China, People’s Republic of
Land value capture in China
Several land value capture- instruments can be observed in China (Table 2.9). Given that all land is publicly-owned, strategic land management is a policy priority. Local governments have strong land banking systems and collect substantial revenues from selling land use rights. Local governments often charge developers for building at higher density (charges for development rights) and for the impacts that their projects have on local infrastructure (developer obligations). Land readjustment is frequently used to redevelop old city centers. There is no legal framework for infrastructure levy, reflecting the view that public services should be paid from the general budget.
Enabling framework
China is a unitary country with three levels of subnational government: 31 regional entities including provinces, autonomous regions and centrally administrated municipalities; 334 prefectures and prefecture-level municipalities at the intermediate level; and 2 851 local entities including municipal districts, county-level municipalities and autonomous counties (OECD/UCLG, 2019, p. 171[1]). Metropolitan areas and megacity regions are not administrative units, being managed by provinces. Cities, as a geographic concept, exist at each of the three administrative levels (OECD/UCLG, 2019, p. 171[1]).
Public ownership of land is organized as follows: urban land is owned by the State, while rural land is collectively owned by village communities. All levels of governments have the power to control and regulate land use, convert rural land into urban land and sell land rights to private developers (OECD/UCLG, 2019, p. 174[1]). Land use rights sales, attributed through land leasing, are the basis upon which other land value captures tools can be applied, with different degrees of innovation and experimentation.
The national and local governments create the legal framework of land value capture.
Strategic land management
All land is government-owned and cannot be sold. Nonetheless, land use rights are commercialized in the real estate market since the mid-1990s. Through land leasing, private actors acquire, use and transfer land use rights. Land is leased for multiple decades.
Local governments own the urban land available to lease. They set the baseline lease rate and decide which land to lease. The transaction price is typically decided at public auctions. Land leasing is very common and serves a myriad of purposes, including to generate public current revenues, which is seen as an unsustainable use by many observers, including the OECD (2015[4]; 2017[5]; 2021[6]), provide land for real estate development or facilitate planned urban growth.
Lease length varies according to the permitted use: 70 years for residential land, 50 years for industrial uses and 40 years for retail and entertainment, for example. The rent is paid in one lump-sum payment, and no periodic readjustments are foreseen.
Leaseholders may transfer or sell the lease in a secondary market. Sub-leasing is possible, but informally. Public entities such as state-owned-enterprises may transfer or sublease land rights to private developers.
Together with land leasing, land banking is an important land value capture tool in the country. Local governments acquire and retain land use rights in advance of needs for the purposes of urban renewal, land consolidation, control of urban growth and the capture of capital gains. Most commonly, they acquire greenfield land within their jurisdiction and rezone it to a different use.
Governments acquires rural land or urban land use rights at negotiated prices, which are regulated by the government itself. Before the announcement of public investment or rezoning, the government may freeze land transactions between other entities, and the local government buys land development rights at a specified price.
The government sells the land development right to the highest bidder or transfers it to government-owned corporations free of charge.
Every local government makes use of strategic land management. Land right sales constitute an important source of local revenues, which are likely unsustainable (OECD, 2015[4]). For instance, in 2014, land right sales revenues accounted for 40% of total revenues in Chongqing, Anhui and Zhejiang (OECD/UCLG, 2019, p. 174[1]), which may partially reflect strongly expanding development.
The main implementation challenge has been empty auctions of land leasing in a down-turn market or when the base rate is set too high. Yet, this challenge is often overcome by organising a successive auction at a lower base rate. Dependence of local governments on land right sales for revenues reinforces incentives to rezone and develop land for commercial use, which can contribute to adverse environmental impacts, rising debt to pay for development and a weak funding basis for funding local public services (OECD, 2021[6]).
Charges for development rights
In exchange for planning permits to build at higher density (Floor Area Ratio), developers have to pay the charge for development rights. Local governments always use the instrument and collect the revenues.
The charge is paid in cash or through in-kind provisions of land, public improvements or affordable housing units. Cash payments occur when the development rights are issued, and in-kind provisions must be completed upon project completion. If requested, developers can defer payment to the sale of land rights.
When paid in cash, the fee can vary by zone. The price may be calculated according to the estimated value of the additional floor space or be defined in public auctions, according to the offers made by willing buyers.
The fee may be embedded in the price of granting development approvals. For instance, a local government that sells land use rights of a plot in proximity of a metro station will set the price as to include the right to build at higher density. Therefore, developers cannot differentiate between a price for baseline development and a price for development at higher density.
When the in-kind payment is through affordable housing provision, the units must be built on-site. Units do not have to be comparable to market-rate units. After building, developers must transfer the units to the government, to be sold at discounted prices or rented. The units should remain affordable for as long as the local government manages them as such. Developers are not permitted to satisfy this requirement by paying a fee in cash.
Local governments may establish the share of affordable housing units beforehand, by including it as a factor that will help select the winner at a public auction. In the latter case, the local government establishes the maximum density (Floor Area Ratio) and the maximum land lease fee. During the auction, private developers bid by increasing the percentage of floor area to be destined to affordable housing. The developer that offers to build more affordable housing units for the same land lease fee wins the auction.
Challenges to implementation are the lack of administrative capacities and the risks associated with fluctuating dynamics of real estate markets as well as the lack of recourse to independent judicial review. Another practical obstacle is that developers often add floor area to their project without notifying the city government. In this case, they will have to pay a fine. This type of irregular construction, although rectifiable, hinders the regular functioning of the instrument.
Developer obligations
Local governments frequently charge developer obligations when developers request approval for new development or development at higher density. Developers have to compensate the impacts that the development has on infrastructure use within and adjacent to the project by building more infrastructure. This infrastructure may refer to new public spaces, public utilities or other public improvements.
To calculate the charge, local governments take into consideration the costs on infrastructure use, as well as the size, type, location and physical characteristics of the development. Other local governments negotiate the charge with developers. Negotiation follows a structured procedure to define which types of infrastructure are more adequate for the area, and in which amount they are necessary. Either way, the charge is not allowed to be paid in cash. To illustrate, in Shenzhen, developers may be asked to provide floor space to host high-tech firms.
The charge is paid upon project completion. Large developers usually provide all public infrastructure on site and then transfer the equipment and land to the city government. If the project is small and the impact on infrastructure is not important, developers are exempt from payment.
Developer obligations are an important tool to finance urban infrastructure. Local governments can recover all the public costs created by private developments by asking them to provide the necessary infrastructure. Noticeable obstacles exist for the redevelopment of urban villages, where adequate legal frameworks and relevant government regulations do not exit. In this case, the developer obligation has to be negotiated on a case-by-case basis.
Land readjustment
Land readjustment is used for the purposes of urban development and regeneration of old city cores. Through land readjustment, land plots are pooled, reshaped and redeveloped. As a result, a new urban pattern emerges, whereby the lots are integrated into the urban grid and well-serviced by infrastructure. Local governments, private entities, property owners and non-governmental organisations frequently adopt the instrument. Local governments collect the revenues of land readjustment in redevelopment projects. In undeveloped land, no money transfers are typically involved.
If the project is to take place on undeveloped land, 75% of property owners should give their consent. On developed land, the share is 95%. The required consent is frequently reached, which enables the project to be carried out. If the project is publicly-led or has a public interest, participation is compulsory. Public entities sometimes carry out expropriations to enforce the participation of resisting property owners. The compensation varies in principle according to the property’s market value, although property rights holders have limited possibilities for appeal of valuations.
A share of 30% of the readjusted area may be reserved for public improvements, such as public utilities, public spaces and public transportation – from which property owners will benefit. The exact percentage may vary city by city and project by project. No collectively-owned plots are reserved for future sales or leasing.
After readjustment, landowners may choose to receive readjusted plots with a value proportional to their original holdings or compensation in cash. It is common that leaseholders receive floor areas in high-rise apartment buildings. In any case, if the readjusted plots are less valuable than the original ones, the affected owners are entitled to compensation. Third party investors may in principle receive readjusted plots in return for their investments.
The main obstacles to implementation are the resistance of property owners, who sometimes appeal against the decision to pool their land, and the high costs of expropriations, which are needed to enforce the participation of resisting property owners in projects of public interest.
References
[3] OECD (2022), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 13 January 2022).
[6] OECD (2021), Making Property Tax Reform Happen in China: A Review of Property Tax Design and Reform Experiences in OECD Countries, OECD Fiscal Federalism Studies, OECD Publishing, Paris, https://doi.org/10.1787/bd0fbae3-en.
[8] OECD (2021), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 25 November 2021).
[2] OECD (2017), Land-use Planning Systems in the OECD: Country Fact Sheets, OECD Regional Development Studies, OECD Publishing, Paris, https://doi.org/10.1787/9789264268579-en.
[5] OECD (2017), OECD Economic Surveys: China 2017, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-chn-2017-en.
[4] OECD (2015), OECD Urban Policy Reviews: China 2015, OECD Urban Policy Reviews, OECD Publishing, Paris, https://doi.org/10.1787/9789264230040-en.
[1] OECD/UCLG (2019), 2019 Report of the World Observatory on Subnational Government Finance and Investment - Country Profiles, OECD/UCLG.