How to Understand Innovation in China's Land Contract System

Currently, China's land contract system reform is moving forward. The registration and certification of land contract management rights, long-term stability, transfer, scaled operation, and industrial and commercial capital entering agriculture, among other things, have attracted much attention from society and academia. Views on the future direction of the land contract system also differ among scholars. Some advocate stabilizing the smallholder economy; some advocate reverse leasing and subcontracting; some advocate family farm operations; some advocate cooperative operations; and some advocate company and enterprise operations. The list goes on. How should these issues be viewed? In my opinion, it is necessary to step outside these specific issues and view the status and role of the land contract system from a macro perspective.

First, discussing innovation in the rural land contract system must be viewed from the perspective of establishing a market economy system. What is a market economy? It is contract. Clearly defined property rights, the free flow of factors, and contracts protected by the state, these three are indispensable. Returning to rural areas, rural markets are divided into product markets and factor markets. The agricultural product market was fully liberalized in 2004, and it can be said that a unified, open, competitive, and orderly market system has basically been established. However, the rural factor market is extremely unsound, especially with regard to land. In recent years, the flow of rural labor and capital has gradually been liberalized. Why does the agricultural land market not work? Ultimately, it is because ownership does not belong to farmers but to the collective. This collective can be the villagers' group, and in some cases the village committee, while farmers only have contract management rights. In that case, the problem arises: if ownership does not belong to farmers, how can it be effectively protected? The state is actually also trying to find solutions. In 1993, it issued “30 years unchanged”; in 2003, the Land Contract Law continued to emphasize “30 years unchanged”; in 2008, it issued “land contract management rights remain stable and unchanged for a long time”; the Property Law simply listed land contract management rights as usufructuary rights and gave them property rights protection; and in 2013, the No. 1 Central Document again required registration and certification of contracted land nationwide. These laws, regulations, and policies are all the clearly defined property rights we discussed earlier. To put it plainly, they establish a kind of quasi-private property rights for rural land. In addition to these, the state also encourages land transfer. The Third Plenary Session of the 18th Central Committee also proposed that land contract management rights can be mortgaged, guaranteed, and used as shares. These all fall within the category of promoting the free flow of factors. In addition, the 2014 No. 1 Central Document also proposed the separation of three rights, separating ownership, contract rights, and management rights. This is a very clear policy signal, namely that the state wants to strengthen protection of management rights, because previously there was no expression of this right. That is, it wants to strengthen protection for land-inflow entities such as industrial and commercial capital, bosses, large households, and family farms, so that they have confidence in long-term stable investment. This falls within the category of strengthening contract protection. From the perspective of establishing a market economy system, this helps us understand the concepts of registration and certification, transfer, mortgage and guarantee, shareholding, and the separation of three rights. This is the first aspect I want to discuss.

Second, discussing innovation in the rural land contract system must be viewed from the perspective of the two centenary goals. The 18th National Congress laid out the two centenary goals: to complete the building of a moderately prosperous society in all respects by the 100th anniversary of the founding of the Party, and to achieve modernization by the 100th anniversary of the founding of the People's Republic of China. This goal is very grand, and of course very difficult. From the experience of countries around the world, to achieve this grand goal, there is probably only one path, namely the industrialization of an agricultural country as proposed by the elder Mr. Zhang Peigang. The central leadership sees this issue very clearly. At the Fifth Plenary Session of the 17th Central Committee, the central leadership proposed advancing industrialization, urbanization, and agricultural modernization in parallel. This is very correct. Why say so? To achieve industrialization, two major problems must be solved: where labor comes from, where raw materials come from, and where products go. Obviously, labor must come from rural areas, that is, transferring the unlimited supply of rural labor described by Lewis into industry; as for raw materials, agricultural products, as important industrial raw materials, must be supplied in sufficient quantities; as for products, both rural and urban areas must develop product markets. Of course, urban consumption capacity is stronger, so more people need to be transferred to cities, and real estate and consumption can both take off. Understanding this layer of meaning makes it possible to understand the painstaking intentions behind the current promotion of new urbanization and the "three 100 million people." Therefore, we can clearly see that the traditional smallholder economy cannot support rapid industrialization and urbanization. Agriculture must take the path of scaled, intensive, specialized, and market-oriented development. Only in this way can labor productivity be raised and more labor be released to enter cities; can the commodity rate of agricultural products be raised, thereby providing guarantees for industrial raw materials and urban life; and can the rural population be thoroughly transferred, giving solid support to urbanization and industrialization. Now returning to the main subject: since the direction of agricultural development is the path of scaled and intensive development, the land contract system must inevitably serve it. That is why there is comprehensive promotion of registration and certification and land transfer. I believe that in the near future there will also be a land exit mechanism, and the land market will be further opened. By the way, some scholars still firmly support the smallholder economy and believe that scaled land operation will leave small farmers displaced and homeless. In my view, this worry is a matter of the adaptability between the pace of advancing scaled agriculture and economic development, not a matter of direction. Where will this bizarre theory lead China's modernization?

The market economy system and the goal of industrialization are the two keys to understanding the land contract system, the agricultural operation system, and even China's path of economic development. I believe this explanation is persuasive.