Zhou Tianyong on the colossal waste from China's land planning

A well-known economist argues that China’s rigid land system is strangling job creation and consumer demand and aggravating income inequality between urban and rural households.

Zhou Tianyong is Director of the National Economic Engineering Laboratory at Dongbei University of Finance & Economics and Director of the Economic Accounting and Innovative Development Committee, China Society of Economic Reform (CSER). He is also former Deputy Director of the Institute of International Strategic Studies, Party School of the Central Committee of the Communist Party of China (National Academy of Governance).

The well-known economist, selected as one of China’s top ten influential economists in 2024 by Sina, a popular news portal, is known for publicly advocating economic reforms.

In an article published on Zhou’s personal WeChat blog on February 12, he argued that the country’s rigidly planned allocation and administrative control over land remains “the strictest” in the world, despite the marketisation of other production factors such as labour and capital. According to his calculations, this system has led to trillions of dollars lost in consumer demand, millions of jobs lost in the secondary and tertiary sectors, and a property income gap between urban and rural areas that exceeds tenfold.

A key economic reform priority, he says, is to allow the long-term use rights of collectively owned rural land to be leased on the market as soon as possible, thus creating a clear outlet for the newly injected liquidity, while also increasing household incomes and stimulating domestic consumption.

土地计划行政管理造成的有关国民经济损失数据

National Economic Losses Caused by Land Planning and Administrative Management

On February 10, I published an article titled “Stimulating and Developing the Economy Urgently Requires Deepening Financial and Land System Reforms.” Some readers noted that the article was too lengthy and that discussing land and finance together made the argument less clear. Therefore, I have decided to divide the content into separate discussions. This instalment focuses on how the land planning system has led to losses across various sectors of the national economy.

I. Increasingly planned and administrative control of land as a factor of production

Since 1978, most factors of production in China have undergone market-oriented reforms. However, land remains governed by the world’s most rigid system of planned allocation and administrative control. This contrasts with the broader reform agenda, which aims to commodify and marketise the allocation of factors of production.

For example, the Ministry of Labour, as well as the Department of Working and Fixed Asset Construction Capital for State-Owned Enterprises under the Ministry of Finance, were abolished. Technological factors, on the other hand, were never under the jurisdiction of a ministerial-level administrative body. As a result, labour, capital, and technology have all shifted from planned administrative control to market allocation. Even in terms of population policy, administrative bodies responsible for family planning were eventually dissolved.

However, land—one of the most fundamental factors of production in a market economy—has not only failed to undergo market-oriented reforms but, in fact, the administrative authority responsible for land management, which was originally at the vice-ministerial level, has been elevated to a full ministerial-level body overseeing planned allocation and administrative management.

As a result, tasks such as:

1. Setting annual land use quotas;

2. Creating an equivalent area of new farmland to replace the farmland occupied by non-agricultural construction;

3. Consolidating rural villages into apartment blocks, with saved homestead land converted into construction quotas;

4. Restricting the expropriation and transfer of collective rural land to local government monopolies;

5. Including land transfer fees in local government revenues;

6. Prohibiting unauthorised land transactions by rural collectives and urban land users;

7. Enforcing strict demolition of illegal constructions, with escalating severity from central to local administrative levels;

8. Monitoring land use via satellite and holding accountable land users who do not develop approved plots;

9. Extending administrative control over even design details, following the consolidated planning of land use across different ministries

have all become key responsibilities of the current land planning and management authority.

From obtaining land use approval, initiating construction, passing inspection after completion, to final project delivery—combined with regulatory oversight—this process involves a dozen or several dozen layers of review. It is overly complex, time-consuming, and highly inefficient. As a result, idle land often remains unused for years or even decades. The vacancy rate for land and buildings in urban industrial parks is about 35%, and nearly 50% of rural homesteads remain vacant. Yet, these vast reserves of idle land cannot be activated through market mechanisms due to control by the land planning and management departments.

Currently, the demand for land at all levels of economic activity—from farmers, urban workers, and individual entrepreneurs to small and medium-sized enterprises needing land for employment and startups, to local governments requiring construction land to drive economic growth—has been severely hindered by the strictest planning and control measures. In this context, how can one expect to stimulate and sustain economic development?

China’s post-1978 economic success can be attributed to the abolition of the Ministry of Light Industry, the Ministry of Chemical Industry, the First Ministry of Machine Building, the Ministry of Coal Industry, and the Ministry of Foreign Trade. Additionally, clothing rationing was abolished, quotas for daily necessities were eliminated, and China became the world’s largest producer of durable consumer goods. Coal production began to exceed demand, and the automotive and agricultural machinery industries experienced rapid growth. Exports expanded at an unprecedented rate. The remarkable economic growth that followed the reform and opening up was, in essence, the result of dismantling the planning and administrative departments responsible for controlling industrial sectors and factors of production.

II. Significant economic losses caused by the planned allocation and administrative control of land

In the functioning of a national economy, the allocation of all factors of production should adhere to the principle of coherence—either they are all governed by planning and administrative control, or they are all allocated through market mechanisms. To illustrate, consider a car with four wheels: if three are rubber tyres and one is made of steel, the car may still move, but it will not run smoothly or at normal speed. This inconsistency would increase friction and maintenance costs, as well as result in significant losses in efficiency and output.

1. Income and consumption losses for farmers under government-monopolised land transfer

In China, urban land is state-owned, while rural and peri-urban land is collectively owned by farmers. From the 1990s to 2023, approximately 1.892 billion mu [126 million hectares] of rural land were converted into construction land to support industrialisation, urbanisation, and the modernisation of transportation and water infrastructure. Of these, 935 million mu [62.3 million hectares] were allocated without compensation, and 957 million mu [63.8 million hectares] were transferred with compensation for urban housing, commercial buildings, manufacturing, and mining purposes. Local governments generated 78.8616 trillion yuan [10.97 trillion U.S. dollars] in revenue from these transactions, but less than 3% of this amount was paid to rural collectives and farming households as compensation.

Had rural collectives and farmers been allowed to transfer their land-use rights directly on the market—even with a 40% tax rate—their potential income could have reached approximately 47 trillion yuan [6.53 trillion U.S. dollars]. This opportunity was missed. Given that the average propensity to consume among rural households is around 80%, and assuming a conservative scenario of 50% consumption and 50% savings from this potential income, nearly 24 trillion yuan [3.33 trillion U.S. dollars] in effective consumer demand was lost to the national economy. While local governments directed land transfer revenues into infrastructure and public facilities, the consumption capacity of rural households remained weak, contributing to overcapacity in the manufacturing sector.

2. Employment losses caused by the inability to combine land and labour in urban and rural areas

Under the land planning and administrative management system, urban and rural land, especially rural collective land, cannot be sold for money. In practice, the ownership and use of these assets have become determined by local governments, and their asset value cannot be recognised.

As a result, rural collectives and farmers have essentially lost the right to use and develop their land, making it nearly impossible to integrate the primary, secondary, and tertiary industries in rural areas. The flow and combination of factors of production between urban and rural areas are also constrained, creating serious obstacles for land-based investment, entrepreneurship, business operations, and employment.

From the perspective of the urban-rural employment structure, several issues are evident in the data from 2000 to 2023. In 2023, China’s total employed population reached 740.41 million. Although the agricultural sector contributed only 6.9% to GDP, agricultural employment still accounted for 23.5% of total employment, with 168.82 million people working in agriculture. This figure is 14 percentage points higher than that of benchmark countries with similarly large populations and comparable development levels.

In other words, if it were not for the land planning and administrative management system that restricted farmers from entering the secondary and tertiary industries, and the household registration (hukou) system, agricultural employment in 2023 would have been no more than 70.33 million. This implies that the combined impact of the land and hukou systems has resulted in the loss of 98.5 million jobs in the secondary and tertiary sectors.

Since the late 20th century, various central ministries and local governments, particularly land administration authorities, have carried out multiple regulatory campaigns concerning the land and buildings used for urban and rural construction, as well as by private enterprises and self-employed businesses, focusing on industrial layout, ecological environment, production safety, and urban-rural development:

1. Regulatory campaigns targeting township and village-level enterprises with low output, misalignment with urban and rural planning, disorderly on-site environments, substandard facilities, and improper emissions.

2. Campaigns aimed at dismantling or relocating small and micro enterprises to make way for large-scale foreign and domestic firms as part of industrial upgrading.

3. Overcapacity reduction campaigns, which primarily targeted the reduction of private enterprises’ numbers and output, while favouring state-owned firms.

4. Campaigns to regulate safety risks in enterprise production, focusing on fire safety, hazardous chemicals, machinery safety, and the prevention of mine collapses.

5. Environmental regulatory campaigns targeting enterprise emissions of greenhouse gases and hazardous air pollutants, as well as the discharge of solid waste and wastewater.

6. Aggressive demolition campaigns targeting illegal rural and peri-urban structures, including non-agricultural construction on farmland under the guise of agricultural facilities, vacant houses on rural homesteads, and unauthorised construction in both urban and rural areas.

All six types of campaigns were deeply intertwined with the existing institutional arrangements governing land use. Across these waves of land-related regulatory efforts, it is estimated that approximately 50 million small and micro enterprises and individual businesses were forcibly demolished, shut down, or driven into bankruptcy. Cumulatively, these actions have resulted in the loss of around 200 million jobs.

In 2019, informal labour, or flexible employment, accounted for 7.3% of China’s total employed labour force, representing approximately 56.25 million individuals. Due to the expansion of demolition campaigns, the contraction of the real economy, the impact of the COVID-19 pandemic, the adoption of unmanned technologies, and the rapid rise of express delivery, food delivery, and ride-hailing platforms, this proportion increased to 23.3% by 2023, with the number of informally and flexibly employed individuals reaching approximately 179.13 million.

3. Income, consumption, and wealth losses and disparities between urban and rural households caused by the land planning system

The land and housing planning and administrative management system, combined with restrictions that prevent the trading of land and housing, has significantly limited the income of both urban and rural households. This suppression of household income as a proportion of GDP has, in turn, curtailed consumption expenditure. Insufficient consumer demand has put downward pressure on the supply of goods and services. These dynamics further lead to a shortage of employment opportunities, rising unemployment rates, and declining wage levels, all of which reinforce a negative spiral of income reduction for households.

Based on the employment losses resulting from the aforementioned land-related regulatory campaigns, assuming an average annual wage income of 50,000 yuan [6,955 U.S. dollars] at current monetary value and considering a 20-year time horizon with an impact rate of 50%, the cumulative loss of labour income to households would amount to approximately 50 trillion yuan [6.95 trillion U.S. dollars]. Given the relatively high average propensity to consume among workers in small and micro enterprises and individual businesses, the forgone effective consumption demand is estimated at 48 trillion yuan [6.67 trillion U.S. dollars]—a profoundly undesirable outcome for the national economy.

From the perspective of households’ income, wealth, and the urban-rural gap, several key observations can be made:

First, in 2023, China’s per capita GDP was 91,746 yuan [12,763 U.S. dollars]. However, households’ disposable income accounted for only about 45% of GDP, and income from wages and salaries made up just 25.6%. In most countries, these two ratios hover around 70% and 50%, respectively. This suggests that if institutional systems regarding land, population mobility, financing for small and micro enterprises, and fiscal expenditures on social welfare were functioning effectively, China’s per capita disposable income in 2023 could have reached 64,222 yuan [8,934 U.S. dollars], with per capita disposable income from wages and salaries accounting for 45,870 yuan [6,381 U.S. dollars].

Second, in terms of the urban-rural income gap, from 1978 to 2023, the dynamic average of per capita disposable income in urban areas was 2.39 times that in rural areas. More specifically, urban households’ per capita disposable income from wages and transfers was, on average, 5.25 times and 5.90 times that of rural households, respectively.

Third, regarding income from properties, from 1998 to 2023, per capita disposable income from properties for urban households increased from 143 yuan to 5,392 yuan [750 U.S. dollars], while total net property income rose from 59.5 billion yuan to 5.03 trillion yuan [699.72 billion U.S. dollars]. In contrast, for rural households, these figures only increased from 30 yuan to 540 yuan [75 U.S. dollars], and from 24.9 billion yuan to 257.6 billion yuan [35.83 billion U.S. dollars]. In 2023 alone, per capita and total net income from properties in urban areas were 10 times and 19.5 times higher than those in rural areas, respectively.

Fourth, regarding the disparity in the value of residential assets, in 2023, the average value of residential assets per person was 552,200 yuan [76,817 U.S. dollars] for urban registered households, 117,300 yuan [16,317 U.S. dollars] for rural hukou holders residing in urban areas, and 74,600 yuan [10,377 U.S. dollars] for rural hukou holders residing in rural areas. On average, urban households owned 7.4 times more residential assets than rural households. However, since rural homesteads and houses are not allowed to be traded on the market, they effectively have no market value. They serve merely as necessities for living, rather than assets or wealth in the context of a functioning market economy.

4. The impact of the land planning system on China’s economic growth potential in 2023

Using the second fundamental model of gradual transition economics and 2023 data, the total value of tradable land assets nationwide was approximately 7.408 trillion yuan [1.03 trillion U.S. dollars]. Due to prohibitions or restrictions on land transactions, this resulted in a loss of around 2.436 trillion yuan [338.87 billion U.S. dollars] in national income.

More specifically, after excluding non-tradable construction land, the remaining tradable construction land was estimated at 530 million mu [35.33 million hectares]. At a shadow price of 600,000 yuan [83,466 U.S. dollars] per mu, the total value reached 31.8 trillion yuan [4.42 trillion U.S. dollars]. If the land market were liberalised and the annual transaction rate reached 0.5‰, it could generate an asset appreciation of about 1.59 trillion yuan [221.18 billion U.S. dollars].

As for forest land, orchards, grasslands, and arable farmland, the total area was approximately 8.46 billion mu [563.97 million hectares]. With a shadow price of 50,000 yuan [6,955 U.S. dollars] per mu, the estimated total value reached 422.846 trillion yuan [58,82 trillion U.S. dollars]. Assuming a transaction rate of 0.3‰ under liberalised market conditions, potential asset appreciation would be around 845.692 billion yuan [117,64 billion U.S. dollars]. Unfortunately, due to the non-tradability of land assets, these potential gains in asset value remain unrealised.

III. Reforming the land system is urgently needed to stimulate and sustain growth

If local governments were to purchase surplus newly constructed urban housing—financed through government bonds—and allocate it for low-rent housing to support rural registered households living in cities, it could effectively reduce living costs for this population and stimulate household consumption. However, if the sole objective is to bail out real estate developers and resolve their debt burdens by transferring unsold properties to the government, such actions would have little effect on revitalising the economy. Worse still, the government would be left holding more non-performing assets.

From today’s viewpoint, the GDP growth rate has largely lost its effectiveness as an indicator for macroeconomic regulation. This is mainly because while injecting liquidity into large-scale projects, infrastructure, and state-owned enterprises may boost GDP growth in the short term, such measures tend to worsen structural imbalances in the economy. Today, the key indicator of whether the economy can regain vitality is whether stimulus-induced liquidity can be translated into higher household incomes. The focus should be on expanding consumer demand and enabling the market to absorb excess production capacity. In this context, improving the Consumer Price Index (CPI) has become a primary goal of macroeconomic regulation.

Under current conditions, the assets with the most liquidity and the ability to actively absorb liquidity in a market-oriented manner are land in rural and peri-urban areas, as well as certain urban zones that are either prohibited from being traded or unable to be traded on the market. Facilitating land transactions would not only unlock the value of this factor of production but also directly boost the incomes of enterprises and households. More importantly, revitalising land assets and integrating them with other key factors of production—such as labour, capital, and technology—would promote cross-sectoral linkages among primary, secondary, and tertiary industries. This two-way flow of factors would support entrepreneurship and job creation, thereby raising household income levels and strengthening domestic consumption.

However, all these possibilities remain constrained by the current land planning and administrative management system.

Therefore, land administration authorities need to shift from a mindset of planned allocation and administrative control to one that actively promotes and facilitates the market-oriented reform of land as a factor of production. A key reform priority is to allow the long-term use rights—ranging from 50 to 100 years—of collectively owned rural land to be leased on the market under rules similar to those governing the transfer of state-owned land use rights, as soon as possible. This policy could also apply to collectively owned rural homestead land, as well as contracted agricultural and forestry land. Ownership would remain unchanged, with property rights registered and market transactions permitted. These measures would not only create a clear outlet for liquidity but also increase household incomes, thereby stimulating domestic consumption.

Zhou Tianyong's economic reform agenda