Background:
China’s rapid industrialisation has brought land supply to the forefront of central government policy. Sustained economic growth requires a consistent and adequate supply of industrial land; however, the scarcity of land resources has increasingly constrained the government’s ability to meet this demand.
A key structural constraint has been the legal restriction confining commercial and industrial development to state-owned urban land. Under the pre-reform framework, the extensive rural collective land was legally inaccessible for such purposes. Although ongoing urbanisation has periodically converted rural areas on the urban periphery into state-owned urban land, thereby creating additional supply, the pace of such conversion has consistently lagged behind market demand.
In response, the Chinese authorities have introduced a range of regulatory measures to address these constraints. Two particularly notable reforms are: (i) the formal removal in 2020 of the legal prohibition on using rural collective land for commercial and industrial development; and (ii) a significant reduction in the statutory maximum term for industrial land use rights, from 50 years to a default of 20 years. A brief summary of each reform is set out below.
Expanded rural land market access
On 1 January 2020, the amended Land Administration Law of the People’s Republic of China (“PRC Land Law”) came into force, following its adoption by the Standing Committee of the National People’s Congress. The amendment deleted the provision that had required non-agricultural construction to be carried out on state-owned land, thereby formally opening rural collective construction land to commercial and industrial use for the first time. As a result, eligible rural collective land became legally capable of being entered into the market and transacted. The amended PRC Land Law also established the legal framework and procedural requirements governing the development and transfer of such land.
At the local level, numerous provincial and municipal governments have promulgated implementing rules to give effect to the national amendment. We have reviewed the implementing regulations issued by Guangdong Province, Sichuan Province, and the Songjiang District of Shanghai. These local regulations indicate that the market access and transaction processes for rural collective construction land will be broadly modelled on those applicable to urban state-owned land. The full life-cycle of rural land development (covering listing, grant, leasing, and payment of land grant fees or rent) will be subject to close supervision by the relevant local authorities. A key distinction, however, is that proceeds from rural collective land transactions are to be paid to the relevant rural collective economic organisation, rather than to the State Treasury as is the case with urban state-owned land transactions.
The following cases, which have been publicly reported, illustrate the practical application of these reforms:
- Xihongmen Town in Beijing. With the consent of local farmers and the relevant rural collective economic organisation, a parcel of rural collective land measuring 32,500 square metres was sold to the local water authority for the construction of sewage infrastructure.
- Lingshui Li Autonomous County in Hainan. A parcel of rural collective land was leased to a local enterprise for the construction and operation of a petrol station. Under the arrangement, the rural collective economic organisation is entitled to receive rental income as well as a 10% share of the profits generated from the operation of the petrol station.
Shortened land use terms
On 16 November 2022, the Ministry of Natural Resources issued a Circular on Improving Policies for the Supply of Industrial Land to Support Economic Development (“2022 Circular”). Prior to the issuance of the 2022 Circular, enterprises acquiring industrial land would typically obtain a land use right (“LUR”) with a fixed term of 50 years by way of grant. Under the 2022 Circular, the Ministry of Natural Resources sought to diversify the supply arrangements for industrial land by introducing three alternative models: (i) grant of a LUR with a flexible term of less than 50 years; (ii) land leasing for a term of between 5 and 20 years; and (iii) a hybrid arrangement combining an initial lease period with a subsequent grant of the LUR.
A number of local governments have since issued implementing rules to give effect to the 2022 Circular.
- Shanghai:: A 20-year LUR term has been established as the default for industrial land grants. A 50-year term may exceptionally be granted where specified investment thresholds are met, including where the total investment amount exceeds RMB 1 billion.
- Guangdong and Shenzhen: A 20-year LUR term applies to standard industrial projects, with a 30-year term available for projects classified as major investments.
Local implementing rules also address the question of term expiry. In certain circumstances, and subject to compliance with applicable conditions (such as no change of use and adherence to planning requirements), land users may be permitted to renew their LUR or lease upon expiry at the same price as the original grant or lease. This renewal mechanism is intended to address investor concerns regarding the continuity of production operations upon the expiration of a 20-year term.
TW Observation
In our view, the reforms described above represent a positive development for multinational corporations considering establishing or expanding production bases in China. The shift towards shorter LUR terms will materially reduce upfront land costs, while the opening of rural collective construction land to commercial and industrial use significantly broadens the range of available locations, including in areas that were previously inaccessible for such purposes.
Beyond the reforms discussed above, local governments are deploying a range of additional incentives to attract foreign investment, including the “build-to-rent” model, under which the local government constructs factory premises to an investor’s bespoke specifications and then leases the completed facility to that investor. We have previously published a newsletter on this model (
The "build-to-rent" model in China – what you need to know).
