Seventeen years ago, Peruvian economist Hernando de Soto coined the phrase “ dead capital” – land and property that could never be used as collateral because ownership had never been legally formalised.
He had in mind the farmers of Indonesia or the tribes of the Amazon. People in these communities all knew who owned what, but there was no land registry and they held no official deeds. De Soto estimated that $9 trillion of capital was locked away in these “dead” assets, which could not be mortgaged. Recognising land rights would release the value and provide the rural poor with a way out of poverty.
Now the Chinese government is experimenting with his ideas. It has been running 33 pilot zones since 2015 – involving one county in each province and two in Zhejiang and Sichuan. Farmers in these zones can apply for mortgages on the basis of a new document – a two-in-one deed that recognises their rights to the land and their ownership of the property on it.
In the past rural land officially belonged to the collective. Farmers only owned the bricks and mortar above the soil. This meant that land could be taken away from them if the local government decided to sell it. As a result few wanted to invest in their homes or even their means of production.
The goal of the 2015 reforms was to give Chinese farmers more choices. They could, in theory, stay and invest in their land (by taking out a mortgage); or they could move to the cities – as many had already done – but draw an income from the land by formally renting it out to other farmers or bigger agribusinesses.
In reality, the mortgages were hard to come by. There was no established market in this type of land and banks had never lent on the basis of the new deeds. Consequently, the banks undervalued the assets and were reluctant to lend large amounts, worried that foreclosing and repossessing would be politically impractical.
But this August the government of Yiwu in Zhejiang – one of the pilot zones – produced its own guide to rural property in the hope of triggering more of the so-called “homestead” mortgages.
According to Southern Weekend the guide’s revised land values were many times higher than previous assessments by the banks, allowing rural folk to access more capital.
The 2015 reforms are only a “small step forward”, says Zhang Limin, deputy director of the Yiwu Land Bureau. “We need to free up our minds, move faster and continue to innovate,” he added. (Zhang’s team worked closely with Shanghai’s Fudan University to produce the price guide.)
Part of the reason the valuations were higher was that they took rental income into account – something banks are not able to do. Properties in Yiwu – famous for its wholesale market – command higher rents because the city is short of warehouse space, Southern Weekend says.
The newspaper gave the example of a local farmer called Ji who was offered a mortgage of Rmb300,000 ($45,288) on his farm before the government price guide came out, but who was then able to access Rmb1.8 million of capital after.
He is using the funds to start a plastics factory. Under the 2015 rules he will retain his land rights even if he takes an urban hukou (household registration permit), meaning his mortgage and rental income will be unaffected (see WiC345).
Counter-intuitively, strengthening farmers’ rights to the land may encourage more of them to move to the cities – an outcome the government actually welcomes
Tellingly, under the conditions of some of the new mortgages, property residing on the land can be demolished – as long as the farmer can prove he has somewhere else to live. That frees the plot up to become part of a bigger, more efficient plantation or other types of development. It “turns soil into gold,” celebrated Xinhua of Yiwu’s new scheme.
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