What Conditions Are Needed to Advance Mortgage of Rural Land Contractual Management Rights

The State Council recently issued the "Guiding Opinions on Carrying Out Pilot Programs for Mortgage Loans on Rural Contracted Land Management Rights and Farmers' Housing Property Rights." This is a solid step forward in the reform of the rural land system and an important exploration of rural land capitalization. From domestic and international practice, land capitalization should have at least three basic requirements, namely clearly defined land property rights boundaries, market value, and an asset transformation platform.

Since the Third Plenary Session of the 18th Central Committee, a series of explorations we have carried out in rural property rights system reform and market system construction have accumulated much good experience, laying a solid foundation for advancing mortgage of rural land contractual management rights. First, long-term stability of land contracting relations and the issuance of rights confirmation certificates have laid the property rights foundation. Second, the increase in land economic value has provided a value carrier and basis. Third, the construction of the rural property rights market system has created trading conditions.

Mortgage loans on rural land contractual rights generally occur between individuals or cooperative organizations and financial institutions. Compared with rural land trusts and rural land securitization, the participating entities are relatively few, and risk externalities are limited, but the degree of land capitalization is relatively high, and derived risks are relatively large, requiring proper risk identification and prevention. For financial institutions, they face policy risks and operational risks. For the government, it faces guarantee risks and social stability risks. For farming households, they face the risk of “losing rights and losing land” and the risk of value deprivation.

For a fairly long period in the future, the rural land issue will remain a key issue affecting urban-rural development and the modernization of industry and agriculture. If the land system reform does not break new ground, the entire country's modernization process will inevitably be hindered. The pilot program for mortgage of rural land contractual management rights is the latest exploration of reform. We must avoid insufficient risk prevention causing reform to “go into reverse,” and we must also avoid merely experimenting without reforming and thus standing still. On the basis of domestic property rights institutional conditions and the realities of rural development, we should fully draw on foreign experience and advance the standardized and orderly development of rural land contractual management rights.

At present, China's agricultural development has entered a new bottleneck period. External challenges and internal contradictions are intertwined, and dilemmas and multi-layered difficulties are constantly increasing. Simple patching and tinkering with institutions and mechanisms will find it hard to escape the predicament. We must start from the land system, a key institution affecting urban and rural areas and even the overall reform agenda, and by loosening land factors guide and reallocate capital, technology, and other production factors, relying on the modernization of factors to drive agricultural modernization.

The State Council recently issued the "Guiding Opinions on Carrying Out Pilot Programs for Mortgage Loans on Rural Contracted Land Management Rights and Farmers' Housing Property Rights." This is a solid step forward in the reform of the rural land system and an important exploration of rural land capitalization. It will certainly bring broad and far-reaching effects, but we should also fully recognize its complexity and difficulty and properly handle risk responses.

What Conditions Are Needed to Advance Mortgage of Rural Land Contractual Management Rights

From domestic and international practice, land capitalization should have at least three basic requirements, namely clearly defined land property rights boundaries, market value, and an asset transformation platform. Since the Third Plenary Session of the 18th Central Committee, a series of explorations we have carried out in rural property rights system reform and market system construction have accumulated much good experience, laying a solid foundation for advancing mortgage of rural land contractual management rights.

First, long-term stability of land contracting relations and the issuance of rights confirmation certificates have laid the property rights foundation. Only when property rights are clearly defined can property rights holders independently realize leasing, compensated transfer, or asset restructuring, mortgage, or pledge to obtain loans through factor markets, and only then can property rights transaction contracts remain stable. For a long time, theoretical circles have debated the merits of private property rights versus public property rights, and a basic consensus has now been reached, namely that as long as property rights are clear, ownership is not the most important thing. Private land ownership is not a necessary condition for land capitalization. Under the premise of collective land ownership, as long as property rights are clear and stable, land capitalization has a foundation.

Since reform and opening up, China has implemented rural land system reform centered on the “separation of two rights,” namely ownership and contractual management rights. Land property rights relations have been adjusted and optimized, but property rights relations have not been fundamentally straightened out. The subject of land ownership is nominal, farmers' land contractual management rights are often adjusted and extremely unstable, the division of the property rights system is unclear, powers and functions are incomplete, and property rights management and registration lack standards, resulting in insufficient rural land mobility and excessively high land transaction costs. In recent years, China's rural land system reform centered on the adjustment of property rights relations has continued to deepen, and a rural collective land property rights system with clear property rights, explicit powers, safeguarded rights and interests, and smooth circulation is taking shape.

In order to fundamentally stabilize rural land contracting relations, the "Decision of the Central Committee of the Communist Party of China on Several Major Issues in Advancing Rural Reform and Development" adopted by the Third Plenary Session of the 17th Central Committee proposed, “grant farmers more complete and guaranteed land contractual management rights, and existing land contracting relations must remain stable and unchanged for a long time.” The long-term stability of land contracting relations gives farmers more stable property rights and land operators longer-term expectations, equips rural land with the property rights conditions for market exchange, enhances the stability of land property rights transaction contracts, and promotes the smooth circulation of rural land. At the same time, the confirmation and certification of rural land rights has been accelerated, and land property rights boundaries have become clearer, providing basic conditions for the market-based circulation of rural land property rights and the reasonable distribution of benefits. By the end of 2014, the area of contracted cultivated land transferred nationwide was 403 million mu, 6.3 times that at the end of 2007, and the transfer ratio reached 30.4%, 25.2 percentage points higher than at the end of 2007.

Second, the increase in land economic value has provided a value carrier and basis. Rural land capitalization is a process of converting land assets into the current market exchange value of assets based on their returns, and land value is crucial to the capitalization process. According to the view of British economist D. Pearce, land value consists of three parts: actual use value, option value, and existence value. In China's rural land value system, in addition to the above three values, land also has social security value, carrying functions such as farmers' employment and old-age support.

For a long time, due to the lack of reasonable mobility, rural land has existed only as a natural resource. Land value has been expressed more as actual operating value, with low transfer value, making capitalization difficult. At the same time, the traditional agricultural industry chain is relatively short, limited to primary agricultural product production, basically selling whatever is produced, and the industry profit margin is relatively low, limiting the economic value of land.

In recent years, the state has intensively issued a series of policies to strengthen agriculture and benefit farmers. The functional forms and industrial chains of agriculture have continued to expand. In particular, industries with high added value and quick investment returns, such as facility agriculture and leisure agriculture, have developed faster, raising comprehensive agricultural profits, driving growth in cultivated land operating value and land demand. Land has concentrated toward new types of operating entities, the value of scattered land has been integrated, the tradability of land has increased, and the mortgage value of land has risen, providing a value carrier for the entry of financial factors.

For example, in response to problems such as low mortgage value of scattered land and financial institutions' reluctance to carry out land mortgage business, Jiaxing in Zhejiang, on the basis of rural land rights confirmation and certification, confirmed the land management rights of new types of agricultural operating entities and issued land contractual management right certificates and other property right certificates (that is, facilities invested and built on the land, etc.). New types of operating entities can directly use land management right certificates and other property right certificates at rural credit cooperatives for mortgage financing. This model operates because of the expected returns of the land and the convenience of centralized disposal of management rights. By the end of 2014, the city had issued 204 land circulation management right certificates, covering 41,700 mu, and the balance of special loans reached 310 million yuan.

Third, the construction of the rural property rights market system has created trading conditions. In Marx's view, only when land has the right to bring returns and can enter market circulation and be freely traded can land rights be capitalized. Assets with poor tradability are difficult to financialize, and assets with insufficient liquidity cannot be accurately priced. Land must enter the market and bring expected returns to owners through transactions before land assets can be converted into land capital. The construction of land property rights trading markets and platforms is crucial to rural land capitalization. Without a sound land property rights trading market, it would be difficult for various property rights attached to land assets to be freely traded, and land capitalization would be difficult to realize or would come at too high a cost. For a long time, based on the importance of land to farmers' production, life, and employment, the government imposed very strict restrictions on transactions in rural land rights relations. The rural property rights trading market developed slowly, and the tradability and liquidity of land were insufficient.

In recent years, the state has gradually relaxed controls, and rural land operating income rights have gradually acquired the tradability and value stability needed to serve as collateral. Since 2008, the state has successively piloted and explored mortgage financing of land contractual management rights in many places through ministerial documents. In the 2014 Central “No. 1 Document,” it was even more clearly proposed to “grant farmers the powers of possession, use, income, circulation, and mortgage and guarantee of contractual management rights over contracted land” and to “allow the management rights of contracted land to be mortgaged to financial institutions for financing.”

At the same time, the construction of the rural property rights trading system has accelerated, and various financial services and intermediary services have also developed rapidly, enhancing rural land mobility. According to statistics from the Ministry of Agriculture, by the end of 2012, more than 800 counties (cities) and more than 13,000 townships (towns) nationwide had established land circulation service centers. In addition, the rural social security system has continued to improve, the social security pressure borne by rural land has gradually weakened, and the asset realization capacity of land has strengthened. This in fact “reduces the burden” on mortgage of rural land contractual management rights and increases the enthusiasm of financial institutions to carry out land mortgage business.