The world?s second largest economy is increasingly realising the pitfalls of pursuing an aggressive high-growth strategy that is leading to social unrest and tensions at home.
Scale has been integral to China?s growth story. Large projects enabling scale-intensive production have come up in different parts of China, particularly in the industrial hubs of the south and the east. Most of these projects have involved active participation of local provincial governments and their officials. Chinese provincial functionaries have been keen on inviting investments?both domestic and foreign?since establishment of projects contributing significantly to GDP ensure career progression of these officials.
China?s 12th Five Year Plan has declared the government?s intention to bring down GDP growth. But it may well remain an unfulfilled objective as it did in the earlier Plan. This is because the incentives for creating new projects for augmenting GDP growth remain unchanged. Provincial officials have their career prospects firmly tied to success in mobilising new projects. Thus, while the Plan has spelt out a particular objective, the ground realities might ensure that the economy continues to follow the same course as earlier.
While unfulfilment of the Plan objective is an issue, the more serious problem arising from continuation of the old incentives is reflected in China?s land market. The country is experiencing a disturbing increase in illegal land seizures. On most occasions, these seizures are for developing industrial and real estate projects.
According to statistics released by China?s land and resources ministry, there were 37,000 cases of illegal land use during the first three quarters of 2011. On a year-on-year basis, this reflected an increase of 10.8% in illegal cases during 2011. The total land involved in all these cases was 16,400 hectares. More than a third of this, almost 6,000 hectares, was arable land.
All land in China belongs to the state: rural land is owned by village collectives and urban land by municipal land bureaus. Over time, industrialisation and urbanisation has created pressures on the land held by provincial municipal bureaus. As a result, they have had to encroach on to rural land belonging to collectives. Since right to private property is not unambiguously established in China, rural and urban households can only obtain land on lease from either the collectives or bureaus for residential, agricultural, industrial or other commercial use. These leases are for well-defined periods ranging from 40-70 years. Illegal land seizures essentially imply the current leaseholders being displaced from their leases on illegal grounds.
For urban land bureaus and provinces, land ?grab? is justified by current incentives. Making more land available for industry and private developers means their contributing more to overall GDP and strengthening their career progress. Other than individual motives, provinces also benefit from allocation of land to property developers on account of the hefty fees they earn from these allotments. Land is the biggest source of revenue for Chinese provinces after the fiscal reforms of early 1990s.
Two factors would be particularly worrying for Chinese authorities. The first is the finding that more than 80% of the seizures have taken place in central and western China. These regions of China are economically less advanced than other parts of the country. China?s efforts to move towards balanced industrialisation have resulted in an emphasis on growth of new industries in these less-advanced parts. But if the emphasis results in adverse outcomes like land seizures then it is certainly a matter of concern.
The second worrying factor is the steady increase in seizure of arable land. Not only is more than a third of the seized land arable, the growth in seizure of arable land has experienced a 6.7% year-on-year growth in the current year. Increasing takeover of arable land by industry and real estate and its conversion to non-agricultural use has adverse implications for agricultural production and food security in a country that needs to feed 1.34 billion people.
Both these concerns reinforce some pitfalls of the growth strategy followed by China for several years now. These include the problems of expanding industries in face of dwindling supply of urban land, distorted incentives for provincial officials encouraging land seizures and complications created by over-dependence of provinces on land as the sole major source of revenue. At the same time, growth targets imposed ?top down? are clearly destined to fail if the experience of the last and the current plan are any indication. Existing incentives will encourage provinces to go for large and scale-intensive projects that augment GDP. Growth cannot moderate unless these incentives change.
The author is a visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views