Meng Xiaosu calls for reforming rural land system, speeding up govt-subsidized housing

Key reform goal set in 2013 still unmet, former state-owned housing giant executive laments a decade later, and Beijing - not local govts - must step up financing for government-subsidized housing.

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Mar 20, 2024

Meng Xiaosu, former head of the National Housing Reform research group and former chairman of China National Real Estate Development Group Corporation, recently stated in an interview with the 《华夏时报》China Times [a Chinese mainland newspaper] that it is necessary to dismantle the binary urban-rural structure to break down the division of agricultural and non-agricultural household registration. This also includes the reform of a land system where urban and rural lands are separated. Such reforms are the future of rural areas and are crucial for rural revitalization.

"If rural homesteads were to have the same price and trading rights as urban housing, there would be no need to worry about the return of mass poverty of the rural population since the gradually closing price gap between rural homesteads and urban housing could unleash immense wealth, thus allowing the rural population to move towards common prosperity together with urban residents," said Meng Xiaosu.

Abolish the division of binary household registration to realize equal price and trading rights between rural homestead and urban housing

In October 2023, while conducting field research in Wuxi, Jiangsu Province, Meng Xiaosu saw the newly built rural houses, as beautiful as the urban villas. He asked the village officials the price of the property, and the head of the village said it was about 500,000 yuan. Meng Xiaosu then asked the price of a nearby villa area developed by real estate developers and was told it was approximately 16 million yuan per villa.

The two residential areas are close to each other, yet there exists a huge difference in property prices. Meng Xiaosu knew that this was because the nature of the land where the houses were located was different. The property worth 16 million yuan is built on 城镇建设用地 "urban construction land," while the one worth only 500,000 yuan is built on homestead land in rural areas, which [by China's laws and regulations today] cannot be sold to urban residents. 500,000 yuan is just its construction cost. "You know, the rural land is not valuable," said the head of the village.

Meng Xiaosu mentioned that he observed a similar situation during his field research in rural areas of Hebei Province, but the prices of the property were a bit different. In the tourist resort of Xinglong County, the value of renovated rural houses was about 200,000 yuan, which is the cost of rural house renovation, indicating that the rural land has little value. On the contrary, the price of villas in the county was about 5 million yuan.

According to China's current laws, the land of rural homesteads is not allowed to enter the land market for circulation. Meng Xiaosu believes that there is an urgent need to implement the resolution of the Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee, which calls for 同等入市、同价同权 "equal access to market, price, and rights for rural construction land with state-owned land" [All Chinese urban land are state-owned]. China now only allows transfers of rural homestead land between farmers, which won't endow the rural homestead land with the same market value as urban land.

In November 2013, the Third Plenary Session of the 18th CPC Central Committee passed the Decision of the Central Committee of the CPC on Some Major Issues Concerning Comprehensively Deepening the Reform, which explicitly stated: "Forming a unified construction land market for both urban and rural areas. We will allow rural collectively owned profit-oriented construction land to be sold, leased, and appraised as shares, on the premise that it conforms to planning and its use is under control, and ensure that it can enter the market with the same rights and at the same prices as state-owned land. "

"In the past, due to the legal restriction, the market circulation of homestead land was not allowed. Farmers who wished to sell their homestead land on the market had no choice but to sell it privately to urban residents, thus having this consequence of large-scale illegal existence of 小产权房 'small property rights' across the country." said Meng Xiaosu.

Meng Xiaosu believes that the implementation of "equal rights and prices" reflects the will of the masses of farmers. The formulation of laws should be based on the interests of the rural populations, and existing laws and regulations should be amended by the will of the rural populations.

Meng Xiaosu mentioned that Beijing requires that the reform of rural homestead land must hold the "bottom line." He believes that this "bottom line" consists of two key aspects: first, the participation of rural populations must be completely voluntary; second, the interests of the rural populations must be safeguarded through institutional means. In the concept of "equal market access, rights, and prices", "equal market access" serves as the tool, while "equal rights and prices" is the goal. Only by granting homestead land the right of "equal market access" can fair market and fair pricing be achieved. By that time, even without transferring rural properties, farmers can also obtain significant appreciation of their housing property.

"If rural homesteads were to have the same price and rights as urban land, there would be no need to worry about the large-scale reemergence of poverty in rural areas. The closing price gap between rural homesteads and urban housing will unleash huge wealth, leading the rural populations and urban residents towards shared prosperity," he said.

Meng Xiaosu referred to this reform as another cost-free reform. "The rural land contract system [in the late 1970s] was a reform that didn't cost money, granting farmers the autonomy of cultivation, thus greatly enhanced rural productivity; similarly, urban housing privatization in 1990s was also a cost-free reform, which not only didn't cost the government any money but also allowed state-owned enterprises to recoup the cost of the apartments. Allowing the circulation of rural homestead land in the future will be another cost-free reform. By merely leveraging the power of the market, this reform can bestow substantial wealth upon the rural population without any financial outlay from the government."

Meng Xiaosu clarified that the market accession of the land of rural homesteads is not bound to change the attribute of collective ownership of rural land. The Constitution of the People's Republic of China stipulates two types of public ownership of land--state ownership and rural collective ownership. To facilitate the transfer of rural land, the Central Committee had already upgraded the past "two rights" of rural land into "three rights," meaning that rural collectives retain ownership, the rural household maintains their qualification, and the right to use the rural land can be transferred.

Meng Xiaosu believes that based on the "equal market access, rights and prices" principle, it's not the ownership of the rural collective land that will be transferred, but the transfer shouldn't be limited to the "right to use" or "right to lease" of rural properties. It should be the compensated transfer of the "qualification" held by rural households so that the rural populations can gain the financial income comparable to transferring urban properties.

Meng Xiaosu believes that after the loosing of market accession of rural homesteads, in the face of a significant wealth appreciation effect, the government can levy a tax on property transfer. "There will be no property transfer tax without housing transactions; if a property transfer tax is levied, all tax revenue should be used to establish social security and medical insurance for rural populations; plus the state's welfare investment in farmers, which includes continuing reallocation of part of the state-owned capital to enrich the social security fund, which can achieve the integration of new rural cooperative medical care system and urban medical insurance, thus allowing rural populations to enjoy equal social welfare as city residents," he said.

In a blink of an eye, more than ten years have passed since the Third Plenary Session of the 18th CPC Central Committee passed the Decision of the Central Committee of the CPC on Some Major Issues Concerning Comprehensively Deepening the Reform, yet the "equal rights and prices" of rural land has not been realized.

Meng Xiaosu told reporters, "Those who oppose [the reforms] argue, 'wouldn't farmers become overnight millionaires? They would feel imbalanced; others say, once farmers are allowed to trade their homestead, they will drink and gamble away all the money and then turn to the government for help.' These people view rural populations as lazy and worthless, however, the rural reform should not be hindered by these stereotypes."

Deepen the Two-Track Approach for Housing and Accelerate the Construction of Government-subsidized Housing

The Central Economic Work Conference in December 2023 noted: "To further revive the economy, China still has to overcome some difficulties and challenges, including lack of effective demand, overcapacity in some sectors, lackluster social expectations, certain risks, and hidden problems, bottlenecks in the domestic circulation, as well as rising complexity, severity and uncertainty of the external environment."

Meng Xiaosu believes that the "bottlenecks in the domestic circulation" mentioned at the Central Economic Work Conference are most notably found in the real estate market. According to the statistics released by the National Bureau of Statistics, the sales revenue of apartments in China once reached 18.19 trillion yuan in 2021 but plummeted to 13.33 trillion yuan in 2022, losing about 5 trillion yuan in sales revenue; in 2023, it further declined to 11.66 trillion yuan, losing 6.5 trillion yuan compared to 2021.

Meng Xiaosu noted that the real estate market serves as the most important pillar of the Chinese economy, and the shrinking of the real estate market has become the biggest cause of "insufficient effective demand." At the same time, over a hundred industries related to the real estate sector have become the bottlenecks of the national economy, with these industries shrinking alongside the real estate sector. Consequently, the stock market, reflecting the performance of publicly traded companies, has also shown a continuous decline.

Why is the real estate market in China declining? Meng Xiaosu believes that there are two reasons if we see from the consumer's perspective: on one hand, wealthy residents are restricted by purchase limits and lack confidence in the real estate market, they would rather save money instead of buying houses; on the other hand, the vast majority of the working class cannot afford overpriced apartments.

Then how to solve the problems in the real estate market? For more than twenty years, Meng Xiaosu has been consistently calling for "improving the twin-track approach of housing", that is, the housing reform scheme proposed that year, which entails "apartments supplied by the market and government-subsidized housing". Meng Xiaosu believes that it is precisely because of the shortage of government-subsidized housing supply that has led to the price rise in apartments, thus harming the interest of the working class. To protect the interests of the working class, measures have been taken to suppress housing prices, which in turn affects the healthy and stable development of the commercial housing market.

Meng Xiaosu believes that government-subsidized housing should not be charged land transfer fees [which real estate developers have to pay to the state] or share the cost of urban infrastructure construction, keeping their price to be only about one-third of the prices of apartments in big cities. Furthermore, buyers of government-subsidized housing should also enjoy the benefits of low down payments and low-interest rates for residential mortgages, making it affordable for the working class. This approach can effectively stimulate the effective demand of the working class.

Meng Xiaosu also believes that, at the same time, there is no need to stick with the [current] purchase quota for apartments, which should be allowed to return to its attributes of free trading. With a sufficient supply of government-subsidized housing, the price rise in other apartments will no longer put too much pressure on the working class. If housing prices rise, the government can increase taxes and use the tax revenue to increase investment in the construction of government-subsidized housing.

Then what is the biggest difficulty faced by the large-scale construction of government-subsidized housing? Meng Xiaosu says that what he is concerned about most is still the lack of investment. Local governments generally face financial difficulties and have to urge state-owned enterprises at the central and local levels to return to the track of government-subsidized housing construction. Who should pay for government-subsidized housing?

Drawing from his rich experience in organizing the construction of security housing, Meng Xiaosu illustrates that the construction of government-subsidized housing still requires the central government to provide majority of funding, followed by matching contributions from local governments. Combined with investment from trust funds, social security funds, and bank loans, it will create a larger scale of investment. Not charging land transfer fees in government-subsidized housing construction allows more funds to be used for construction, which can strongly promote the development of the construction industry, building materials industry, and other related industries, thus effectively increasing the employment and government tax revenue, thereby accelerating the formation of a virtuous cycle of domestic demand.