|Title||Fixing China’s Distorted Urban Land Quota System|
|Year of Publication||2015|
|Authors||Xiao Y, Zhao J|
|Series Title||Paulson Institute Policy Memo|
Chinese cities face two related problems: first, a shortage of land available for development, and second, wasted allocation of that land. Taken together, these two problems constrain local economic and social development at a time when cities are growing rapidly. Indeed, more than fifteen years after China decided to marketize land in 1998, China’s land market, to a large extent, remains inefficient. This distortion of China’s urban land market derives mainly from problems of supply. There are three main sources of urban land supply in China: (1) the conversion of agricultural land into urban land; (2) the conversion of rural construction land into urban land; and (3) the redevelopment of the existing stock of urban land. This memorandum focuses on the first and second sources of supply. It begins by exploring the sources of inefficiency in China’s current land market. The government has attempted to undertake reforms, but China’s one size-fits-all national land allocation policy does not sufficiently take account of local variations. In practice, the inflexibility of land policies at the local level prohibits market Introduction mechanisms from responding to—and correcting—these inefficiencies. The memo then turns to two specific reform experiments: “Quota linking” is an innovation that has allowed local governments to get around quota restrictions. If they increase the supply of arable land by reducing construction in rural areas, local governments are permitted to increase their quota of land for development in urban areas, thus establishing a “link.” “Quota markets” are a further evolution of this idea and have marketized the quota system by permitting officials in selected municipalities to trade their quotas outside local counties and in the entire prefecture. Both experiments are controversial, yet the Chinese government has decided to move forward and scale them up. By 2013, Beijing had already allowed 29 provinces to proceed with quota linking or quota market experiments. With these programs now underway, this memorandum offers several recommendations aimed at putting safeguards in place to minimize the adverse effects and side effects of quota markets.