Along with abolishing China's one-child policy, privatizing rural land is said to be another top reform for China's new leaders.
Bank of America's Ting Lu writes that the key to urbanization is reforming the rural land system.
China's urbanization rate is said to have reached 51 percent in 2011, but if we were to strip away migrant workers without hukou (residency permits) and homes, the real urbanization ratio is closer to 36 percent.
Many argue that China is near its Lewis Turning Point i.e. the point at which the shift of people from agriculture to manufacturing does not lead to productivity gains, but Ting argues that "speeding up urbanization could both boost demand and improve efficiency, so it’s absolutely right for new leaders to focus on urbanization to sustain China’s growth and improve social harmony."
What's more, he says collective land ownership in rural China is the biggest impediment to urbanization.
We have previously written that China's agriculture sector is extremely inefficient and farmers frequently protest against land grabs. This is largely because of China's land laws that prevent farmers from owning land and being able to borrow against it. But farmers have slightly better rights to their residential homes.
This is because Chinese laws allow a rural household that gets an urban residency permit will have to renounce their share of collective ownership of farming land, but can hold on to their rural property which gives them rights the land below their homes. And this in turn leads to a waste of rural land. From Ting:
"Surging home prices in China in the past decade is to a large extent due to the under-supply of residential housing, which in turn is the consequence of under-supply of land for property development. We are sympathetic to the 1.2mn km2 “red line” (or 1.8bn Mu) for farming land as the ratio of imported grain to China’s total grain consumption has increased by 1ppt each year in the past five years and now is at around 10%.
But we see a big waste of rural residential land. Close to 200 million migrant workers don’t live in their rural homes except during the Chinese New Year holiday. Actually, urban residential land only totaled 11,000 km2, while the residential land in the rural area is estimated at 92,000 km2.
Therefore, the focus for future land reform is to reduce the waste in residential land in the rural area and to expand the urban area from the current level at 39,000 km2, which is only 0.4% of total national area, vs. 2.6% in the US and 4.0% in Japan."
But land reforms are also necessary because existing land laws created vast social and income inequality:
"China experienced rapid industrialization but rather slow urbanization in the past decade, resulting in 150mn migrant workers living in urban areas without having urban residence permits. Most of those migrant workers cram in factory dorms, are excluded from urban public services and social welfare systems, and leave a total of around 58mn of their children in rural areas.
It’s true that for many small cities migrant workers can get urban residence permits by buying homes there, but it’s hard for most migrant workers to accumulate enough wealth to do so partially because they could not sell (or capitalize) their cultivated land and residential land and partially because home prices rose too much as a result of limited supply."
Ting writes that China could give farmers more land rights and local governments could purchase rural residential land and reabsorb them into land for farming. The government could then expand urban areas and farmers willing to sell their residential lands could get urban Hukous after buying urban homes which could be part of the nation' social housing.
And remember the hukou brings with it benefits like health care, pension, and free education among others, so this could go a long way in limiting social unrest among Chinese citizens. Ting thinks these reforms will however take place after 2015.
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