quota system) I only needed go to the Urban Land Trading Center to get land. Now I also need to go to Rural Equity Exchange Center to get quota." 113 This signifies that quota trading is a specific mechanism to connect the rural and the urban land uses.
The fact that the certificate can only be traded through the trading center also affects how the price is reached, because the trading center requires that transactions must be conducted as open bidding; no mutual agreement on the price between just two parties would be accepted. In the Chengdu official words, this is to ensure that "quota is sold at market price."
Validating Transfer of Certificates
113 20121115-CD-YZ
160 The trading of certificates and transfer of ownership of quota must -be validated by the
Chengdu Land Bureau. After the transaction is completed in the Rural Equity Exchange
Center, the Land Bureau takes back the old certificate from the seller and issues a new
certificate to the buyer. The new certificate would look like pretty much the same as the
old certificate, except for two things-first the "certificate holder" is changed from the
seller to the buyer, and the "way of obtaining quota" is changed from "through original
investment" to "through market transaction."
The formal step of validating transactions and issuing new certificates to the buyer
prevents private quota trading-say for example, if company A sells company B a
certificate not through the trading center, but privately, the certificate still says that the right holder is company A. The land bureau would not issue company B a new certificate
without proof of formal transactions through the trading center. And the certificate listing company A as the holder would be of no use to company B. This set up discourages companies from trading privately with each other.
Use of Certificates
Because it is the certificate being traded, the size of quota represented by the certificate is undividable - that means if a certificate contains 100 mu of quota, they are sold as a whole. When in use, the certificate works pretty much like a bankbook. Using the above example again, if company B buys through the trade center a certificate from company A that contains 100 mu of quota, and it has a development project that would require 60 mu of quota, it will submit its quota certificate to the land bureau with other required
161 documents and materials for project approval. The land bureau would note in the
certificate that 60 mu is deducted and used for this particular project. Company B still
holds the remaining 40 mu of quota and can use it for other projects.
A company can also pool several certificates together. If a project requires 300 mu of
quota, for example, company B could buy a certificate of 100 mu from company A and
maybe another certificate of 200 mu from company C. In the project application,
company B would submit both certificates to the land bureau so the total quotas meet the
need of the project.
5. 2.2 The Demand for Quotas, the Reactions from Sellers and Buyers, and Price Determination
The open bidding for quotas ensures that the price would reflect the law of supply and demand. But what is the demand for quotas responding to? It has to do with regulations about the use of the quota certificate. As Chapter 4 has detailed, Chengdu had a major policy shift regarding the use of quotas. I will take each in turn and explain how the use rules regarding quota certificates affect sellers and buyers, and the price of quota in exchange.
Trial 1 "holding quota to enter land bidding"
In 2010, Chengdu's policy regarding quota use was that all developers who want to buy urban land parcels must hold a quota before entering land bidding. The government did this because it was worried that quotas as a new commodity in the market would have no
162 demand and therefore arbitrarily imposed it on developers as a prerequisite for land bidding. The policy was given wide publicity-The Deputy Mayor held a road show promoting quota generation and quota use. Hundreds of land developers, the potential buyers of quotas, were invited.
The government's strong signal was received by land developers. They were nervous about obtaining quotas. "Buying quotas is like getting a ticket to enter the land development game. It is a make-or-break deal for us," one developer commented." 4 In addition, back then, the rule was that a quota could be traded again and there was no time limit on using the quota. These policy details, plus the fact that a quota takes a long time to produce, led to market speculation-some developers wanted to stock up when the quotas were still cheap, and then use or sell them when the market would be tight. In the first bidding, there was even perceived collusion among the buyers. One of my interviewees said that several major developers planned to buy out all the quotas in the first bidding to have a monopoly over them, then influence the land market. They went up and up with the bidding price.
To quota sellers, the endorsement of the government was encouraging news. Mr. Liang"5 , one quota developer I interviewed, said that with the set of policies, "quota value would appreciate. Quota development would be such a lucrative business-it would be more profitable than real estate development.""' Indeed many enterprises, ranging from real estate companies to investment funds, even to cultural companies, became interested in
114 20121115-CD-YZ 115 Pseudonym. 116 20121115-CD-HL
163 investing in quota generation.
The very first auction of quota certificates went ahead in Chengdu on October 27, 2010.
With speculative buyers and enthusiastic sellers, the market did overreact. The first bidding attracted 179 developers to bid for the 30 certificates, which totaled 2,000 mu of quota. The starting price was RMB 150,000 yuan/mu, and the clearing price ranges from
465,000/mu to 920,000/mu. The total selling price amounts to 1.457 billion, or about
385.9% of the starting price. The unusually high price of the quotas led the Central
Government to stop Chengdu immediately and the first auction was nullified.
Trial 2. "Holding Quota Certificate to Use Land"
Chengdu's experiment resumed after the government significantly revised its quota use and trading rules. In April 2011, Chengdu issued a new policy." 7 The key difference is that the government removed the requirement of "holding certificate to enter (land bidding)" and instead required that developers only need to hold a certificate after winning the bid and before signing a land lease with the government. This is summarized as "holding certificate to use (land)."
From "holding certificate to enter" to "holding certificate to use": one word difference in
"7 Chengdushi Guotu Ziyuanju Guanyu Wanshan Jianshe Yongdi Zhibiao Cujin Nongcun Tudi Zonghe Zhengzhi De Shishi Yijian (Cheng Guotu Zi Fa (2011) No.80)(JAiXM W1k an .iiR I1 $dii $j AE9( .i R(2011) 80 4) The Implementation Guidelines by Chengdu Municipal Land and Resources Bureau on Improving the Trading of Construction Land Quota to Promote Comprehensive Rural Land Consolidation (Chengdu Land and Resource Bureau (Year 2011) No. 80)
164 the rule means different impacts on the demand for quota certificates. "Holding certificate to enter" (land bidding), as explained above, means that having a quota is a prerequisite for entering land bidding. Therefore if ten developers are potentially interested in bidding on a piece of land, the demand for quota would be ten times the size of the land. Now with the new requirement of "holding certificate to use," only the winner of the bidding needs to use quota. The potential demand for quotas thus created would more or less equal the size of the land, much less than demand created under the old rule of "holding quota certificate to enter bidding."
Chengdu has revised other rules to further prevent speculation. First, secondary trading of quotas is no longer allowed. After developers buy quota certificates, they must use the certificates for actual projects, not resell them. Second, a time limit is put on quotas. A buyer of a quota certificate must use it within two years from the transaction date. These rules discourages companies who want to buy a quota cheap now and use or sell it later to reduce costs or make profits. In fact, land developers would not buy quotas until they win the land bid. As my interviewee told me, "There is a month between winning the bid and signing the lease with the government. It is more than enough time to go to the Rural
Exchange and buy a quota.""' Lastly, Chengdu added a clause on security deposit, stating that even if there is no quota available on the market, the winning developer could pay a deposit in the amount comparable to the costs of quota, and still go ahead with the land development project. This has further reduced the incentive for developers to buy quotas in advance. "In 2010, the government infused too much value into the quota
"1 20121115-CD-YZ
165 certificate; in 2011, they took too much out of it,""' my interviewee, quota developer Mr.
Liang commented.
The price of quotas after the revision of rules has gone down significantly. In late 2012 when I visited Chengdu for the second time, the price was fixed at RMB 0.3million yuan/mu. This price was set as the minimum protection price to ensure the costs of quota generation would at least be covered, and it is supposed to be the starting price for bidding. Since the market demand has dampened so much, there is now a surplus of supply. The starting price is not bid up and becomes the clearing price.
The minimum protection price was arbitrarily set by the Municipal Government; and in the eyes of quota developers, RMB 0.3million/mu was set towards the low end. "For
RMB 0.3million/mu, at least 80% of the current investors would not make any profit selling quotas. In fact, many of them have quit. Those who have stayed are working in really remote rural areas where compensation to peasants is extremely low. Peasants on the urban fringe or in the suburban areas won't take that level of compensation." 0
From being enthusiastic about quota investing before the first bid to about 80% investors quitting the business, the climate of quota trading in Chengdu has dramatically changed.
When I visited Chengdu for the second time at the end of 2012, the resumed trading had been going on for about 18 months, a time long enough for another cycle of quota generation if there were interest. But, as the staff of the Rural Equity Center told me, the
"9 20121115-CD-HL '2020121115-CD-HL
166 quota for sale then is mainly invested in by the Municipal Government. Private investment is hard to attract. "The market is paralyzed. How can you make it alive again?" quota developer Mr. Liang lamented.m
What would increasing the minimum protection price do to the market, if Chengdu could change it? Director Yang, a senior policy maker in the Land Bureau who played a significant role in drafting the quota rules said, "Ideally, the starting price of a quota should not be set so low. It should be allowed to increase to reflect the real costs of quota generation. If it increases, a lot more investors will be interested." Mr. Liang, the seasoned quota developer, gives more tangible estimates, "If quota price is raised from
RMB 0.3 to 0.6million/mu, the market size will double. Many more investors will be entering the game. And it won't be only in the remote areas where they generate quotas.
Those counties and districts in the suburb can also generate quotas, because the price is high enough to cover the costs." Lastly, he added, "The life of this industry [quota generation] could be another one year or ten years, depending on the policy."
5. 2. 3 Inter-governmental and Intra-governmental Politics of Quota Trading in Chengdu
The last section showed how the design of the market influences market participants.
This section turns to how the designers of the market are influenced by political forces.
As Oliver Williamson (Williamson 2000) commented, the governance structure is a
12 20121115-CD-HL
167 higher-order issue than the market details--before you can get the prices and quantities right, you have to align the governance structures with transactions. While I took two snapshots of the market-under the 2010 and 2011 trading rules respectively in the last section, in this section I shift perspective and explore the dynamic process of how the rules were conceived, negotiated, and changed. Several factors are intertwined and, as I will show, it is inherently a political contracting process.
The analysis is conducted at two levels. I will first look at the negotiations between the
Central Government and the Chengdu Municipal Government--the quota experiment is a special preferential policy granted to Chengdu by the Central Government, and the level of tolerance by the Central Government would determine how much policy maneuvering space Chengdu has in this experiment. On the second level, I look inside the Chengdu municipal government. Although when analyzing central-local relationships, I treat the municipal government as a unified actor, it really is not a single entity. When carefully examining the establishment and operation of the quota market, we will see that the push and pull between political leaders and techno-bureaucrats directly impact how the rules regarding the quota market are written. Different phases of the quota experiment have displayed different political struggles and negotiations.
Phase 1: Birth of Quota Trading in Chengdu (2008-late 2010)
Accidental Local Factor and Relaxation of Central Policy
168 Between 2006 and 2008, Chengdu was allowed to conduct a Linking Program experiment--as in other pilot cities, transfer of land conversion quotas had to stay within the county boundary. But an unexpected event changed its course. The destructive
Wenchuan earthquake hit Chengdu's rural area in May 12, 2008 and leveled millions of houses in the mountains and valleys. In the aftermath of the earthquake, the Ministry of
Land Resources gave a special policy to Chengdu to support its reconstruction-the
Ministry relaxed the "use within county" restriction, and allowed land quotas to be transferred in the entire municipality of Chengdu.
This was a much-needed policy. In rebuilding peasants' houses, there was a shortage of government funding. The Chengdu government hoped to attract as much private funding as possible into reconstruction, in a way that made business sense to private investors.
The business model would be that if the private sector invests in building new houses for peasants that are more compact than before the earthquake, and therefore save land, they would get quotas in return. If the Central Government had not relaxed the "use within county boundary" restriction, the quota generated would not be of little use-the destroyed villages are located in some of Chengdu's most remote and mountainous areas and there is little demand for developable land locally. Instead, if quotas can be used elsewhere in the municipality, especially in the urban core, then there is incentive for the private sector to come in.
169 Muddling through in Crafting Quota Trading Rules at Local Level: political leaders versus technocrats
Although the earthquake was an accidental factor prompting Chengdu into exploring quota trading, Chengdu's ambitious political leaders and prepared bureaucrats seized the opportunity. The preferential policy granted by the Ministry only had general principles, and Chengdu government had to work out the details of institutional design. Eventually, the policies regarding quota trading were written as a result of strong political will on the side of the municipal leaders and hard brainstorming on the side of the bureaucrats.
The municipal leaders, most prominently the party secretary Li Chuncheng upheld
"integrated rural and urban development" as one of his political flagships. He was opportune, because the political priority of the Central Government in the previous years had been supporting rural development. More specifically, since the top leaders from the
Ministry of Land and Resources came to Chengdu in 2009 to support the initiation of quota trading, Li had been very ambitious to push quota transfer from ad hoc, special post-disaster policy to an established, regular market.
But the specific design relied on more technical bureaucrats, like Mr. Yang 22 , director of land use laws and regulations who drafted the overall regulatory frameworks; and Mr.
Hua 23, director of trading in the Rural Equity Exchange who contributed to defining the trading bylaws. Both said frankly that they did not know what quota trading would look
122 Pseudonym 113 ibid.
170 I
like and how the market would react. "We are muddling through."
The political leaders had determined to push forward quota trading, and the technocrats were tasked to flesh out the details. As shown in the last section, Chengdu's entire quota market is designed around how best to attract private investment--first to rebuild earthquake-destroyed houses, and later extended to upgrading rural houses in general to produce quotas on a large scale. So the bureaucrats as architects of the quota trading faced a major challenge: how to infuse values into quota trading, to make it profitable and thus attractive to the private sector. The technocrats brainstormed and found the tweak in the quota-using rule that would make the quota a scarce and valuable commodity-as the last section explained, Chengdu required that all developers interested in bidding must buy a quota.
The trading rules were drafted in a short timeframe. Mr. Hua, director of trading in the
Rural Exchange said, "We had held thousands of meetings to discuss the rules and written hundreds of drafts in just a few months." Within that short period, the bureaucrats were under great pressure to produce a final draft. They did not have time for careful financial and economic analysis, nor did they not have the capacity in-house anyway. More importantly, the political leaders would not accommodate anything against their will.
Mr. Hua said that he felt extremely nervous before the first bidding-he knew that
124 20121112-CD-H 12 20121112-CD-H
171 something might go wrong. "The first bidding went ahead anyway with the not so well- thought-through trading rules." We know the story after that with last section's description--the market indeed over-reacted and Chengdu's trading was immediately stopped.
Phase 2: Suspension and Resumption of Quota Trading (Dec 2010- June 2011)
The Central Government's opposition was strong and prompt. Even the local policy makers were surprised to find that the local newspapers in Chengdu on the second day of the quota bidding were all silent on the bidding. We do not know if Central Government commanded them to do so or local newspapers self-censored-whichever way, it shows that the locals got the message that the first quota bidding was something unaccepted by the Central Government. Instead, stories about how the Central Government scolded
Chengdu appeared in the news. One news article said that shortly after the bidding, the
Ministry of Land and Resources sent a special investigation team to Chengdu. The team members questioned the whole process and asked many harsh questions (Jiang (R) 2011).
Even though the Central Government gave Chengdu the initial green light to go ahead with quota trading and without explicit restrictions, there was a bottom line that the
Central Government was insisting on. My key informant from the Ministry revealed that the key concern of the Ministry is about the risks and uncertainty of high quota price.
They are aware of the efficiency argument that Chengdu insists on and many economists
172 haveadvocated for, if a quota is allowed to be transferred within a large area (like in the municipal area in Chengdu). But the general attitude of the Ministry is that political stability is the dominating priority--they'd rather be safe than innovative or entrepreneurial. 26
I conducted my first field visit in Chengdu in 2011, when the trading was in suspension.
During my fieldwork, a delegation from another province happened to be visiting
Chengdu to "learn from their experience" and asked several times for "the specific trading rules." Chengdu's government officials were clearly not excited to talk about their experience and were very cautious about questions regarding the detailed trading rules. They mentioned a few times, "We are under a lot of pressure from the Center
[Central Government]." At the banquet hosted for the visiting delegation at the end of that day, the government officials dropped their guard after a few drinks. They poured out their grievances and won immediate sympathy. Both government teams complained how the Central Government had different sects of policy makers who drive the Central
Government's position to different directions with regard to land use. Seeing themselves as reformers, they did not like how the conservatives in the Central Government had the upper hand now.
In the meantime, Chengdu worked hard to defend itself. Director Yang, who designed the policy framework, in his own words, "quarreled with directors, and debated with
126 20110809-BJ-M
173 deputy ministers on the institutional details.""' Chengdu's basic argument was that the current problems are at operational level--the trading rules could be revised to better control price, lest there be unforeseeable negative impact. But the experiment must be continued; it is the only way out of the rigid central control of the quota system. "Sadly, problems at the operational level have caught the nerve of the Central Government who then want to turn around the entire experiment."1 2 8
Inside the Ministry of Land and Resources, a decision regarding the future Chengdu's of quota trading was hard to make. The case was submitted up to the Deputy Ministers; even during the May Day holiday (which is a weeklong holiday in China) three deputy ministers did not take a break and still debated about the case. As Director Yang told me later, the initial decision was to ban Chengdu from further experimenting with quota trading. The official document announcing the ban was on its way to Chengdu when the ministry suddenly turned over its decision, revoked the document, and announced that
Chengdu could have a second chance on the condition that they modify the trading principles. The local officials in Chengdu did not know what led to such a sudden turn.
The best guess is, as revealed earlier, there are different sects within the Central
Government and those for the reform of quota trading and those against are constantly fighting and commanding the heights in turn. The more reform-oriented leaders in the
Ministry may have spared Chengdu.
At the Central Government's direction, Chengdu resumed quota trading after
127 20110517-CD-Y 128 20110517-CD-Y
174 significantly modifying its rules and removing all the details that might lead to speculation on quotas. As the last section explained, those changes have significantly dampened the demand for quota, and the price is set at a very low level.
Phase 3: A Weak Ending: changed leaders and changed priorities
Although to a certain extent, Chengdu won the fight with the Central Government so its trading resumed, the changed dynamics within the municipal government itself prevented the design of the quota market from being improved. As examined earlier in this chapter, the revised trading rules have left Chengdu's quota market inactive. One key factor was that the government determined that the minimum protection price was set too low for investors to adequately profit. "We need further policy discussions to improve the policy.
But the political atmosphere has changed," explained Director Yang. The reason is that the main political figure behind the quota market and the larger campaign of Integrated
Urban and Rural Development, Party Secretary Li Chuncheng, had left Chengdu. The new party secretary who took over shifted the policy priority to Urban Renewal, investing in enhancing infrastructure in the center city. "You know, each leader wants to create their flagship projects, not just inherit what others left. They need distinct achievements for their political careers." But this shift of political leadership took place before the development of the quota market could be completed. "We have some holes in the institutional design. And more policy research and discussions are needed to complete the work. But the municipal leaders are no longer backing us up and our proposals are put
175 aside," Director Yang complained.
To recount, different phases of the development of the quota market have displaced different kinds of political struggles and negotiations. At the conception of the quota market, the main negotiations were between the Central Government and Chengdu
Municipal Government-the Central Government granted Chengdu a special policy, which became precondition of its quota trading, due to the accidental event of the earthquake. When the market was to be born and detailed rules waited to be drafted, the battle then was between the political leaders and the technocrats. For political ambitions, the political leaders of Chengdu predetermined that quota trading must be established and promoted, before the techno-bureaucrats could conduct careful analysis and draft detailed rules. This is the story before the drama of the first auction of quota in 2010.
The story then took a sudden turn due to the unexpected results of Chengdu's first quota bidding which triggered the Central Government's strong reaction. Significant fighting and negotiation went on between the Chengdu Municipal Government and the Central
Government. Even within the Central Government, there were different opinions about the way to go, which further complicated the decision on Chengdu's future. Eventually,
Chengdu was allowed to resume its trading on the condition of significantly revising its trading rules.
After Chengdu reached an agreement with the Central Government, the focus shifted back to within the municipal government. The previous political endorsement, which
176 worked both as a support and as a pressure to technocrats, was gone due to change of leadership and shift in policy priority. The technocrats were given less attention, which led to the "incomplete design" of the quota market in Chengdu. The market was lukewarm and both the selling and buying of quotas is less active.
5.3 Chongqing
Although the Central Government gives Chongqing and Chengdu the same general special policy-allowing decoupling of quota generation and quota use projects, and allowing for transfers of quotas across the county boundary and within the entire municipality-the two cities have taken on very different approaches to designing quota trading. The biggest difference is that while
Chengdu's local policy is centered on attracting the private sector to fuel quota generation and use profit incentives, the municipal government of Chongqing explicitly excludes private investment. 29 Chongqing's market trading is government-led and administratively organized.
5. 3.1 Planning and Assigning Quota Generation in Chongqing
In Chongqing investment for quota generation is all from the government. The municipal government prepares a formal plan for land consolidation for the entire
129 20121129-CQ-L
177 municipality and it is also responsible for inspection of quota generation projects.
The organization and supervision of quota generation is delegated to county/district governments, which set up designated Land Consolidation Centers.
Each county/district is required to survey its existing amount of developable land and estimate the potential for the amount of quota to be generated. The county/district government will sign an agreement with the peasants and rural collectives if they agree to participate in quota generation projects and will organize bidding and contracting for the construction, demolition and reclamation."4 These projects are formally registered with the municipal government, which drafts an annual plan and calculates the total for the entire municipality.
For example, for year 20111 found a table of the size of land to be saved in each county/district.
Table 5-1 Breakdown of Rural Development Land Reclamation Tasks Assigned to District- and County- Governments of Chongqing, Year 2011
District/ Task (size of rural District/ Task (size of rural County developable land to County developable land to reclaim, Unit: hectare) reclaim, Unit: hectare) Total 6670 Tongnan County 270 Dadukou Dist. 10 Tongliang County 30 Jiangbei Dist. 10 Dazu County 130 Shapingba Dist. 10 Rongchang 220 County
10 20121129-CQ-W
178 Jiulongpo Dist. 80 Bishan County 30 Nan'an Dist. 20 Liangping County 110 Bei-bei Dist 20 Chengkou County 150 Yubei Dist 40 Fengdu County 260 Ba'nan Dist 50 Dianjiang County 120 Wansheng Dist 40 Zhong County 500 Shuangqiao Dist 20 Kai County 330 Jiangjin Dist 500 Yunyang County 370 Hechuan Dist 260 Fengjie County 200 Yongchuan Dist 170 Wushan County 60 Nanchuan Dist 70 Wuxi County 210 Changshou Dist 70 Wulong County 120 Fuling Dist 170 Shizhu County 200 Wanzhou Dist 450 Xiushan County 120 Qianjiang Dist 300 Youyang County 370 Qijiang Dist 280 Pengshui County 300 (Data source: Chongqing official document, translated by the author.)
It is important to note that both the Linking Program and the Quota Trading
Program are ongoing in Chongqing. The numbers presented in the above table include targets for both linking program and quota trading program assigned to each district/county. It would be more ideal to find data just on the quota-trading program, but it was not accessible. Nevertheless, the table shows that quotas generated for sale are not based on market incentives, but rather political tasks.
Chongqing states that quota generation is not profit-driven, and the government
' Chongqingshi Guotu Fangguan Ju Guanyu Qieshi Jiada Gongzuo Lidu Quebao Wancheng 2011 Nian Nongcun Jianshe Yongdi Fuken Renwu De Tongzhig, Yu Guotu Fangguan Fa (2011), 44 Hao (Af-IPTM nT 2011 M11 _V (2011) 44 4) [Notification by Chongqing Municipal Land and Housing Bureau on Working Practically and Harder to Ensure Completing the Task of Rural Construction Land Reclamation in Year 2011, Chongqing Municipal Land and Housing Bureau, Year 2011, No. 44]
179 only gets paid for its operational costs. They claim that the biggest beneficiary is the peasants. If the quota is later sold at a price higher than the costs of generation, any profit is given back to peasants as extra compensation, in addition to a minimum compensation already paid to peasants during quota generation.'3 2
County/district governments in Chongqing cannot retain the quotas they have produced for local use. They must turn these quotas to the municipality for trading.'3 3 Procedurally the municipal government issues two different kinds of documents related to quotas. The first kind is called Construction Land
Consolidation Inspection Certificate." 4 It is issued to the district/county government once a quota is generated. This document only shows that a quota has been generated and the reclaimed agricultural land has passed the inspection. Like the quota certificate in Chengdu, it will contain detailed information such as project name, location, area recovered and so on.' However, one cannot use this certificate directly on a development project. The only use for this document is to apply for quota trading. The second document issued is the actual quota certificate.
It is only issued after the quota is traded on the market, and the Land Bureau recognizes it as a valid document for land conversion in development projects.
The two different kinds of certificates make sure that a county cannot consume the quota it produces and must sell it.
132 20121129-CQ-W 133 20121129-CQ-L " 4 iiE" in Chinese "3 (Chongqingshi Guotu he Fangwu Guanliju ( [Chongqing Municipal Land and Housing Bureau] and Chongqing Nongcun Tudi Jiaoyisuo J Z&F4&A PF [Chongqing Rural Land Exchange] 2011). pp.27-28.
180 5. 3. 2 Manipulating Quota Trading in Chongqing
A. Getting quota on the market
Once quotas are generated, the way they get onto the market is administratively
organized in Chongqing-the county/district governments that are delegated to
develop quota will notify the municipal Rural Land Trading Center that their
quota generation projects are completed and have passed inspection. Notifying the
center does not guarantee that the quota will be traded. The trading center will
decide whether to allow the county's quota to be on the market or not. If this
country/district has been supplied quotas recently, the center will push it back and
ask them to wait for their turn next time. The center will basically go around the
municipality and make sure that all counties get equal opportunities for quota
sales. 136
In addition to making the counties to take turns, the center will also consolidate
several projects within the county. For example, if a few projects are to be
completed in the next six months or so in a county, the center will not organize
trading for the projects that finish early, but rather, wait until all projects are
completed. According to my interviewees in the municipal government, this is out
of concern for equity too. "Ifthese projects in the same county are traded at the
same time, the price of quota will be more or less the same. Since peasants' final
compensation is calculated based on the selling price of quota, this means that
136 20121129-CQ-L
181
1- - -, -_----_'__- --." compensation to peasants in the same county will be more or less the same, to prevent any discontent among peasants." 37 Once the counties are allowed to sell the quotas, they will turn in the Construction Land Consolidation Inspection
Certificate to the Rural Land Trading Center.'38 The center needs two months then to prepare for the bidding.
B. Taking Stock of Demand
As for buyers, the center also has to do a lot. "We'll take stock of potential demand." 3 9 There are two ways that the center assesses potential demand. First is through informal communication. Since quota trading in Chongqing is sporadically organized (only several times in a year), enterprises who want to buy a quota at a time the trading is not happening will contact the center and express their interest.
Once the center is ready to organize trading, it notifies all potential buyers by making an announcement of the trading seven days in advance in a local newspaper, Chongqing Daily, as well as on the website of the Municipal Land
Bureau. "0 After the announcement and before the trading is organized, potential buyers who want to participate in quota bidding have to pay a deposit in advance.
And the deposit is not a set amount, but proportionate to the size they are
137 20121129-CQ-L ".. (Chongqingshi Guotu he Fangwu Guanliju (-*LTt M -r jr N *11) ME !A,9) [Chongqing Municipal Land and Housing Bureau] and Chongqing Nongcun Tudi Jiaoyisuo A f4 JidV 2Afi [Chongqing Rural Land Exchange] 2011), p. 36 139 20121129-CQ-W 140 20121129-CQ-L
182 interested in buying. And this size sets the upper limit they can buy from each bidding. Based on the informal communication and formal deposits, the Rural
Land Trading Center would have a pretty good idea of the potential demand.
C. Manipulating Supply and Setting the Price
Taking stock of potential demand and knowing the size a particular enterprise wants beforehand is critical information to the trading center. This is because the trading center wants to keep the price of quota in a certain range-it has to be high enough to cover the costs of quota generation, to prevent any loss; but it also has to be low enough, lest subsequently it leads to a big increase in land and housing prices. To achieve this goal, the trading center manipulates supply to match potential demand.
For example, County X has completed a dozen projects and produced 10,000 mu of quota and turned them over to the trading center. But if the deposit paid by all interested buyers corresponds to 7,000 mu of quota, the trading center would not offer all 10,000 mu on this bidding, but slightly less than 7,000 mu, so there will be some competition in bidding, but not too much.
Other than the overall size, how much each enterprise wants is also important.
This is because quotas are not sold by unit, but by certificate. Each certificate may represent different sizes of quotas. As explained earlier, Chongqing issues two kinds of documents, Construction Land Consolidation Inspection Certificate to
183 the quota generators (county and district governments) and Land Quota
Certificate to the actual buyers of quota. These two certificates do not correspond to each other directly. The Trading Center actually groups the quotas contained in several Construction Land Consolidation Certificate into one Land Quota
Certificate. And how big or small they package the quotas are according to the enterprises' needs as confirmed by the deposit. If an enterprise has paid a deposit for 300 mu of quota, the trading center may package a couple of Construction
Land Consolidation Certificates together that amount to, say, 297 mu of quota, more or less meeting the demand of this enterprise.
All certificates are auctioned off at the same starting price for one unit of quota, but because the sizes are different and enterprises have different needs, the selling prices of each certificate are different. But they more or less stay in the expected range. Over the years, the selling price of a quota has been relatively stable and just a little over the starting price. In 2009, it was RMB 91,500 yuan/mu. In a
2012 bidding, the starting price was RMB 178,000 yuan/mu and the average selling price of RMB 211,000 yuan/mu.
"If we go for free bidding, I'm sure that quota can be bid up to as high as 1 million/mu, like what happened in Chengdu. But Chengdu is messing it up. We have to control the price, so down the road, housing price would not spike," my key informant from Chongqing Development and Reform Commission said.'
1''20110524-CQ-H
184 Like Chengdu, Chongqing has also imposed a time limit of two years on quotas.1 42 Reselling of quotas is not allowed.'4 3 But local banks in Chongqing accept quotas for mortgages.144
There were a few exceptions when the bidding price fluctuated. In 2009, the lowest selling price was 90,000/mu while the highest was 300,000/mu. In 2012, the selling price went down to a little over 200,000/mu. The trading center admits that there are several factors affecting the price of quota, beyond the control of the center. First, the popularity of quotas among developers has been increasing.
Initially people did not understand what a quota was and it took time for the new rules to be understood and accepted. After the first land quota certificate was used on a land development project, enterprises were more enthusiastic and therefore demand increased. Second, in late 2012, there was a decline in quota price, mostly due to the overall political atmosphere of the city-the once high-key Party
Secretary Bo Xilai was sacked by the Central Government. "Under Bo's ambitious ruling, Chongqing's economy was 'advancing triumphantly.' After the political earthquake, however, many enterprises that were planning to invest in
Chongqing have changed their mind and gone elsewhere." 145
D. Distributing Quota Benefits and Averaging out Compensation to Peasants
There are two prices in quota trading, the starting price and the selling price. The
142 20110523-CQ-W 143 20121129-CQ-W 144 20121129-CQ-W
14 20121129-CQ-W
185 starting price is set by the government, and equals the minimum protection price
of the quota. It covers the operational costs and basic compensation to peasants.
In 2012, the starting price was set at 176,000/mu and a detailed breakdown is in
the table below.
Table 5-2 Breakdown of 2012 Minimum Protection Price of Land Quota in Chongqing
Engineering and construction costs RMB15,000/mu 11,000/mu financing costs Operation costs: 36,000/mu 11,000/mu 10,000/mu to county and management costs. district government 1,000/mu to municipal government Minimum compensation to 85% to peasant households: 120,000/mu peasants of 141,000/mu 15% to rural collective: 21,000/mu Price: 176,000/mu (Data sources: interviews 146 147 148 149 and Chongqing official document "0)
The minimum compensation standard is adjusted upward every year, from less than
100,000/mu to peasants and rural collectives in 2008 to 141,000/mu in 2012. Regardless
of the total level of compensation, the Municipal Government has set a ratio of 85/15%
split between the peasant households and the rural collective.
Chongqing has stressed again and again that quota generation is not profit driven. Any
profit generated in quota trading is given back to the peasants."' Compensation to peasants is disbursed in three installments. First, after the peasants agree to participate in
14620121129-CQ-L
14720121129-CQ-W 148 20110523-CQ-W 149 20110523-CQ-W (Chongqingshi Guotu he Fangwu Guanliju (1fk N -i-;"-r * f N )) [Chongqing Municipal Land and Housing Bureau] and Chongqing Nongcun Tudi Jiaoyisuo A Pfr [Chongqing Rural Land Exchange] 2011) 151 20110523-CQ-W
186 the quota generation project, the county/district governments give an advance payment to
peasants. This advance is a fraction of the minimum compensation. This ratio is decided
by the district/county government itself and ranges from 30% to 50% of the minimum
compensation.
The second installment is paid after quota trading. Once the trading center receives quota
payment from the buyer, it will then pay off the remaining portion of the minimum
compensation to peasants. Peasants receive the compensation from the trading center
directly in their bank accounts -helping peasants create bank accounts designated for
quota compensation is part of the work of the county/district government during quota
generation. Note that that from agreeing to participate in a quota project to the
completion of it takes about 1-2 years, and then for the trading center to organize bidding
and finally receive payment from buyers takes at least another several months. This
means that peasants need to wait for around 2 years between their first and second
installment.
The third installment of the compensation is the most complicated part. It is called the
"premium," that is, if the quota sells more than the minimum protection price (which
consists of minimum compensation, engineering costs, and management costs), this profit
will be given to the peasants. As explained earlier, the trading center packages several
quota generation projects together to form one land quota certificate, and each quota
certificate is sold at a different price. Therefore, the "premium" each peasant receives
would be different, but the Chongqing Municipal Government thought this would be
187
11111111111M Millillipil unfair. Instead, they want peasants in the same area and participating around the same time to get more or less the same amount of compensation, to prevent any discontent among them. To do this, the trading center calculates the "average selling price" over a
1 2 year, and uses this price to calculate the premium. 1 This means that the peasants cannot get their final installment until all transactions of a year are closed and the average price calculated. This also means that when signing the contract to participate, peasants do not know eventually how much they would get beyond the minimum compensation. They have to bear certain risks-it could be a lot more than the minimum compensation or very little.
5. 3. 3 Inter-governmental and Intra-governmental Politics of Quota Trading in Chongqing
Divided County/District Governments
The district/county governments are under political pressure to produce quotas. Back in
2008 and 2009 when the quota trading experiment just started, the mayor asked the county heads and district heads to organize quota generation; but the lower-level governments did not know what this was about, and were not enthusiastic. The municipal land bureau had to explain and show them how to do it. Then a government agency for quota generation, the Land Consolidation Center was set up within each district and county government. Quota generation was assigned as tasks and so the political pressure went up. "Furthermore, the municipal leaders order the district/county
112 20121129-CQ-L
188 governors to also lead the land consolidation center, so they pay more attention and work
harder." 153
At the same time, the municipal government has set up fiscal incentive for district/county
government in quota generation. For each mu of quota sold, the county and district
governments get RMB 10,000 yuan as management overhead that goes to district/county
coffers. Note this is a fixed number--no matter how much the quota eventually sells for,
the fiscal revenue from quota generation for county/district government does not change.
If a quota sells for a very high price, any profit is given to peasants (as the last section
explained), not to the county/district governments. Also, this rate has not increased over
the years, although the minimum protection price for peasants has increased every year.
Despite being given the same political pressure and fiscal incentive, district and county
governments have different opinions about the tasks of quota generation, and their
attitudes are related to the distance of their county/district to the center city, as well as the
demand for urban land in their county/district. In general rural counties, which are
located in the remote areas and have little demand for land development, think it a good
business, while suburban counties detest it.
To rural counties, the fiscal revenue from quota generation is sizeable. "Initially, they are not interested; after the consolidation is done and money is in place, they
153 20110523-CQ-W
189 become more active."" 4 First, these counties have vast rural areas and their assigned targets for quota generation are quite large. Some counties are assigned to produce as much 1,000 mu a year. At the rate of RMB 10,000 yuan/mu of management overhead, this means 10 million yuan extra-budgetary fiscal revenue added to the local coffer. "' Second and more importantly, the land in rural counties would not have generated revenue for county/district governments in any other ways -the location is remote, the demand for land for residential development or industrial development was very limited. The county/district government could not leverage it to generate much land sales or tax revenues.
Therefore, quota generation has produced extra revenues for them, and they are more likely to cooperate with the municipal government.
To counties and districts in the suburban area, the sentiment is the opposite: "...they do not want to sell the quotas generated. They would rather use the quota for their own projects-to use land to attract businesses and industries," my key informant in
Chongqing's Reform and Development Committee told me.' 56 I got the same impression from a university professor and his team of graduate students who work with townships and villages to design their land consolidation projects. "They'd rather have linking programs (that stay within the county) than participate in quota trading."'57 The return from land development-either for direct fiscal revenues from land sales, or for future tax and job creation-is much bigger than the quota income.
154 20110523-CQ-W '" 20110523-CQ-W 156 20110524-CQ-H 15 20121127-CQ-Y
190 Although these counties are reluctant to sell quotas, they do not have a choice. Before
each project is established and proved, it has to be specified if it is a linking project or a
quota trading project. Once confirmed as quota trading project, the quota generated must
be turned over to the Rural Land Trading Center for sale, not used locally.'58 The
counties are directly under the municipality and they cannot really say no. "Ideally, any
saved developable land should be used to meet local demand. If there is a surplus, then
quota can be sold to other counties. But you know, politically we prefer to push forward
quota trading--quota trading is our own unique innovation, but linking programs are
running in so many other cities," "'my key informant from the Municipal Land Bureau
admits. "Another reason is that in the short term, we have to increase quota supply to
maintain the market. Therefore counties/districts are required to sell." 60 He was openly
admitting that the supply is forced. In addition, although he conditioned his statement by
saying, "it is a short-term solution," this term is not short. I conducted this interview at
the end of 2012, when quota generation had already been going on for more than four
years in Chongqing. For over four years, the supply was still not spontaneous, but created
as political tasks.
And the supply of quota was indeed in shortage. Trading is organized only when
there is enough supply. When I visited in late December 2012, the trading center
had organized quota trading only once for the first 11 months of the year. The reason, as given by the official at the trading center was that there was not enough
158 20121129-CQ-L
"9 20121206-CQ-U '6 20121206-CQ-U
191 quota generated to supply onto the market.1 6' This is in great contrast to
Chengdu's regular trading of quota offered twice a week.
Chongqing and Central Government
Chongqing has a less bumpy relationship with the Central Government and, unlike
Chengdu, its policies around quota trading have been consistent. In fact, Chongqing was the first pilot city ever approved by the Ministry of Land and Resources to experiment with quota trading. Even though Chengdu now also has quota trading, Chongqing still claims itself as the "only pilot in the country." Given its political ambition, it is not surprising.
Chongqing indeed got a very special policy. Chongqing, being the largest city in China, boasts a geographical area of 82,300km 2 and a population of 29.19 million, which is double the size of Chengdu in terms of population, and 6.8 times in terms of geographic area. The size translates to a market area that is several times bigger than Chengdu.
Chongqing Municipality oversees about 40 counties and districts.6 2 Trading within the entire municipality means a market area that is about 40 times bigger than if within a county as in Linking Programs. Moreover, the economic gap between Chongqing's urban area and rural area is huge. There is a much bigger incentive for the remote areas to transfer their quota, and also a potential big supply.
Administratively, Chongqing as a municipality enjoys provincial status, like Beijing and
161 20121129-CQ-L 162 During the period of my research, Chongqing's administrative division changed from 40 to 38 counties, merging several districts in October 2011.
192 Shanghai which are directly under the rule of the Central Government. Administratively it is one level higher than Chengdu and two levels higher than a typical county. Therefore the land bureau of Chongqing and the municipal government of Chongqing have more political power and resources at their disposal. Their relationship with the Central
Government is closer, unlike Chengdu, which had to mediate through its provincial government (of Sichuan Province) above it, and according to Chengdu, "We could not lobby as effectively as Chongqing could. We are farther away from the center. Our provincial government is conservative and not on our side."" 3 Chongqing officials I interviewed commented that any economic issue in China is a political economic issue.
"You have to have good guanxi with the Central Government; you have to strive for good policy. With good policy, your work is much better and more promptly completed." 164
Municipal Leaders
Unlike Chengdu, Chongqing's quota trading has not been impacted by leadership change in the Municipal Government. The preparation for the quota experiment was conducted in the couple of years leading up to 2008. Between the preparation and the initial launch in 2008, Chongqing had a shift in political leadership. The Party Secretary first giving support to quota experiment was Wang Yang; his successor, Bo Xilai continued to give a green light to the quota experiment. Chongqing was more fortunate than Chengdu in the sense that the fundamental design of quota trading and its operational details were crafted and established before the shift in political leadership. The political successor in
Chongqing did not need to put extra effort into improving it. Inheriting something that is
163 20110517-CD-Y 164 20110524-CQ-H
193 already up and running is easier. Moreover, the new party secretary, Bo Xilai's political flagship was the "Smashing the Black, Singing the Red" campaign, promoting communist propaganda and cracking down on crime. The political campaign was a much bigger deal than quota trading. Since quota trading was less prominent politically in
Chongqing than in Chengdu, during a political shift, it is less likely to be discarded as the
"predecessor's pet project" and more likely to be kept in its status quo. 165
Another reason that Chongqing's quota trading as an institution is more sustained than in
Chengdu is that the technocrat behind it is more powerful than in Chengdu. In Chengdu, technical design relies on the Land Bureau, while in Chongqing it was spearheaded by then Deputy Mayor Huang Qifan during the former Party Secretary Wang's term; Huang was later promoted to become the mayor of Chongqing during the new Party Secretary
Bo's term. His promotion only ensures that quota market as his achievement is to be strengthened rather than weakened.
Mayor Huang had given a strong promotion to the quota trading. Huang previously was presiding over the economic reform in Shanghai and helped established the Shanghai
Stock Exchange. The quota market is claimed to be another significant market reform.
From the description above we know that really Chongqing's quota exchange is nothing like a market. It is ironic how the government still uses market language to justify the innovation and efficiency of quota trading.
165 20110524-CQ-H
194 5. 4 Chapter Conclusion
In this chapter, I have examined the setup of quota markets in Chengdu and Chongqing respectively. Before diving into these two markets in detail, I first reviewed the Linking
Program, a predecessor of the quota market through which quotas are transferred from one place to another in a more rigid, planned way. The Central Government of China then allowed Chongqing and Chengdu to go ahead with the quota market experiment, relaxing two critical requirements so quotas can be transferred in the entire municipality and the transfers are conducted in established trading centers. One would think that with enlarged market areas and established marketplaces, the quota markets would be a great improvement in efficiency.
However, after looking into details, I find that these markets are not real markets.
Chengdu initially tried hard to attract private sector investment into quota trading. By making a quota a prerequisite for any developers to bid on land in the city, they had artificially made the quota a scarce resource, which inflated the demand for it and led to speculation. Quota prices rocketed in Chengdu's first auction, which caught the nerve of the Central Government. The Central Government stopped Chengdu's experiment immediately and ordered Chengdu to revise its quota trading rules. As a compromise,
Chengdu added many constraints to the use and trading of quotas, including time limit and no secondary market, to reduce speculation. The market turned around after this revision-demand was greatly dampened and there was an oversupply. The municipal government also arbitrarily picked a starting price for the bidding, which was too low for most private investors to profit. Many have quit the business.
195 Chongqing's quota trading is closer to a command and plan system than to a market. The municipal government explicitly excludes private investment. Instead it orders county and district governments to produce quotas. All quotas created must be turned to the municipal trading center for sale, not kept locally. Although Chongqing organizes biddings for quotas, the trading center manipulates the supply and therefore influences price setting -potential buyers are required to report their demand in advance, and then the trading center matches supply to the demand, so the bidding price stays in a certain range preferred by the government.
Wondering why these "markets" were so designed, I explored the politics behind the institutional changes. In Chengdu's case, I find that the municipal government's more liberal approach to the quota market is pushed back against by the Central Government, which is conservative and skeptical about transferring quotas in large areas due to concerns of equity and stability. Moreover, with the municipal government, the relationships between the political leaders and the technocrats also shaped how the specific rules were written-when the political leaders wanted to push forward the quota market experiment, technocrats had little time to conduct careful financial and economic analysis of the market, leading to unexpected market reactions. Later when technocrats wanted to improve the design of the market, the political backing was gone with the shift in political leadership, leaving the technocrats paralyzed.
196 In Chongqing's case, since the key aspects of the quota market--investment, production, sale, and price--are under government control, its approach is more preferred by the
Central Government. Internally, Chongqing's design of the quota market has not been affected by a change of political leaders-on the one hand, Chongqing's conservative approach to the market is less controversial, therefore more acceptable to leaders of different inclinations. On the other hand, the experiment is spearheaded by the mayor who is much more powerful to maintain the status quo than the technocrats in Chengdu's case.
Chongqing's internal conflicts are mainly between the municipal government and the county/district governments. The municipal governments assign quota productions as tasks to the county and district heads and exert political pressure on them. Although the municipal government also provides fiscal rewards at the same time, different county/district governments have different sentiments towards quota generation. Those in rural and remote areas are more cooperative because the fiscal revenue is sizable relative to their economic level. Those in the suburbs are more reluctant-the fiscal revenue from quota generation and quota sale is much smaller than if they could keep the quota locally to develop their own projects.
The politics behind establishing this new institution implies that the primary concern of these markets is not so much to improve efficiency, as it is a way for municipal governments to bypass Central Government's quota restrictions and gain more control over land. The municipal governments do so by forcing remote counties to get involved, using a combination of political measures and market-based incentives. Inside the
197 municipal government, whether the technocrats can get support from the political leaders
will determine how effective the new institution of quota trading can serve the intended
political purpose.
So far, Chapters 3, 4, and 5 have each examined a critical component of the quota market.
Taken as a whole, how does the operation and evolution of the quota market inform our understanding of decentralization and urbanization patterns in developing countries?
Building on the previous chapters, the next chapter seeks to theorize the quota market from a perspective of property rights and institutional evolution.
198 Chapter 6 The Implications of China's New Land Quota Markets:
Reconfiguring Space, Property Rights and Intergovernmental Relationships
This dissertation examines a new phenomenon, the land quota market in China. The
physical changes brought by the quota market are striking. Peasants in the deep rural
areas have suddenly moved to high rises, as old residential land has been reclaimed for
farming, in order to generate new quotas. Although the Central Government sets official
limits for urban growth, cities can go beyond that with the locally created new quotas. A
new market has been established to trade quotas. But why is the whole thing even going
on? Why are local governments in China doing anything about land?
We have prior knowledge: from the first generation of researchers, we know that land is
about public finance in China. The theoretical framework of "Fiscal Socialism" has
informed us that local governments can leverage rural-to-urban land conversion and
subsequent land sales to generate fiscal revenues. We also know that Fiscal Socialism has
many discontents, most notably peasants whose land is taken by the government at a very
low level of compensation, but sold to developers at a high price. As a result, arable land
is disappearing quickly, and food security is becoming a concern of the Central
Government. To respond to these pressures, the Central Government has imposed strict
official quota controls on local governments. Fiscal Socialism is unsustainable.
199
""11"FR"M11MMW"1"--- The quota market emerged as a local government response to circumvent control
by the Central Government. How could this drastic change take place? What does
it challenge our conventional understanding of land use changes and institutional
evolutions? This chapter "connects the dots" and recounts the quota story from a
property rights perspective, which explains spatial changes by examining the
social relationships that shape the definition and practice of property rights. I
argue in this chapter that the quota is essentially an intergovernmental issue. But it
is not just about central-local relationships; we should also look inside local
governments, as well as at the businesses and the peasants that are drawn into this
new land game. I argue that the result of the quota market is a city-dominated
development, with a deepened urban-rural divide. Furthermore, the quota market
could potentially reinforce the dominance of big city over small cities. The
impacts on businesses and peasants are the side effects of intergovernmental
struggles, but could tip over the entire system.
6. 1 Making Land Fly: Spatial Changes in Rural and Urban China
The quota market has created a peculiar phenomenon, "flying land." Although land itself
cannot literally fly, landowners in different locations swap the uses of their land, so the developable land is concentrating on the urban fringe, and the arable land is expanding in deep rural areas. From the evidence documented in previous chapters, we see that rural areas participating in the quota market are going through dramatic changes in landscape.
200 Village settlements are becoming smaller and denser, and the most remote villages are affected first.
This change is the result of a new spatial logic: spatial factors such as proximity and continuity, usually considered important in land development, no longer matter so much in the quota market. Other factors such as density and distance have become more important and work in unexpected way. I call this phenomenon "de-spatialization" and
"re-spatialization."
The land quota market has a "de-spatializing" effect. The value of quotas generated have nothing to do with their locations; rather the value is from the use change of the land. As long as a piece of developed land is reverted back to agricultural use, no matter where the land is, the quota generated is sold at the same price to quota buyers. If we conceive a quota as a new kind of input into the real estate industry, we can think of the quota just like cement or steel-no matter where it is produced, its value to real estate development is the same.
However, just like producing cement and steel, where a quota is more likely to be produced is where the production costs are the lowest. And here, because the commodity is land, the nature of land as immobile and location-specific still plays a role. From
Chapter 3, we have learned that producing quotas in a particular location is more desirable depending on two factors, density change and distance. On the one hand, if settlements in a village are more sparsely located than in other villages before the quota
201 generation, the density change in the village will be greater after quota generation; therefore the village will be more likely to be targeted for quota generation. On the other hand, if a village is far away from the city, peasants' expectations for compensation will be lower than in a village near the city. Therefore the costs for quota generation are lower.
Villages in the deep rural areas are more likely to be targeted for quota generation. This is
"re-spatialization"; density and distance play important roles in unconventional ways.
We can use Chengdu's case to empirically illustrate the de-spatialization and re- spatialization processes. According to the database of 735 projects planned in Chengdu between 2006-2011, if all implemented by tearing down farmhouses that originally occupied land in the size of 361,888.83 mu?, at least 266,689.15 mu will be generated. A total of 430,191 households or 1,389,522 peasants will be affected. That is saying that the residential area in rural Chengdu has decreased by 266,689.15 mu. This is about a 74% shrinkage in total area of residential land in participating villages. Using floor area ratio, or the dwelling units per given size of area as a measurement, peasants' new settlements are about 3.3 times denser than before. Moreover, these affected villages are located in what Chengdu categorizes as the "second development zone" and "third development zone." The two zones correspond more or less with suburban counties and rural counties.
(See the table and the map below.) About 63.5% of all quotas to be generated are from jurisdictions in the third development zone or counties that are predominantly rural. The quota market has led to densification deep in the countryside.
202 Table 6-1 Distribution of Quota Generation Projects across County-Level Jurisdictions in Chengdu (2006 - 2011)
Locations Jurisdictions No. of Size of Size of No. of No. of (development Quota Land Land Households People zone) Generation Occupied Saved Resettled Resettled Projects by Old (Size of Farmhouses Quota Generated) 1st 6 urban 16 11,437.61 8,222.85 17,493 57,545 development districts zone 2 nd 6 suburban 244 120,991.98 89,044.68 172,611 533,852 development districts/ zone counties 3 8 rural 475 229,459.24 169,421.62 240,087 79,8125 development counties zone Total 20 735 361,888.83 266,689.15 430,191 1,389,522 (Data source: Chengdu Rural Equity Exchange. Compiled by the Author)
Figure 6-1 Number of Quota Generation Projects By County in Chengdu
203 On the urban land use, the impact of quota market is hard to assess. First, data about on
what land parcels new quotas have been used are inaccessible. My key informants inside
the government do not even have a clue. Second, there is a time lag for the impact to be
shown-quota generation projects take at least two years to be completed, and quota
buyers have another two years to decide where to use the quota. This means that although
the rural residential area has been reduced to generate quotas, the urban area may not
have consumed the quotas until four years later. Given the short observation period of my research (2008-2012), it is still early to quantify the impact of the new quotas on urban expansion.
However, we can make a guess about the long-term addition to urban land supply as a consequence of the quota market. My key informant from Chengdu Land Bureau has estimated that if half of Chengdu's rural households agree to participate in quota generation, and the new rural settlements are about 3.3 times denser as it is practiced now, then at least 0.49 million mu of quota could be generated in the next five to six years. As
Chapter 4 has emphasized, the urban land supply increased using new quotas is on top of the official quota. At its current scale, the new quotas could at least increase the urban expansion by 10% more than without the quota market and solely with official quotas.
Land use changes are the spatial expression of social relations. The dramatic spatial changes resulting from the quota market is only one part of the story of China's changing mode of land commodification; the other and more important part is about social
204 relations that engender these spatial changes. The next section shifts perspective and examines the property rights reconfiguration in the establishment of the quota market.
6. 2 Reconceptualization of Property Rights
Conventionally, people understand property rights as a fixed, explicit, and formal bundle of rights. Clearly defined and secure private property rights backed by state power are thought to be the foundation of commercial exchanges and lead to prosperity and economic growth (Besley 1998; Demsetz 1967).
However, as Rose (Rose 1994) has argued, property rights are more than entitlements to things. A more sophisticated understanding is that property rights are not so much about controlling the "thing," but rather about defining the relationship with others in using the property. When the social relations are changing, the property rights are also malleable.
Given this understanding, the evolution and reconceptualization of property rights is not simply driven by external conditions, although changes in technology, in market value and so on would call for redefining certain property rights, in order to improve efficiency
(Demsetz 1967; Alchian and Demsetz 1973; Anderson and Hill 1990). A more complete view of property rights evolution should explain the mechanism of changes (Merrill
2002). The more important factors shaping property rights evolution is the power relations and redefining property relationships is essential a political process. Interest groups, political contracting, and the relationships between right grantor and potential
205 right holder should be carefully examined (Libecap 1989; Riker and Sened 1991;
Levmore 2002).
In the case of the quota market, we have observed a reconceptualization of land rights.
On the surface, transferring of rights through the quota market is a response to the
increasing scarcity of urban land. But this alone is not enough to explain why the
institutional details of the quota market are so designed. We have to delve deeper into the
negotiations among key actors in the society. In addition, the simple understanding of
property rights evolution as an issue of overall efficiency prevents use from identifying
the real winners and losers. As Levmore (Levmore 2002) has argued, when interpreting
property rights changes, behind the optimistic efficiency improvement story, there is
always a pessimistic interest group story.
6.2.1 Changing Property Rights in China's Transformation
Understanding property rights evolution as reflecting changing social relations is especially relevant to interpreting contemporary China. In many cases formal rights as recognized by law are disconnected from what is practiced in reality.
Conversely, what is socially accepted as a right may not be legally recognized. In fact, China's history of economic reform in the past decades can be understood as an active reformative period (Lin, Cai, and Li 2003). Property rights are ambiguously defined and keep evolving, in response to changes in external conditions and shaped by the negotiations of social actors.
206 Examples of property rights experiments and innovations are ample in the long line of Chinese local experiments. In the late 1970s, a secret experiment of partially privatizing rural land rights and abandoning collectivized farming led to the establishment of the "household responsibility system," which improved agricultural productivity significantly (Zweig 1997). In the 1980s, the emergence of village enterprises (TVEs) led to the unexpected growth of rural industries.
Scholars have argued that the "fuzzy" organizational and ownership structure of
TVEs -often private in nature but masked as public-promoted its development
(Huang 2008; C. P. W. Wong 1988). In the 1990s, the private sector boomed surprisingly without access to credit from state banks and well-defined private property rights; small business owners managed to fund their businesses by inventing a variety of informal financing mechanisms outside the legal purview
(Tsai 2004a).
Bottom-up initiatives like these were breaking the law but reacting to what the market called for and conforming to what people socially conceptualized as acceptable. Many of these experiments have become recognized and formalized by the government (such as the household responsibility system), some died out
(such as the TVEs), while others are still struggling to get government approval
(such as private lending). Regardless of the results, they provided opportunities to test boundaries in property rights reconfigurations.
Since the 2000s, the unprecedented phenomenon of urbanization has brought another chance for reformation of property rights in practice. In China's transition from an
207
_1W11111W9NW agrarian to industrial society, the return to agricultural production is (increasingly going down decreasing?), while the value of urban land is quickly going up. The right to change land use from rural to urban is the secret to increased wealth. The control over land conversion has become the key right that social actors contest about.
In law, the right to change land use resides with the state in China. The state owns all urban land, and the rural collectives own the rural land. If a piece of land is to be changed from agricultural use to urban use, the ownership must also change, through a process of the state taking the land from peasants. Arbitrarily matching land use classifications with different ownership arrangements in essence has deprived peasants of the formal right to gain from land value appreciation from agricultural to urban use; at the same time, it helps the state to leverage land for public finance and economic growth purposes.
In practice, although the state is strong, it cannot single-handedly decide the rules and make the changes. As the previous chapters have illustrated, businesses and peasants are participating in this social negotiation in their own way. More importantly, the "state" should not be treated as a single actor. Inside the state, intergovernmental relationships between the Central Government and local governments, and between different levels of local governments (such as between municipal and county governments) are playing important roles. One reason for this intergovernmental dynamics is that which level of government represents the state as landowner and therefore can benefit from land conversion is ambiguously defined and intensely negotiated.
208 I will discuss more systematically later in this chapter how the web of relationships
centered on local governments is recast and realigned in the formation of the quota
market. Before that, let us take a look again at the concept of "quota" and what it means
from a property rights perspective.
6. 2. 2 Land Conversion Quota as Property Right
The official explanation in Chongqing and Chengdu is that quota trading helps
turn peasants' assets into capital, realizing the potential value of peasants'
property through the market mechanism. They say that the peasants give up the
development right in their land, and through the market the right becomes the
development right owned by real estate developers.
I do not agree with this claim. I think it has mischaracterized the nature of the
quota and thus masked the potential losses to the real stakeholders. My view is
that the quota represents not a development right but a "conversion right" that has
nothing to do with peasants or businesses. Quota trading is essentially about inter-
governmental relationships. To illustrate this point, I ask three questions about the
quota: what kind of right does a quota represent? Who owns this right? What is
the spatial dimension of this right?
What kind of right is a conversion right? To understand the content of this right,
we have to understand it in relation to its opposite, the duty of agricultural
209
...... preservation. Conversion is the right to change the classification of land use from
agricultural use to non-agricultural use, that is, being relieved of the duty of
preserving agricultural use.
The conversion right is not a development right. Rather, having a conversion right is the
precondition to exert a development right, if the land to be developed is currently in
agricultural use. In other words, for land that is not classified as agricultural land, such as
unused land, or already developed land, a quota is not required for development or
redevelopment.
Before the strict quota control, a conversion right in land was undefined. And people did
not need to distinguish the conversion right from the general development right. If one
has the development right to a piece of land, regardless of the current use of the land is,
one can use it for development. The definition of conversion right is in response to the
increasing scarcity of developable land and the requirement to preserve agricultural land.
Who owns a conversion right? What is the relationship between the state and the
conversion right? Is the state a regulator of the conversion right or is it a right holder? In
classical property rights literature, the discussions of the state as property rights grantor
and the state as property rights owner are separate topics. Those who see the state as a
right grantor discuss the state's legitimate basis for establishing property rights
institutions (Locke 1653; Blackstone 1870; Weber 1921). Those who see the state as
property owner debate about whether public land ownership has helped or hindered
210
P -N, M.M. ___ economic development (Marx 1867; George 1920). But in the case of quotas, we have an
opportunity to reconcile the two concepts: the Chinese state is property right granter and
regulator, and at the same time the property owner of public land. I argue that the two
roles of the state are played out by different levels of government, depending on the
specific situation.
In the case of the conversion right as embodied in the official quota, the Central
Government should be understood as a property right regulator, while the local
government should be seen as the landowner. By granting quotas, the Central
Government is giving local governments the right to convert land. As the landowner, the
local governments then sell the development right of land converted with quotas to
developers. Neither peasants nor businesses have to do with the conversion right represented in the official quota. It is essentially about how the Central Government regulates landowners, the local governments.
The right embodied in the new quota is more complicated. And here the role of the local government, more specifically municipal government, changes from landowner to property right regulator. Since the rural collectives do not own the conversion right or development right in agricultural land, in the process of resettling peasants, the local government is exerting its "public residual right," acting in the capacity of a rule maker, not landowner. Rural collectives as the landowner have to abide by the government's ruling. This is similar to taking; the difference is that it is not the ownership that is taken, but rather uses other than agriculture.
211 In quota use, the special policies devised by Chongqing and Chengdu are further confusing what the conversion right is. The business has nothing to do with the official quota, but in Chengdu, the new quota imposed indiscriminately to developers does not mean a conversion right. Rather, it works like a tax or fee. In Chongqing, developers with quotas have the special privilege to pick land parcels, discriminating against developers who do not have quotas. The quota in this sense is no longer a conversion right. I think this is where the institutional design is problematic. The document representing the new quota has a vastly different connotation than the official quota.
What is the spatial dimension of the conversion right? It is conceptualized as a separable and transferrable right, a right that is detached from its current location. This conceptualization is similar to the existing construct of "transferrable development rights"
(TDRs) as applied in policy programs in the US and Europe, leading some researchers in
China to call the quota the "Chinese variant of development right" (Wang and Tao 2009;
Wang et al. 2010). As I have showed, the quota is a conversion right, not a development right, but its transferability, or the de-spatialization dimension, is similar to TDRs.
When the government assigns the official quotas, there is no spatial dimension. The local government can use the quota to convert land anywhere in its jurisdiction. As long as the amount of converted land does not exceed the quota, the Central Government as the rule maker will not interfere with local governments' right. The "a-spatial" aspect of the official quota also means that converting a piece of land in one particular location has
212 nothing to do with land in other locations. By creating new quotas, the local governments have altered the spatial construction of property rights in the official quota. Using the new quota, a piece of land can be converted in one location, because peasant houses are uprooted in another location. The conversion right is detached from one location, and transferred and used in another.
In the literature, the movable right or spatial dimension of property rights is under-studied, but has significant impact on how the land politics originate and develop. The next section will look at how the extent of transferability of quota is connected to land politics among key actors.
6. 3 The Politics and Evolution of the Quota Market
As explained in Chapter 1, the model of Fiscal Socialism (Kim 2008; Tsai 2004b; Zhu
1999; Zhu 2004) has already turned our attention to the balance of interests among the government, the businesses, and the citizens. What is different in my study is the "de- spatialization" and "re-spatialization" of land transfers.
In the rest of the chapter, I examine the detailed politics around the quota market using the framework of Fiscal Socialism 2.0. I first discuss central-local relations, which is a precondition for the establishment of the quota market. I then turn to the conflict between different levels of local governments, which is the most distinct feature of Fiscal
Socialism 2.0 from 1.0. I then discuss how the key relationships in Fiscal Socialism 1.0,
213 that is, relationships between government and businesses and between government and peasants, still matter in Fiscal Socialism 2.0, but have developed new dynamics. (See the following two figures for illustration.) The key question boils down to this: How do de- spatialized transfers of land change landed politics and the associated costs and benefits of different actors?
6. 3.1 Local Governments and the Central Government
The battlefield between central and local governments is whether to allow local governments to experiment with land conversion quotas outside the current legal and regulatory frameworks, and if so, how much freedom local governments could have in the experiment. In this regard, the interests of the municipal government and the suburban county governments are aligned - they both need more quotas for urban growth, and want the control of land to be further decentralized. Although the municipal government and the county government would quarrel about the detailed terms of quota transfers, they agree that getting the experiment started is the first order issue. They cooperate in striving for special policies from the Central Government.
So does the Central Government know the intentions of local governments? Why would it allow or not allow local governments to experiment with quotas? My key informant from the Ministry of Land and Resources said: "We know that the so-called 'land reforms' and 'rural housing upgrading programs' are all about quotas. Quotas matter so much to local governments -they do not just affect land uses, but local public finance, economic
214 growth, and achievements and thus promotions of local leaders. Giving local governments some freedom is our choice out of no choice."166
My key informant also admitted that the Central Government is well aware of the problems with the system of official quota control, the most fundamental one being the conflict between rationing limited quotas when the demand for land is huge. "The command and control approach as represented in quotas is not the best solution. If possible, we would like to adopt zoning by law like in the U. S., to regulate land use spatially, rather than numerically. Ideally, the regulations of space should be strictly enforced, while the projections of land use should be flexible and adjusted accordingly to reflect real demand. But in China's reality, it is just the opposite. The long-term planning is binding, while the short-term spatial regulations are subject to local changes."1 67
Although China's economic reform has been ongoing for more than three decades, in the field of land use, the transition from central planning to market is still hard to achieve.
Designing institutional details seem to be the biggest challenge. "Even if we recognize the general direction, we don't know the solutions to all the challenges. Land management is such an intricate issue. There will be so many uncertainties with reforming land rights. You change one detail and it might have a domino effect on many other things."168
166 20110809-BJ-M 167 20110809-BJ-M 168 20110809-BJ-M
215 By allowing local governments to experiment, the Central Government is delegating the difficult task of institutional design to local governments. The Central Government is learning what works and what doesn't through local experiments. If such experiments turn out to be successful, the Central Government can use them as a model and scale it up to the whole country. If experiments fail, the adverse affects are contained locally and do not undermine the credibility of the Central Government. This approach of "local experimentalism authorized by the Central Government" is seen in many aspects of
China's economic reform (Heilmann and Perry 2011). This time, it is applied to rural-to- urban land conversion, which only became a key issue in the era of urbanization.
Local governments are also in a better position than the Central Government in dealing with land issues; since land is immobile and essentially local, reconfiguring land rights involve interests of a range of local actors, and requires local knowledge. Local governments, rather than the Central Government, are the institutional entrepreneur and are at the center of the stage of the show.
Getting the green light from the Central Government is the precondition of the quota experiment. But in the course of the experiment, the Central Government continues to influence institutional evolution at key moments. This is because there are certain bottom lines on which Central Government insists. Issues that would make Central Government nervous are often related to risks and uncertainties that might affect social stability. The
Central Government worries about peasants' discontent about compensation and resettlement; it also worries about homebuyers' reactions to increased housing prices due
216 to quota costs. The Central Government watches carefully and steps in when local
governments have crossed the line. Local governments don't like that the Central
Government looks over their shoulder. "Their [Central Government] concerns are about operational details-these we can sort out ourselves and do not need their micromanagement."1 69
The Central Government's intervention during the development of the quota experiment is more than just micromanaging; it could turn the whole thing around and reverse the direction of institutional change. There are different sects inside the Central Government.
The "reformers" are more market-oriented and favor the quota experiment for its prospect of improving efficiency in land use. The "conservatives" detest the quota experiment for its potential impact on social equity -they worry that resettled peasants and rural counties where quotas are outgoing will be disadvantaged. Allowing the quota experiment to go ahead is a compromise between the two sects. But in terms of the institutional details, the conservatives prefer linking programs to the quota market. They think that linking programs can contain the potential risks in a county, a much smaller area than the municipality that the quota market covers. Also, the conservatives advocate that new quotas should be used within a county to support county development, rather then used in an entire municipality. When traded across the municipality, quotas are more likely to be concentrated in the center city that is already wealthier and further developed than the counties. The different sects constantly battle and they use the divergent results of local experiments to justify their positions. As we have seen in Chengdu's case, the
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217 first quota bidding was stopped immediately and Chengdu was almost forced to abort the
entire experiment. The local practitioners think that the Central Government was making
too big a deal. They think the conservatives are taking advantage of small operational
issues to turn around the entire experiment. Which sect in the Central Government has
the upper hand is beyond the control of local governments, but it nevertheless affects the
direction of institutional evolution at the local level. This situation encourages local
governments to be speculative and opportunistic, constantly guessing the preferences of
the Central Government. In the local officials' own words, "We keep watching from
which direction the wind is blowing."' 7 0 This explains why Chengdu's political leaders
pushed for quotas in such a rush, without careful market and economic analyses-they
must take advantage of the tail wind before it changes direction.
In a sum, the quota experiment is an initiative by local governments to change central regulations and practices, but authorized by the Central Government. The Central
Government lets local governments do the trial and error for difficult policy issues that the Central Government cannot solve. However, the Central Government is not all hands- off. Opinions of different sects inside the Central Government, as well as the fundamental concerns for social stability, will drive local experiment to different directions and affect details of the institutional design.
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218 6.3.2 Conflicts inside Local Governments: Municipal and County Governments
Since municipal government and county governments both govern certain urban areas
under them, there is competition for land conversion quotas. This is a competition
between the big and more powerful city governed by the municipal government, and the
small and less powerful cities governed by the county governments. Therefore, where the
new quota will be used is important. The municipal government wants to use it in urban
districts so that any fiscal revenues or economic growth are attributed to the municipal
government, and the counties want to keep new quotas with themselves.
The mechanism to determine where to use the new quotas is the big flashpoint between
municipal and county governments. Counties prefer linking programs, but the municipal
governments push for the quota market. The key difference is the market area of quota
transfer. As Chapter 2 and Chapter 5 have explained, the Linking Program restricts the
quota generation and quota use in the same county. Only counties that not only have vast
rural areas to generate quotas but also fast-growing urban area to use quotas would fit
into this "self-sufficient" category, and have incentives to run linking programs.
Suburban counties are self-sufficient but rural counties and urban districts are not-rural
counties have a very small urban area and therefore little demand for quotas, and urban
districts have a small rural area and therefore limited potential to generate quotas. The
quota market has changed this and makes quotas available in the entire municipality
consisting of dozens of counties and districts.
219
? 5 4 , I ! i 4 - P-1 I I - How does this major change in institutional design from Linking Program to quota market affect the allocation of land resources among counties and districts then? Without clear data on where the new quotas are finally used and thus unable to compare that with data on how the official quota are used, I develop the following analytical framework to help us gauge the possible results.
First, to remind us again, suburban counties have the largest gap between real demand for land and the amount of official quotas allocated, and therefore need new quotas more than others. This is a result of the political dominance of municipal government over counties in official quota allocation. Would the quota market help suburban counties close this gap? Compared to official quota allocation (as illustrated in Figure 6-4), a linking program is a way for self-sufficient suburban counties to generate quotas and reduce the gap, because the quotas generated flow from one part of a county to another of the same county (as illustrated in Figure 6-5). In that sense, linking programs could ameliorate the imbalance between the large amount of quota concentrated in the center city and the small amount in the counties.
220 A Official Quotas
Figure 6-2 Distribution of Official Quotas
Figure 6-3 Flows of New Quotas in Linking Programs
221 But, compared to linking programs, what are the added benefits of upgrading to a quota market? I argue that the added benefits to suburban counties are marginal and limited to the following: for suburban counties that cannot produce enough quotas to meet their demand in linking programs alone, they now have a choice to buy quotas from outside the county. For counties that have a surplus in locally created quotas -that is, if they have produced more than they can consume, the quota market provides a platform to sell the extra quotas. However, this is unlikely to happen. Suburban counties would rather
"bank" the quotas for projects in the future than sell them. This is because land prices in suburban counties are much higher than the quota price.
The added benefits of the quota market are mostly for the municipal government. First, rural counties were not included in linking programs, but are now participating in the quota market. They mostly play the role of quota generators. With much more vast rural areas than the suburban counties, rural counties can increase the potential pool of new quotas for the entire municipality. Second, the urban districts, not included in the linking programs, are now participating in the quota market as buyers. They can use quotas for projects in their jurisdictions, which contribute to the municipal government's finance and economic growth. The flow of new quotas in the quota market is illustrated in the figure below.
222 Figure 6-4 Flows of New Quotas in the Quota Market
With the above conclusions, we refine our question about the municipal and county government relationship: How does the increased pool of new quotas and the access of urban districts to new quotas affect the distribution of land resources? Would it reduce the imbalance between the center city (urban districts) and suburban counties, or enlarge it? Would it at least make suburban counties better off than without any new quotas? My answer is, it depends. And it depends heavily on the intention of the municipal government.
First, would the quota market make relative improvement in suburban counties' position in land resources allocation? The flip side of this question is, although all will have more quotas, thanks to the creation of new quotas, would urban districts get even more than the
223 counties, therefore making the imbalance even bigger? First, the quota market has "saved" the municipal government some official quotas. As explained in Chapter 4, in both
Chengdu and Chongqing, real estate developers in the urban districts are a main force baying and using new quotas, in addition to county governments. Before the quota market, real estate developers did not need to deal with quotas--because a quota in essence is a government permit that a local government needs to secure before selling land on the market. Now with the quota market, by imposing new quotas onto developers, the municipal government has in fact saved some official quotas that they should have used on these projects.
How would the municipality use this saved official quota? They could act in self-interest and use it to develop more projects in the center city, or act in the greater good of the municipality and distribute it to counties that lack quotas. In Chengdu for example, the final use of the saved quotas is still being considered. One proposal is to give the saved quotas back to counties. In Chongqing, there is no such thinking, and counties are complaining about the forced outgoing of quotas.
Second, would counties improve their absolute position? Stated differently, would they at least have more quotas (official quota and new quota combined) and therefore more land to develop, than without any quota experiment? My answer is that it also depends on the municipal government's intention and the allocation of the official quota. In the extreme case, the municipal government could decide to give counties even fewer official quotas,
224 and make them rely more on buying new quotas from the market. In that case, the
counties may end up having fewer quotas than before any quota experiment.
In sum, I argue that the quota market creates a possibility to rebalance the resource
allocation between center city and the counties. But because the institutional design
eventually gives the decision power to the municipal government, it depends on the
intention of the municipality. This conclusion also suggests that the quota market is only
a marginal revision to the official quota allocation system. Although the quota market
provides counties the freedom to buy new quotas from the market, it also enables further
concentration of quotas in the hands of municipal government. It is still political power,
not market forces, which dominate the allocation of land resources.
6. 3. 3 Local Governments and Businesses: Reinforcing Differential Treatment
In the government-business relationships, the municipal and county governments have
similar interests and are in general collaborating. The creation of the quota market has
reinforced the pattern of the government's differential treatment of different kinds of land
users. The first kind is the commercial and residential real estate developers, the second
kind industrial developers, mostly factories.
The residential and commercial development consumes only 10% to 20% of newly
converted land every year; in contrast, industrial land development consumes more half.
Before the establishment of the quota market, we have already observed that the
225
MOMMMt" I I 11-1-Y-1-1.1 governments sold land to the first group at market rate through open bidding, while
granting land to the latter at a very low price or even for free. Treating the two kinds of
land developers differently has revealed the government's fiscal and economic
development strategy: commercial and residential development is going strong in China
and these developers have very inelastic demand for land, especially land in premium
locations. Through land sales to them, the government can generate immediate fiscal
revenues. Industrial developers are something Chinese local governments have to go after.
Cities are competing with each other fiercely for industrial investment, aiming at taxes, job creation and economic growth down the road. Since factories do not value location so
much and their labor costs and operational costs do not vary too much across cities,
where they can get land most cheaply would affect their location choice. Leveraging land
therefore becomes local governments' primary policy tool to attract industries.
The quota market has only reinforced this divergent treatment of residential and
commercial land users versus industrial users. Using its regulatory power, the municipal
government has imposed quotas to residential and commercial land users, making them to pay for quotas, on top of paying for land. For the industrial users, the local governments are buying quotas for them, and using quotas (therefore availability of land) to attract industries.
226 6. 3. 4 Local Governments and Peasants: Deepened Rural-Urban Divide
The spatial dimension of quota market is so different than typical land taking.
Understanding the government-peasant relationships requires us to ask, peasants where?
Two groups of peasants are affected by urbanization because of the quota market. The first group is peasants on the urban fringe where the quota is used. Peasants' land in this case is taken for its location advantage, being close to an urban economic center. This group of peasants already existed in typical land taking before the establishment of the quota market and is further impacted by the quota market. The second group of peasants affected by the quota market is in deep rural areas where the quota is generated. Peasants' land in this case is taken for its low density-resettling peasants into higher-density residences and reclaiming their old residential land for farming could generate land quotas. The second group of peasants affected by urbanization is the unique result of the quota market.
When local governments claim that quota markets are pro-peasants, they make two mistakes. First, they have overlooked the impact on the first group of peasants on the urban fringe. Second, impact on the second group of peasants in the rural areas is complicated and far-reaching, and cannot simply be said as all positive.
I argue that the quota market has in fact displaced more peasants on the urban fringe.
The purpose of creating quotas is to convert more land on the urban fringe. The official quota controls the scale of conversion, but the new quota has increased this scale. The politics around land taking and the confrontations between peasants and government is
227 well documented in earlier research under the framework of Fiscal Socialism (Yu 2007;
Yu 2008; O'Brien and Li 2006; O'Brien and Li 2005). In the process of government land
taking, peasants revolt when they see that their land could generate so much value once
turned into urban use, but receive compensation only comparable to their agricultural
income. This confrontation has not changed in the quota market, and the scale is
increased. Local governments have often underemphasized adverse impact on peasants
on the urban fringe.
What about the impact on the second group of peasants? I argue that potential impacts
include reduced confrontations between peasants and the government, important lifestyle
changes that peasants find hard to adjust to, and uncertain economic prospect for them.
Reduced confrontations
The political dynamics between peasants and the government are very different than from typical land taking on the urban fringe. Peasants in quota generation projects are generally more satisfied with the compensation they received. Chongqing government repeatedly stresses that all sales proceeds of quotas go to the peasants as evidence that the quota program is fair and pro-peasants. But this is not because that these peasants get more compensation than peasants on the urban fringe whose land is taken. In fact, the compensation standards are comparable. The difference though is that the expectations of peasants in quota generation are much lower. De-spatialization plays a role here-unlike peasants on the urban fringe who see their farmhouses and rice fields turned into high
228 rises in front of their eyes, peasants in the deep countryside are not aware that the quotas
generated from their land will be used somewhere else to build high-end houses,
shopping malls or factories. If they knew that their compensation is only about 1/20 to
1/10 of the final land-selling price, thanks to the quota they contributed, they might have
a feeling of bitterness, like their counterparts on the urban fringe. Their dissatisfaction
would increase confrontations with the government.
Holdout problems are also much less severe in quota generation than in typical land
taking. In land taking on the urban fringe, the fiercest confrontation between peasants and
the government would happen when a few households refuse to move. Location is
important in this case-if the land cannot be cleared, the entire development project gets
stalled. Government coercion often leads to bloody violence. Internal conflicts among
peasants during typical land taking are also severe -the last few houses refusing to move
will be pressured and even harassed by the rest of their village. Sometimes this is because
the final compensation is disbursed only when the whole village is moved. Another
reason is that the holdout households could bargain for much more compensation,
making their fellow villagers furious about the difference.
In quota generation the above kind of conflicts are much less severe, because locations and continuities are less important--again a benefit of de-spatialization. Peasant participation in quota generation projects is voluntary. I have seen in my fieldwork farmhouses standing next to demolished houses, rather than an entire village is wiped out.
If one household does not want to move, its impact on the entire project is marginal. A
229 quota is only a number. One less household to move only means one less mu of quota to generate. Since the loss is small and the stakes much less, the government does not pressure every peasant into participating. In fact, official governments I interviewed say that a challenge of their work is that peasants sometimes change their mind in the middle of the project, so the project design has to change accordingly. It shows that peasants do have a choice. In this sense, peasant-government confrontation is much more mild than in land taking. Among the peasants, peer pressure is also much less. Each household makes individual decisions. Moving early or later does not make a difference in the compensation they receive. The perceived fairness is bigger than in typical land taking.
Therefore peasants will not push their fellow villagers to also participate.
Changed Lifestyle
For peasants in the rural areas who participate in the quota generation projects, there are both positive and negative welfare impacts. On the positive side, their housing conditions are indeed improved. From old, rundown farmhouses peasants strenuously built by themselves over the years, to ready-to-move-in new apartments with running water (and even elevators in some cases), paved roads in and around the residential community, schools and clinics nearby, they are enjoying much better living conditions.
"Housing upgrading" is the strongest evidence local governments emphasize as improving the life of peasants enabled by quota market. Some local governments call this
230 form of new concentrated residential community "on site urbanization," boasting that peasants do not need to migrate to cities for a better life. Rather, just by staying where they are, with upgraded housing, improved infrastructure and public services, peasants are enjoying modem, urban life.
However, to peasants, this is a lifestyle change that many find hard to adjust to. Peasants complain about very specific things: living in apartments, they have nowhere to raise pigs and chickens; climbing upstairs is difficult for the old and crippled, but when living in their old one-story farmhouses, it was no problem. Having running water is good but paying for it is not."' All these are examples of adjustment issues as a result of the sudden transition to urban lifestyle. De-spatialization again plays a role in this transition.
As Chapter 3 has discussed, there is a tendency for quota developers to go farther out into the deep rural areas to save generation costs. This leads to a counterintuitive phenomenon: the more rural and farther away from urban areas a village is, the faster peasants' lifestyle is transitioned to urban. Where it is most rural is becoming urban first, and the transition shock is the greatest.
Uncertain Economic Prospect
Another problem of the so-called "on site urbanization" is that peasants' transition to modem lifestyle takes place before their transition to modem mode of production.
171 As covered in many news articles in Chinese. In English, a recent thesis has documented the shocks to changed lifestyle in a village in Shandong Province. See Wilson, Saul. 2014. "Redesigning Rural Life: Relocation and In Situ Urbanization in a Shandong Village." Undergraduate Thesis, Cambridge, MA: Massachusetts Institute of Technology.
231 Traditionally, peasants have sparsely settled for the very reason that they want to be close
to their crop fields. Living in concentrated, high-density apartments at quite a distance
from their fields means increased transportation costs (both in terms of travel time and
monetary costs). How would that affect peasants' farming practices?
Local governments realize that living away from the individual plots would be a problem for the peasants, and have different strategies to deal with it. One approach is to leave peasants' farming practices enacted as much as possible, and make them commute to the fields. In Yazhuang Township of Jiaxing Municipality, the township official told me that peasants there mainly grow peach trees, which are of low maintenance and need little heavy machinery. Therefore after resettlement, "peasants can just ride their bicycles from the new houses to their peach gardens." In Tianjin, township governments have arranged shuttle buses to transport peasants every day to the crop fields. However, these can only work as temporary solutions.
The other approach by local governments is to fundamentally transform peasants' farming practices-replacing family farming with corporate farming. In doing so, they combine the quota program with another initiative that the Central Government has been advocating for-pooling farmland together for large-scale modern farming. The Central
Government believes that large-scale modern farming can save the deteriorating agricultural sector in China. Currently, fragmented plots by individual households are too small to generate economy of scale, resulting in low productivity and limited income
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232 for the peasants. Local governments implementing this initiative advocate that once peasants transfer their farmland for large-scale farming, the peasants not only can get
land rent from the agricultural corporations, but also have the option to be hired by corporations as agricultural workers, and earn a salary on top of the land rent.
Promoting large-scale modem agriculture was designed as a policy initiative independent of the quota market. But I found that the two have interaction effects. In places where the local governments have already been pushing for large-scale agricultural modernization, peasants are more likely to participate in the quota market-they reason like this: since I would not farm my individual plot anyway after transferring my farmland, it does not hurt if I live at a distance from it. In places where the local governments initiate the quota program first, peasants' reasoning is similar-since I would live at a distance from my crop field, I might as well transfer it to agricultural businesses and save the transportation costs and time. The quota generation program targets the residentialland of peasants and large-scaling modern agriculture program targets theirfarmland. Unexpectedly, the two independently designed policy programs often happen hand-in-hand in the same village, and transform peasants' lifestyle and mode of production at the same time.
However, the success of agricultural business and its impact on peasant welfare is yet to be seen. There are also cases where peasants have been relocated, but the village cannot find agricultural corporations interested in renting their land. In this case, the economic prospect of the peasants is uncertain. If they have to continue to farm individually, the problem of transportation costs comes back, and there is no sound solution yet. To be
233 sure, places like Chengdu have measures aimed at preventing this from happening. The municipal government requires that townships consider potential economic development opportunities for peasants when designing quota programs.'73 But this is only a safeguard measure and its implementation is not guaranteed. More importantly, it does not alter the incentives of township and county governments whose main purpose is quota generation.
To sum up, because of the creation of the quota market, the scale of land taking on the urban fringe is likely to increase now that more quotas are available to the government.
This means displacing more peasants on the urban fringe than without the quota market.
For peasants in the deep rural areas who participate in quota generation, having better housing is not all positive. Living in higher density settlements entails lifestyle change as well as impact on farming practices for peasants. The drive behind the drastic changes in the rural landscape, rural economy, and rural lifestyle is the government's quest to get more quotas for urban expansion, rather than merely benefiting the peasants.
Since the research period of this project is relatively short (between 2008-2012), the longer-term impact on peasants is still to be seen. Although peasants mostly seem to be playing a passive role in the process of institutional change, if their adjustment to changes in lifestyle and production mode down the road proves to be difficult, they may become the main force overturning the quota market.
1 See for example, Chengdu Planning Bureau, and Chengdu Land and Resources Bureau. 2011. "Chengdushi Xiang (Zhen) Zonghe Guihua Bianzhi Jishu Daoze (J$iIri1f () 11IMJ-#fJ1 4)n,4) [Technical Guidelines for Drawing up Comprehensive Plans of Towns and Townships in Chengdu]."
234 6.4 Chapter Conclusion
The quota market has led to dramatic landscape changes in rural and urban China. Behind the spatial changes is a process of property rights reconfiguration, which is essentially
shaped by social relations and power dynamics. The property right represented by a quota is a "conversion right." In the Chinese context, conversion right is about intergovernmental relationships-the national government as a rule maker and regulator grants local governments, the landowner, a right to change agricultural use of land to urban use. With rapid urbanization, the conversion of land matters a great deal to local public finance, local economic growth, and even promotion of political leaders.
In the formation of the quota market, local governments act actively as the institutional entrepreneur. With the Central Government, they vied for the policy space to experiment with quotas. With businesses, they take advantage of existing differential treatment of different kinds of land developers and impose quotas on those who are able to pay. To peasants, they provide improved housing conditions, in exchange for peasants' participation in quota generation.
However, the institutional entrepreneurs cannot single-handedly change the system.
There are pushes and pulls in their relationships with other key actors. The Central
Government steps in when the quota experiment touches basic concerns of the Central
Government about social stability. Businesses, although they seem to be generally weak and passive in their relationship to government, exert their influence through market power. They vote with "prices" to signal the contradictions in design of the quota market.
235 Lastly, although peasants in quota generation projects seem to be satisfied with their
compensation level, the lifestyle change and the impact on traditional farming is potentially adverse. The peasants' disorientation in this drastic, engineered transition to modem life in the long run could tip over the entire system.
Another factor influencing the institutional evolution is the conflicts inside the local governments. Municipal government and county governments are not just higher and lower level political units, but also represent big and small cities. They compete for land quotas and their relative positions decide where the quotas are going and where urban expansion is taking place. From the analysis in this chapter, I conclude that eventually the powerful municipal government gets to decide how the quotas are used.
A seasoned rural investor I interviewed in Chongqing said the quota market is the product of "city hegemony," further drawing land resources from the rural areas. I would like to add that it is also "big city hegemony," reinforcing the political dominance of municipal government over county governments. We may see that the big center cities continue to grow bigger, while small urban areas governed by the county struggle to expand.
236 Chapter 7 Conclusion: Lessons from the Land Quota Markets
Land rights could be an emotional and even contentious issue to many people. Planners are especially concerned about designing land tools that would achieve both efficiency and equity. Land quota markets in China, a new invention of market-based land policy, promised to achieve both goals by reconceptualizing land rights as detachable from their locations. "De-spatialized" land transfers make land "fly" from rural to urban areas through open bidding for land conversion quotas. Land quota markets are a new and complicated phenomenon and many rich lessons can be drawn from it. I have tried in this dissertation to frame it from the perspective of how intergovernmental relationships have shaped the institutional changes and how the distribution of land resources among local governments would be potentially shaped by the quota markets.
This dissertation adds a unique and critical perspective on how we understand the physicality and the location of land, and related to that, once the spatial dimension of land rights are altered, how the contestations around land would evolve. The approach to studying property rights changes in this dissertation is not by taking "snapshots" of property rights arrangements before and after the policy experiment, but rather by analyzing the dynamic process, the key junctions, as well as the power relations and the political contracting behind the scenes. I had the rare opportunity to access key actors in the policy experiments in five municipalities of China, especially in Chongqing and
Chengdu. I was able to trace the change processes and gain an insider's view.
237 7. 1 Findings about the Land Quota Markets
7. 1.1 Tracing Institutional Changes
To understand how land quota markets are new and unusual, I have examined them
against the institutional context of China that it has evolved out of. In China, the land use
planning system is rigid and top-down. Long-term projections of land use are enforced as
regulations. Land conversion quotas prescribe the maximum size of agricultural land that
a local government can convert to urban uses, and are assigned to each city through an
annual land use plan. The strict and inflexible quotas rarely meet the real demand for land
when Chinese cities are growing quickly amid economic development and urbanization.
Every city is crying for quotas.
Although all cities want to have more land quotas, it is most problematic for those
politically less important, but economically fast-growing cities. This is the result of a
peculiar governance setup, the "municipality over counties" structure in China. Because
of urban-biased development strategies, cities in China are given higher political status
than rural areas. A municipal government does not just govern a center city, but also the
suburban and rural counties around it. This structure is critical to understanding the emergence of quota markets, as well as China's general urbanization pattern.
The structure of "municipality over counties" makes the center city grow through accessing resources from its neighboring counties under the jurisdiction of the same
238 municipal government. In the era of urbanization, the urban areas governed by suburban counties are also expanding quickly and becoming small cities. The center city is not only economically more advanced than the small cities, but also politically more powerful. In other words, the relationship between big city and small cities within a municipality are not just an economic hierarchy, but also a political one. Political logic can override economic logic in resource allocation--land conversion quotas allocated to a municipality tend to concentrate in the center city, while suburban and rural counties get much fewer quotas.
Against this institutional background, local governments in China invented the land quota market. It increases supply of developable land on the one hand, and meets the Central
Government's requirement of farmland protection on the other hand. The trick lies in
"swapping" built-up areas in the countryside with agricultural land in premium locations.
The land swapping in a municipality involves different jurisdictions-land is outgoing from rural counties to suburban counties and urban districts.
The quota market is trading "conversion right," the right to change land use from agricultural to urban purposes. Before the establishment of quota markets, the conversion right was not defined and separated from the general development right. This new way of reconceptualizing and utilizing land has important implications for both rural and urban areas. It has changed the rules of the land game and the mode of land commodification. I illustrate these changes by examining three key components of the quota markets: quota generation, quota use, and quota trading. The three components also conceptually
239 correspond to severing the conversion right, exerting the right, and transferring the right.
By examining the huge changes that quota markets have brought to rural and urban areas,
I seek to illustrate the novelty of the new institution and how the key actors in urban and rural realms react to it.
In the rural areas, land quota markets have created a new process of quota generation and a new profession of quota developers. Quotas are generated by demolishing low-density farmhouses and resettling peasants to high-density apartment buildings. Then the rural residential land previously occupied by the old farmhouses is reclaimed for farming. The key actor that organizes the process of demolition, resettlement and reclamation is quota developers. Unlike real estate developers, quota developers profit by reversing development. Quota developers can be both private and public entities. In Chengdu, the municipal government is trying to attract as many private quota developers as possible, because quota generation is both time consuming and capital intense. In Chongqing, however, the government is not allowing the private sector to enter quota generation. All quota generation projects are arranged by the municipal government, and township governments and village committees in Chongqing play the role of quota developers.
Quota generation has changed the rural landscape. Unlike land taking on the urban fringe, villages in quota generation projects are not targeted for their proximity to the city, but rather the density change after consolidating peasant residencies. Rural areas that were previously not affected by urbanization are now involved by contributing land resources.
More importantly, since compensations to peasants are the biggest component of the
240 quota generation costs, quota developers tend to go farther out in more remote areas where people's expectation for compensation is lower. This has led to a peculiar phenomenon: densification of rural residences takes place first in the most remote areas.
In the urban sphere, quota markets create an extra step in land development. Now real estate developers have to buy land quotas before they can buy land parcels. Developers have to learn about this new institution and assess the impact on their businesses. Quota markets have raised the threshold for developers in some cases, and in others led to speculation in the land markets. In Chengdu all real estate developers are required to buy quota, and in that case, quotas work more like a tax or fee rather than representing any property right. In Chongqing, the municipal government gives developers with quotas special privileges such as picking their own land parcels outside the government plan, at the cost of bending current government procedures of land provision and land auctions.
Both governments are specifically targeting residential and commercial development projects, not industrial projects.
A surprising finding from examining the sale and use of quotas is that despite all the focus on developers, most quotas are bought by county governments. As explained earlier, before the establishment of the quota market, suburban counties were most short of quotas. Now they are able to close the gap to a certain extent through market transactions.
County governments use the quotas bought for industrial projects in their jurisdiction.
This reflects and reinforces the differential treatments of development projects by the governments in China: local governments treat residential and commercial projects as
241 cash cows, but compete with each other to attract industrial projects. Before the
establishment of the quota markets, developers of residential and commercial projects
had to buy land at the market rate, while industrial projects were given land at very low
prices or even for free. Now residential and commercial projects are required to pay for
quotas on top of paying for land, while industrial projects do not need to worry about
quotas and governments actively seek and buy quotas for them.
The heart of the quota market is the trading rules. The extent of transferability of land quotas is the flashpoint between municipal government and county governments.
Counties prefer linking programs, a policy predecessor of the quota market, which helps keep quotas generated in one county stay in that county. The quota market, however, devised by the municipal government, turn quotas into an outgoing resource concentrated in the hands of the municipality. Furthermore, by examining the specific rules and the operational details of the quota markets in Chengdu and Chongqing, I found that the so- called "quota markets" really are not markets. They are heavily manipulated by the municipal governments, so the control of land is further taken away from the county government.
7. 1. 2 Interpreting Institutional Changes
As a coping strategy, the emergency of the quota market could be contingent. Using my informants' own words, "quota is only a prop."1 4 But I argue that it is worthwhile to explain why a contingency could at least develop and be sustained for a while. How is the
174 20121115-CD-HL
242 municipal government, as the institutional entrepreneur, able to initiate changes in so many realms to establish the quota markets?
I argue that although the municipal government cannot single-handedly change the institution, it has to mediate the web of interests around it in land conversion. The emergence and evolution of the quota markets are shaped by two levels of politics: the first between the Central Government and local governments, and the second between municipal and subordinate county governments.
Trading conversion right and de-spatializing land transfers is the basis for the new kind of politics. Before the land quota market, conversion right as embedded in quotas was undefined. Official quotas were conceived as an administrative resource, regulated and assigned by the Central Government. What local governments did in establishing quota markets is define a right in the rural land that was undefined before. And we must note that peasants have never formally owned the conversion right in rural land. Rather, it is a public residual right. The main relationships shaping the changes in property rights as shown in the quota markets are not between the state and citizens, but between different governments. It is essentially an intergovernmental, intra-state power struggle.
In the evolution of quota markets, we have seen a decentralization and then recentralization process of land control. Before any quota programs, with the official quota allocation system, the Central Government had the most control over land conversion. With the creation of the quota linking program, a predecessor of the quota
243 markets that restricts quota generation and quota use within a county, county governments in fact got more control. However, with the establishment of quota markets that trade quotas in the entire municipality that encompasses many counties and urban districts, control of land conversion is recentralized to the municipal level. The following figure is an illustration of how different institutional designs correspond to the control of land by different levels of government.
POLITICAL RANKING / LEVEL OF LAND CONTROL National Government
Municipal Government Decentralization
County R-/Wecentralization Government
TIME / INSTITUTIONAL EVOLUTION
Figure 7-1 Decentralization and Recentralization of Land Control
We can connect this process of decentralization and recentralization of land control with the two roles of the state in China as the regulator of land and the owner of land; different levels of state tend to play one role or another, or both, depending on the context.
Between the Central Government and local governments (including both the municipal government and the county governments), the Central Government plays the role of a
244 land regulator, while local governments care most about their interests as landowners - they govern urban areas and benefit directly from rural-to-urban land conversion. Inside the local governments and between municipal government and county governments, the municipal government acts as a land regulator. It is politically powerful enough to change the rules of the land conversion and make counties play their game. In other words, the municipal government's dual roles of property right holder and property regulator give it both the incentive and the authority to change the institutions governing land use.
Quota markets have created trading relationships among center city, suburban counties, and rural counties. Typically trading involves mobile goods, such as oil and minerals, agricultural or manufactured products. Only when conversion right is conceived and practiced as transferrable right detached from its original physical being can this trading relationship be possible. It potentially could either emolliate or reinforce the big city dominance over small cities within a municipality, depending on the specific institutional design and more importantly, the considerations of the municipal government that makes the design. Based on analysis in this research, I am more pessimistic about it-as we have learned, the quota markets are not real markets. The trading relationships are still dominated by power and politics. The quota markets are more likely to reinforce, rather than emolliate, the big city dominance.
Although peasants were mostly passive in the institutional evolution of land quota markets, potential discontent among them may tip over the entire experiment. In quota generation projects, the economic prospect of resettled peasants is dismal, and in quota
245 use projects, the nature of peasant-government conflicts has not changed and the scale
has only increased. The social contract around the new conversion right is at best
partially renegotiated and accepted. As it is, this institutional setup is transient and may
collapse because of internal conflicts.
7. 2 Research Implications: Turning Our Attention to the Hierarchy of Cities
The theoretical contribution of this dissertation is the extension of the model of fiscal
socialism. While fiscal socialism can explain the behavior of a single local government in
decentralization and urbanization, my study suggests that with increasingly scarce land
resources, the competition among local governments in the system of cities must be
examined. We have to dissect the local governments, both spatially and politically.
Spatially, we ask where the land is available, and under whose jurisdiction. Politically,
we ask which local government is more powerful and therefore able to design new
institutional arrangements to access land resources from other jurisdictions.
The concept of a "system of cities" is nothing new to scholars of urban and regional
economics. In studying systems of cities, scholars have found that the distribution of city
sizes follows Zipf's law or the "rank-size" rule, which predicts that the size of a city is
inversely proportional to the city's rank In other words, the largest city is about twice the
size of the second largest city, three times the size of the third largest city, and so forth
(Gabaix and loannides 2004). The rank-size rule is an empirically based observation, and
scholars try to explain what factors have contributed to the distribution. Economic geographers look at natural geographic advantages such as size of rivers, ports, and
246 waterways. Urban economists look at the determinants endogenous to city growth: for example, the tension between centripetal and centrifugal economic forces, and the constant returns to scale of the urban economy (Fujita 1999; Fujita, Krugman, and Mori
1999; Krugman 1996). Other scholars have pointed out that being remote is a disadvantage. Growth of big cities leads to stark core-peripheral relations (Baldwin and
Martin 2004a; Henderson, Shalizi, and Venables 2001). But in this body of literature, political factors are not explicitly considered.
In my study of the system of cities through the case of land quota markets, political power is a dominant factor. The cities governed by the counties and governed by the municipality in a hierarchy are not just defined by their size of economy and level of development, but also by political rank and direct lower-level to higher-level governing structure.
My focus on the political hierarchy of cities coincides with other studies of vastly different geographical and historical scopes. Sociologist Christopher Chase-Dunn and his colleagues have demonstrated the positive correlation between political dominance and the size of cities, using data from a history of four millennia and covering world systems such as Mesopotamia, Egypt, West Africa, the Far East and so on. They have proved that in the same network of cities, when political and military power is more centralized, it is more likely that the largest cities will continue to grow much larger than other cities in the same network. This is because political forces help important resources sustain the large population to continue to concentrate in the largest cities (Chase-Dunn and Willard
247 1993; Chase-Dunn and Manning 2002). This group of researchers also found that the impact of political hierarchy on resource allocation can be found on a much smaller scale too, for example, among the indigenous people of Wintu and neighboring tribes in northern California (Chase-Dunn and Mann 1998), and in pre-modern systems of
Chesapeake in 1608 (Hall and Chase-Dunn 1999). These works build on and extend the original theoretical framework of world systems established by Immanuel Wallerstein
(Wallerstein 2004; Hopkins and Wallerstein 1982) who influenced the study of core and periphery countries in international relations.
My discussion about the political hierarchy of cities within a municipality in China and its impact on allocation of land resources for urban growth is a modern edition of Chase-
Dun's thesis applied to rapid, rather than long-term institutional changes. Quota markets are an example of how political power could help the big cities grow through engineering of space.
7. 3 Policy Implications: Planning Is Not Engineering
Studying land quota markets tells us that what matters in urbanization are not only the relationships between rural and urban areas, but also the balance between big and small cities.
On the one hand, big cities in China attract far more population than their infrastructure and public services can support. Governments such as Shanghai and Beijing have already considered measures to limit inflows of people. On the other hand, small cities with
248 declining public investment cannot retain the current population, not to mention their of lack economic opportunities to attract new population. Balancing their relationships by giving smaller cities more support and freeing them from the dominance of the big cities might be the solution. There are already attempts in China to change the "municipality over county" structure. In Hainan Province for example, "municipality over county" is replaced by "province over county"-the province directly manages counties, without municipal governments in the middle. Although this reform was not originated for the concern of land uses, it would have profound implications for land quota allocation and therefore land conversion. It will be very important to test whether reforms such as this would give small cities governed by county governments more autonomy and better position them in inter-governmental competition than under the "municipality over county" structure.
As for the specific issue of land use policies, studying quota markets reminds us that both urban planners and urban scholars should resist the tendency to borrow concepts and/or techniques of land management from western countries to China out of context. To be sure, the goal of planning is common across countries: to balance public interests and private interests. But land tools essentially hinge on how to regulate the use of property rights, and property rights are a politically and socially shaped concept and practice that vary from country to country. In China, not only are the formal property rights in land mostly public- or collectively-based, vastly different from the western country where private property rights are enshrined. But the informal, the social acceptance, the historical social cognition is also different. Furthermore, in China what is public and what
249 is private interest are unclear. Does the local government represent public or private interests? They have public authority, but they also have their own self-interest. Their behaviors cannot simply be understood as comparable to those of local governments in
other political systems.
China's planning culture and policy-making style are also quite different from those of
western countries. While the formal planning is never participatory and only technical
with no inputs from citizens or lower-level governments, it is constantly challenged and
circumvented by political means. It is less about the government and citizens, and more
about intergovernmental relationships. Land quotas represent a rationing system, and
allocation of land uses in China still works more like command and control than like a
market.
Therefore, I would not recommend improving the design of the land quota markets -that
would be yet another coping strategy or quick policy fix. Rather, I advocate abolishing
the official land quota allocation system as a whole, and adopting systems such as
"zoning by laws" as used in the US. Make the spatial control, rather than numeric control,
of land use binding and biting.
Land and urbanization has entered the center stage of China's development and
modernization. Can China take short cuts to urbanization by engineering space? There is
an old Chinese saying,"yu su ze bu da," which means, "More haste, less speed." It
provides a useful insight to reflect upon when the government considers accelerating
250 processes that naturally take decades or centuries to complete. As this dissertation was being written, China announced its first national urbanization plan in March 2014, making urbanization a political priority. I argue that urbanization should not be just a political project, but a social project. Planning for urbanization should not be command and control, but participatory. Land use changes should not be subject to power fighting power between different governments, but by instituting fundamental rights and empowering the people.
251 Annex: List of Interviews
No. Date Municipality Interviewee Interviewee Title Affiliation 20110301-RA- 3/1/11 Wenzhou Township Tangxia Town Y Official 20110301-RA- 3/1/11 Wenzhou Managers Rui'an Branch, Agricultural Bank LZ of China
20110302-RA- 3/2/11 Wenzhou Division Planning Division, Rui'an Bureau L Director of Land and Resources
20110303-RA- 3/2/11 Wenzhou Division Rui'an Land Consolidation Center Z Director
20110303-RA- 3/2/11 Wenzhou Division Management Division, Rui'an H Director Bureau of Land and Resources
20110303-RA- 3/3/11 Wenzhou Director Office for Urban and Rural C Coordination
20110303-RA- 3/3/11 Wenzhou Village Head Chen'ao Village C 20110307-JS-S 3/7/11 Jiaxing Vice Jia'shan Branch, Agricultural President Bank of China
20110308-JS-Y 3/8/11 Jiaxing Director Office for Urban and Rural Coordination
20110308-JS-S 3/8/11 Jiaxing Deputy Jiashan Bureau of Land and Director- Resources General 20110308-JS-L 3/8/11 Jiaxing Director Planning Division, Jia'shan Bureau of Land and Resources
20110308-JS-U 3/8/11 Jiaxing representative new Yaozhuang Town New Peasant Community
20110309-JS-L 3/9/11 Jiaxing Division Jiashan Land Consolidation Center Director
20110309-JS-W 3/9/11 Jiaxing Village Head Miaojia Village 20110310-JS-S 3/10/11 Jiaxing Vice Jiashan Branch, Agricultural Bank President of China
252 20110412-TJ-H 4/12/11 Tianjin Deputy Head Huaming Town of the Township 20110412-TJ-D 4/12/11 Tianjin Party Xinzhuang Town Secretary of the Township 20110413-TJ-S 4/13/11 Tianjin Office Xinzhuang Town Manager 20110413-TJ-U 4/13/11 Tianjin Deputy Xinzhuang Town Township Head for Resettlement 20110413-TJ-C 4/13/11 Tianjin Deputy Xinzhuang Town Township Head for Construction and Planning 20110415-TJ- 4/15/11 Tianjin Deputy Jinnan District Bureau of Land WU Director- and Resources General official Jinnan District Bureau of Land and Resources
20110516-CD- 5/16/11 Chengdu Deputy Chengdu Development and C Director- Reform Commission General
20110517-CD- 5/17/11 Chengdu Director Law and Regulation Division, Y Chengdu Bureau of Land and Resources
20110518-CD- 5/18/11 Chengdu Director Law and Regulation Division, YH Chengdu Bureau of Land and Resources
Chengdu Deputy Ningguo City, Anhui Province Mayor 20110518-CD- 5/18/11 Chengdu A Retiree of (His mother was a resettled U a peasant) Construction Company Chengdu A resettled (He works in the city now) peasant
20110519-CD- 5/19/11 Chengdu Former Chengdu Construction W Director- Commission General
253 20110520-CD- 5/20/11 Chengdu A resettled (He works in the new apartment U peasant, male built on the previous farmland of his village)
Chengdu A resettled (She works in the new apartment peasant, built on their previous farmland) female
20110522-CQ- 5/22/11 Chongqing Vice Party Chongqing Institute for z Secretary Agricultural Research
Chongqing Director Institute for Agricultural Economics
20110523-CQ- 5/23/11 Chongqing Official Chongqing Land Bureau and W Chongqing Rural Land Trading Center
20110524-CQ- 5/24/11 Chongqing Official Chongqing Development and H Reform Commission
20110525-CQ- 5/25/11 Chongqing Deputy Nan'an District Land L Director Consolidation and Bank Center
20110526-CQ- 5/26/11 Chongqing Director Agricultural land preservation L division, Nan'an Branch, Bureau of Land and Resources
20110628-BJ- 6/28/11 Beijing Project Beijing Greenbelt Area W Manager Infrastructure Development and Construction Corp.
20110809-BJ-M 8/9/11 Beijing Deputy Division of Regulations and Director Policies, Ministry of Land Resources
20121024-BJ-L 10/12/12 Beijing former private developer
254 20121029-BJ-B 10/29/12 Beijing Project Wanke Real Estate Development Manager Group
20121030-BJ-Z 10/30/12 Beijing Deputy Beijing Zhonghong Real Estate Manager Development Corp.
20121105-CD- 11/5/12 Chengdu Executive a local Chengdu real estate X Assistant development company (A)
20121106-CD- 11/6/12 Chengdu President a local Chengdu real estate z development company (B)
20121108-CD- 11/8/12 Chengdu Deputy Chengdu Land Consolidation L Director Office
20121109-CD- 11/9/12 Chengdu Director Law and Regulation Division, Y Chengdu Bureau of Land and Resources
20121115-CD- 11/15/12 Chengdu Director Law and Regulation Division, YZ Chengdu Bureau of Land and Resources
20121115-CD- 11/15/12 Chengdu Manager Sansheng Real Estate YZ Development Corp.
20121112-CD- 11/12/12 Chengdu Division Trading Division, Chengdu H Director Agricultural Equity Exchange
20121115-CD- 11/15/12 Chengdu Division Trading Division, Chengdu HL Director Agricultural Equity Exchange
20121115-CD- 11/15/12 Chengdu Manager Jinhe Investment Corp. HL 20121126-CQ- 11/26/12 Chongqing Deputy Beijing Chengjian Development T Manager Corp Chongqing Office
20121127-CQ- 11/27/12 Chongqing Researcher Northwestern University of China Y 20121128-CQ- 11/28/12 Chongqing Media New Real Estate Channel L Manager
255 20121128-CQ- 11/28/12 Chongqing Manager Yuanyang International Real z Estate Development Corp Chongqing Office
20121129-CQ-P 11/29/12 Chongqing Deputy Yufu Corp. Manager 20121129-CQ- 11/29/12 Chongqing Deputy Chongqing Rural Land Exchange W Manager 20121129-CQ- 11/29/12 Chongqing Officer Chongqing Rural Land Exchange L 20121203-CQ- 12/3/12 Chongqing Officer Chongqing Land Consolidation M Center
20121204-CQ- 12/4/12 Chongqing Dazhu Village D 20121205-CQ- 12/5/12 Chongqing President Maide Investment and z Development Corp.
20121206-CQ- 12/6/12 Chongqing President Maide Investment and z Development Corp.
20121206-CQ- 12/6/12 Chongqing Officer Planning Division, Chongqing U Bureau of Land and Resources
Total: 63 Interviews
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