Fitch Ratings-Hong Kong-06 May 2020: China's new policy granting greater autonomy to provincial-level governments over land conversions and farmland acquisitions will assist fiscal and economic performance in the medium to long term, via increased governance efficiency of land management on the local level, Fitch Ratings says. Still, Fitch believes the reforms maintain the protection of farmland as a top priority, thus an aggressive conversion plan at the national level appears unlikely for environmental and agricultural reasons.
China's state council announced recently the new policy on approvals for land conversion and farmland acquisitions. This policy followed the newly amended Land Administration Law, which took effect on 1 January 2020. These changes are part of a series of land reforms implemented by the Chinese government to revitalise and integrate urban-rural development.
All provincial level governments will now be allowed to use farmland not classified as permanent basic farmland for development purposes without obtaining central government approval. In addition, only eight provincial governments - namely Guangdong, Zhejiang, Jiangsu, Anhui, Beijing, Shanghai, Tianjin and Chongqing - will be allowed to trial the acquisition of permanent basic farmland, farmland that is larger than 86 acres and other land larger than 173 acres for development without State Council approval.
These small changes in China's land management system will help nudge provincial governments' capital revenue higher in 2020, after many regional economies were put into a temporary halt in response to the coronavirus pandemic. However, the new policy seems unlikely to bring immediate uplift to revenue, but will assist fiscal and economic performance in the medium- to long-term by increasing governance efficiency of land management.
Land-use rights are divided into two broad categories - farmland and construction land. The latter is the main source of capital revenue at the regional level. Farmland is prohibited to be used for development purposes for both environmental and agricultural reasons. China pledged to secure 307 million acres of arable land by 2020, which represented around 20% of farmland and the rest forests, grassland and land for irrigation. This will edge down to 301 million acres by 2030 to allow for a minor decline in arable land. Around 80% of this arable land is identified as permanent basic farmland and is strategically important for China's food reserves.
Conversion of farm land into construction land is a common method among Chinese local and regional governments to obtain additional land allowed for development or construction given the stringent protection of arable land, and any decrease of farmland due to the conversion is compensated by the equivalent amount of new farmland developed of similar quality. Previously, converting farmland to construction land was subject to strict approval from the State Council, with annual conversion quotas and overall land-use plans also needing approval. For collectively owned rural land to be used for development, the state requisitions the land before its use is allowed to change. In the past, state land requisitions needed State Council approval to safeguard the interests of farmers.
The State Council's relaxation of the approval process will allow provincial governments to tailor land supply to development demand much more efficiently by trimming application forms and reducing approval times. Land is increasingly scarce for new factories and office buildings or other commercial uses in more affluent areas. The new land policy could help speed up infrastructure plans, creating a catalyst for economic growth in the medium term.
However, these changes appear unlikely to increase land supply significantly in the near term, due to the restrictions in national land-use planning and stringent central government controls and management remain in place. All local and regional governments are still subject to both overall quotas and annual quotas for land conversion under National Land and Space Planning and Overall Land Use Planning policies. Provincial governments are only allowed to approve land conversion within the state-approved quotas. More control and oversight from the state level will also be in place to ensure provincial governments protect permanent basic farmland and natural reserves. This also includes a State Council appraisal programme to assess provincial governments' skills in land management.
Fitch believes the new policy retains farmland protection as a top priority. The State Council appears unlikely to approve a large amount of conversion quotas in 2020 and thus avoiding financial markets interpreting the new reforms as policy stimulus. In addition, some provincial governments have already approved new construction land quotas for 2020. For example, Beijing announced on 25 February a construction land quota of 9,168 acres - a 1% decrease on the 2019 quota.