Property

When the Communist Party announced last October that it was reforming rural property rights, it was initially greeted as a radical move that would finally set Chinese farmers free from the shackles of the state.

The Party communiqué was actually far less revolutionary than the headlines suggested – largely ratifying existing practices and assuring farmers that their land rights would be solidified. Most importantly, Beijing remained opposed to granting individual farmers the right to mortgage their land.

But a new pilot project in the northeast province of Liaoning, where 151 rural households have been allowed to use their land-use rights as collateral for mortgages, shows that change may be afoot. By giving farmers practical access to credit for the first time, the pilot project has the potential to turn rural households into economically significant players.

Liaoning’s Faku county is the first to be selected as part of an experiment launched by the People’s Bank of China to allow a handful of rural counties in nine provinces to pilot new financial products. Whether this experiment is extended to other counties will indicate whether a breakthrough in rural financing is likely.

Extending the project nationwide would boost agricultural productivity and increase rural household incomes. Beijing wants to expand credit to help farmers weather the economic downturn in the short term and to boost rural consumption in the long term.

Under current law, farmers are allowed to transfer their individual land-use rights but cannot use them as collateral for mortgages. This massively restricts farmers’ ability to invest and consume.

The legal regime for rural land developed over the past three decades. After decollectivisation in the early 1980s, farmers received 15-year individual cultivation rights for a set amount of agricultural land. These were subsequently extended to 30 years in the 1990s.

Since then, various laws have gradually turned these informal use-rights into much more formal and secure property rights. Together, these laws supposedly grant individual farmers an indivisible, perpetual property right to their land – including the ability to lease out or transfer their use-rights.

However, Beijing views land reform as a trade-off between economic development and social stability: privatising land would create huge assets and increase agricultural productivity and rural incomes, but it would also risk separating farmers from their ultimate source of financial security – their land.

Although the broad trajectory of land reform supports more flexible rural land-use rights, Beijing has opposed granting individual farmers the right to mortgage their land for social and, therefore, political reasons.

Partly, the government fears a return to the dark old days of pre-Communist China when, according to Party propaganda, peasants were rent slaves bound to unscrupulous and rapacious lenders. But today’s prohibition on mortgaging farmland, which prevents farmers from improving their circumstances through better access to capital and credit, amounts to an alternative form of economic servitude.

If Liaoning’s pilot project were extended nationwide, it would boost agricultural productivity and increase rural household incomes – a vital step towards shifting the economy to a more sustainable, consumption-based model.

Fears that landless farmers potentially pose a risk to social stability could scupper any genuine reform – but any loosening of the shackles that tie farmers to the land is a positive development. Watch this space.

Last autumn’s sudden collapse in commodity prices left a lot of China bulls with egg on their faces. Didn’t China’s insatiable demand for stuff, driven by a long-term process of urbanisation and rising incomes, guarantee the good times would roll for another two or three decades?

For the past seven years, commodity prices were essentially considered a simple function of Chinese demand. As the world’s top consumer of aluminium, copper, lead, nickel, tin, iron ore, steel, coal, wheat, rice, palm oil, cotton and rubber, China was thanked (and blamed) for heralding a new era of inflated raw material prices. After the commodities crash, this theory appears in tatters.

Indeed, over the next two or three years China is likely to play only a small role in setting global commodity prices: even if Chinese demand recovers, markets will be overwhelmed by shrivelling demand everywhere else.

But after the rest of the world stabilises and excess production capacity is absorbed – somewhere between 2010 and 2013 – China will again emerge as the key driver of global demand. Assuming that Beijing maintains economic and social stability – and there is no evidence to suggest that it will not – the pace and scale of industrial and urban development in China should drag up commodity prices. China’s enormous size renders its urban growth even more significant for global markets than was Japan’s in the 1960s and 1970s.

The pace of urbanisation in China, largely driven by rural migrants fleeing the penury of the fields for a better life in the city, is unprecedented. In 1980 a paltry 20 per cent of Chinese citizens lived in urban areas, a figure associated with the poorest countries on earth. By 2030, when more than 1bn Chinese citizens will live in towns and cities, that figure will reach 70 per cent – a higher proportion than in Japan or Italy today.

A recent study by the McKinsey Global Institute forecasts that 100 new cities with populations of 500,000 to 1.5m will mushroom across the country over the next 15 years; these will be joined by a further 60 new mid-sized cities with populations of 1.5m to 5m. By 2025, current trends suggest that six new cities – Tianjin, Guangzhou, Shenzhen, Wuhan, Chongqing and Chengdu – will join Beijing and Shanghai with real urban populations exceeding 10m.

As China’s growth and urbanisation continues for another couple of decades, Chinese demand for commodities will rise substantially – especially hard commodities used for building houses and roads. China has only just reached the most commodity-intensive stage of urbanisation, with metal intensity four times higher than in developed countries and twice as high as in other developing countries, according to the World Bank.

The uptick in metal intensity, which began in the mid-1990s and accelerated at the beginning of the 2000s, correlated with an increase in the urbanisation rate from 30 to 40 per cent. In 2007, more than 50 per cent of Chinese steel and 44 per cent of copper demand was gobbled up by the construction and infrastructure industries. Metal intensity growth is projected to peak along with the population growth rate around 2015, but remain high through 2030.

Global commodity markets have tanked and Chinese demand has stuttered. But the hungry dragon is not yet sated – he’s just pausing between courses.

Welcome to the Dragonbeat blog. Today, everyone with a serious interest in global issues needs to know about China. This blog expands the analysis of the Chinese economy previously found in the fortnightly column written by the China Economic Quarterly (CEQ) for FT.com. Dragonbeat’s principal writers are Arthur Kroeber, managing director of Dragonomics Research & Advisory, the parent company of CEQ, and CEQ managing editor Tom Miller. By moving to a blog format where you can expect a weekly post from us every Monday, we hope to provide a space where readers everywhere can share their views on China’s economy and its impact on the world. Our first blog post, written by Arthur Kroeber, is below:

The global financial crisis poses two challenges for China: one of domestic economic management and another of international economic diplomacy. How it addresses these two challenges will in large measure determine whether China takes up what it considers to be its rightful place as one of the world’s leaders, or subsides instead into a Japan-like irrelevance despite the size of its economy.

The domestic challenge is straightforward: China must find a new engine of productivity and employment growth to replace a long-running export engine that is likely to be out of commission for several years.

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