On June 2, Sound of Hope Radio, an independent Chinese-language radio network, invited the well known economist and Chinese affairs expert Cheng Xiaonong to talk about why the Chinese regime is so eager to demolish homes and acquire land. The interview with him is now published in two parts.
Yu Shan: In recent years, forced demolitions carried out by local governments have been a root cause of social instability and led to various violent social conflicts. To stop this situation, earlier this year, the Chinese regime introduced new laws and regulations regarding forced demolition.
The Bureau of Land and Resources released an emergency notice; the Ministry of Public Security claimed a ‘zero tolerance’ on forced demolition, but cases of forced demolition continue to happen.
What caused these local officials and law enforcement officers to neglect the public interest and resort to violent methods to demolish people’s homes? What is the real reason? Today we invited well known economist and Chinese affairs expert Cheng Xiaonong to give us an analysis.
Hello! Mr. Cheng.
Cheng Xiaonong: Hello! And Hello to listeners of the Sound of Hope Radio!
Yu: Many people in China have been closely following the issue of illegal land acquisition and forced demolition by local governments in recent years. Earlier this year, the Chinese Communist regime also released some new regulations trying to prevent forced demolitions.
However, reality seems to show that the new regulations did not have much of an effect and that local governments carried on despite the order.
In the first quarter of this year alone, there were almost 10,000 cases of illegal land acquisition, a 2.3 percent increase compared to the first quarter of last year. Regarding this, the Bureau of Land and Resources released an emergency notice requiring that local governments employ strict management to prevent forced demolition, but this still has had no effect.
What has really caused today’s situation? Why are the local governments so eager? What is the motivation? We are going to talk about this today.
Before we get into the main topic, can Mr. Cheng first explain to our listeners the new regulation titled “Regulations for Expropriation and Compensation of Houses Built on State-owned Land.” Does privately owned land exist in China? What is this concept of state-owned land?
Cheng: Before 1978, for thousands of years, land in China was privately owned. No matter whether it was during the era of emperors, during the Nationalist Government era after feudalism ended in the early 20th century, or during Communist rule before 1978, it has always been so.
In rural areas, the land was collectively owned by the villagers, but collective ownership is still private, not public—not owned by the government. In cities, except for streets and government buildings, all residential buildings were the property of the house owners, which means they were private possessions. However, all this suddenly changed in 1978.
In 1978, some farmers in rural areas started what was called the Contract Responsibility System (household responsibility system). The idea was that farmers were to be given quotas of land by the government.
Many key figures of the central government, including Deng Xiaoping, all opposed this system. At the time, Zhao Ziyang in Sichuan and Wan Li in Anhui supported this system, which was welcomed by the farmers. However, most officials in the central government opposed it.
In this situation, the National People’s Congress modified the Constitution, and added the sentence, “Land of the People’s Republic of China is State owned.”
The general public did not know about this. Also, the government did not compensate anyone after making this change. For many house owners, such as those in the countryside whose families had held the house for generations, suddenly they only owned the building, the land underneath was no longer theirs anymore.
Since that time, all land in China has been state owned. However, that so-called “state-owned” does not allude to the central government, but specifically to the local governments. This means all land within the jurisdiction of the local government is owned by the local government, which also means that the local governments can freely allocate land.
During the 1990s, the conflicts were not so large because the local governments did not forcibly demolish homes on a large scale. Forced demolitions actually started in the late 1990s and have continued until now. Now, the problem is getting even worse.
Yu: That means, even if you buy a house in mainland China today, the land underneath is not yours?
Cheng: This is a phenomenon unique to China, that for the first time in the world, buying the house doesn’t come with the land underneath. I know that anywhere else in the world, the land underneath belongs to the house owner, so the government has no rights over it. That is true in the United States, Canada, and Japan, but not in China.
Chinese regulations state that when a resident buys a house, he has the right to use the land, but not ownership rights, and there is a due date associated with the usage rights.
This time limit is 70 years, according to the regulation, but the government doesn’t really respect this time limit. Last year, an official from the Ministry of Construction said to the public media that all houses in China constructed before 1995 are of bad quality and all of them should be torn down.
This means, if this statement was implemented, then for those who bought the house before 1995, while still within 70 years, the government might still demolish the house. In other words, this 70 year usage limit is an empty promise. If the government doesn’t respect it, then the 70 years disappears into thin air.
Suppose someone built a house before 1995, but the government wants to reacquire this land for other purposes, then the government has the right to demolish the house. This means the money that this person spent to buy the 70 years of usage rights is out the window.
Let’s say the government builds a new residential building on the same land and this person wants to continue living there, then he has to buy the land for the second time; paying for the land use for a second time. We know that the value of the building is limited, usually only less than 40 percent of the purchase price, the rest is mainly for the land. So, if the government wants to, it can reacquire the land many times to take money from the building owner.
Yu: From the cases reported of violently demolishing houses, we see the violence of the demolitions is not only done by the real estate agents, but local governments and law enforcement officers are involved in many cases.
Media in China reported that though some of the forced demolitions are done by the real estate agents, if there hasn’t been the local government behind the demolitions, they could not have happened.
For example, in the case of the self-immolation related to a forced demolition that happened in Jiangxi Province on Sept. 10, 2010, the law enforcement officers had threatened the owner, “If you don’t tear down the house, you might not know how you die tomorrow.”
From these cases, we can see the government and law enforcement officers manipulate things behind the scenes. Why, then, is the government so keen on it?
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Cheng: We all know that Hu Jintao proposed the building of a harmonious society a few years ago. The proposal, Hu said, was a response to the rapid increase of what China calls “mass incidents” in the past 7-8 years. The number of mass incidents increased from 50-60 thousand cases per year to a 120 thousand cases per year. Since the year before last, the Chinese government has no longer released the number, because it might be larger.
Most of the “mass incidents” are related to the forced demolition of houses. Since the central government wants to build a harmonious society, but the local government kept pushing for forced demolition, which resulted in “mass incidents,” then, logically speaking, the central government should severely punish the local governments’ deeds, because they directly violate the policy of the central government.
However, as we can see, the central government does not intervene in these events. In other words, while the central government on the one hand cries out for a harmonious society, on the other hand, it lets local governments forcefully demolish people’s houses at will.
There must be some trick involved. Why doesn’t the central government stop it? Why do local governments act so evil and mean? The main reason is that local governments depend on forced demolition of houses to make money.
In China, there is a term, “land finance.” Since the implementation of tax reform, launched by Zhu Rongji in 1994, local governments’ revenue has been relatively insufficient due to the lack of tax revenue.
But local governments are expanding and they have to hire more officials, so costs increase. Thus, local governments constantly want to scrape money from people to meet their needs. Before 2000, the local governments mainly scratched money from peasants, by implementing a variety of compulsory taxes in rural areas.
As a result, peasants in China are significantly poorer than people who reside in the urban areas. The situation has been worse after 2000. At last, Premier Wen Jiabao had no choice and announced a stop to imposing compulsory taxes in rural areas. Consequently, local governments lost one source of income.
In response, local governments came up with another idea, which is the demolition of houses, acquiring land, and selling land, to make profits.
It is practiced mainly by the collusion of local governments and real estate companies. Of course, sometimes, local governments will directly do it under the name of establishing a development zone or constructing public facilities, and then choose some lands they want to develop.
They first send the people employed by real estate companies to demolish houses. If that doesn’t work, they send the police to force the demolition of the houses, such as the Jiangxi case we just mentioned. The typical cases involve policemen.
After they demolish the residents’ houses and seize the land, the local governments will give some compensation to the house owners, but they will only give a little compensation.
The reason is that the local governments don’t use the lands directly, but sell them to real estate companies. They have to earn a large amount of money from selling the lands to the real estate companies. That is, if the local governments can bring down the compensation as low as possible and raise the land price as high as they can, they can earn the most money.
As a result, in the past few years—take the Beijing and Shanghai governments as examples—about 50-60 percent of their financial revenue came from selling land. We can imagine if a government disregards its own interests, and sells the land at the price it buys them, the price of the land will be much lower, and the price of houses will not be so expensive.
However, local governments earn a lot of money from the demolition of houses. While big cities like Beijing and Shanghai are like this, a large portion of the financial revenue of many medium and many small cities rely even more on selling land.
Local governments’ finances are divided into three parts. One part is the budget income, mainly from taxes.
The second is called extra-budgetary income, which refers to a variety of compulsory assessments and charges.
The third part is the addition of extra-budgetary revenue, and the income from land is included here.
Thus, China’s former premier Zhu Rongji once said that local governments are not short of money. If the third part were cut, the local income would be insufficient. Or it can be put this way: the money the local governments want to spend is much larger than what they can get from the budget and extra-budgetary income.
That is why when putting the three parts together, the land-sale income accounts for 50-60 percent of the total revenues, even for cities like Beijing and Shanghai. It is a phenomenon that is not seen in the rest of the world.
Precisely speaking, what the government earns is what the house owners lose. I estimate it might be a few trillion yuan per year [one trillion yuan equals approximately US$157 billion]. Thus, we can understand from this perspective why the local government forces demolish so rampantly and unscrupulously and why the central government only does lip service on this issue in order to get rid of the responsibility, as if it has nothing to do with the problem.
Actually, the central government acquiesces to the local governments’ mean deeds on “land finance,” since the central government never punishes nor stops them.
Local governments have huge economic interests in the land income funds, such as the officials’ cars, their eating and drinking at public expense, their luxurious mansions, their travelling abroad at public expense, and so on.
If there were no such money, officials of China’s local governments would have been poor. In that case, there is no motivation for being a cadre. If there is no enthusiasm among local governments’ cadres, the central government will have a harder time getting its orders to be followed. This is why the central government connives with the local governments.
Cheng Xiaonong, Ph.D., trained as an economist. He is a former aide to ousted Party leader Zhao Ziyang and former editor-in-chief of the journal Modern China Studies. He currently lives in the United States.
Yu Shan is a Sound of Hope Radio host.
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