Chinese Studies
2012. Vol.1, No.1, 1-4
Published Online May 2012 in SciRes (
Copyright © 2012 SciRes. 1
Dual Land Market and Rapid China’s Urbanization:
Problems and Solutions
Huachun Wang1*, Chunxue Zhao2, Maerhaba Xiaokaiti1, Yue Zhou1, Rui Zhao1
1Academy of Governme n t, Beijing Normal University, Beijing, China
2Research Institute for Fiscal Science, Ministry of Finance, Beijing, China
Email: *
Received March 15th, 20 12 ; revised April 29th, 2012; accepted May 15th, 2012
The dual land market has greatly encouraged the economy and urban development and created far-reach-
ing effects on excessive land expropriation and land finance. Using an analytical framework of dual mar-
ket structure model, this paper investigates the relationship between local land finance and China’s rapid
urbanization. Low-cost land expropriation is the main reason why extensive urbanization goes so fast in
recent China. Granting farmers the complete land rights, implementing property tax to consolidate local
tax bases, unifying the dual land market are helpful to achieve both social equity and land use efficiency
in Chinese rapid urbanization process.
Keywords: Dual Land Market; Land Expropriation; Land Finance; Urbanization; China
A new land development process was introduced in China
upon the adoption of economic reforms since the early 1980’s.
Land use rights could be transferred as a transaction of owner-
ship. China has been undergoing a rapid urbanization since then,
the urbanization rate rose from 37.66 to 51.27 percent between
2001 and 2011 (NBS, 2012). Rapid urbanization has resulted in
much arable land being used for non-agricultural purposes
through land expropriation. Land distribution and its impact
have been given less attention compared with the rapid gross
domestic product (GDP) growth. Through the investigation of
the formation of dual land market in the rapid urbanization, it
can be observed that the formation of the dual land market is a
complicated process involving conflicts of interests.
The legal frame work for land expropriation is defined by the
Land Administration Law (LAL) enforced in 1998. The state
may expropriate land for public interest. However, public in-
terest has not been clearly defined. In fact, both the land for
urban infrastructural and the land for commercial purpose are
satisfied by land expropriation. Neither the rural collectives nor
farmers can negotiate with the urban land users about the prices
or other requirements (Qu, Heerink, & Wang, 1995).
The compensation for arable land constitutes three compo-
nents according to the LAL. The compensation for land is six to
ten times the derived land productivity, which is the monetary
value of the annual average agricultural output value over the
past three years. The compensation for resettlement is four to
six times the derived land productivity. The last item is the
compensation for accessory assets in land. The maximum
compensation for land expropriation cannot exceed 30 times the
derived land productivity.
However, when the land is leased out for commercial pur-
pose, the price will be much higher. The fair market value of
the land and the negative impacts of land expropriations have
not been considered. The dispossessed farmers are largely ex-
cluded from sharing the land value appreciation resulting from
land development projects (Wang & Scott, 2008). There are
currently over 40 million dispossessed farmers and 70 percent
of them are related to rural land expropriation in urbanization
(UIE, 2007a). Low compensation provoked dispossessed farm-
ers into violent clashes with local authorities (Zhu & Proster-
man, 2007). Land-related issues have recently become the top
cause of rural grievance, local social unrest and political insta-
bility (Carl, 2006; UIE, 2007b).
What is the relationship between land expropriation and ur-
ban expansion? Why the central government cannot curb local
land expropriation? What further measures should be taken?
This paper aims to address these questions. Based on an ana-
lytical framework of dual market structure theory, this paper
focuses on the formation and operating framework of the dual
land market, reveals its influence on the behaviours of local
land finance and excessive land expropriation. The paper is
organized as the following. After a brief introduction of the
formation of dual land market in part two, part three describes
the public land leasing strategies adopted by local governments
in China. Part four rationalizes local land finance in a wider
context of economic and political institutions in China. Part
five examines the central government’s response to local land
expropriation. Policy implications are discussed regarding fu-
ture reform of the land market.
The Formation of the Dual Land Market and the
Dynamics of Land Transactions
As one of the pillars of Chinese public ownership, land is
state-owned or collectively-owned, which emphasises that the
government should monopolise the supply of land (Ho & Spoor,
2006). Rural land can only be expropriated by the local gov-
ernment to ensure that all urban land belongs to the state. A
dual land market emerged with the coexistence of market-ori-
*Corresponding author.
ented and non-market-oriented leased land under the public
ownership and the monopoly land expropriation system. The
dual land system differs not only in terms of the cost of obtain-
ing land use rights but also in terms of property rights and the
freedom of land transaction. To understand the dynamics of
land transactions in China, it is important to understand the
formation and dynamics of the dual land market (as Figure 1).
Dual land market works as the following. Local governments
can lease the land through negotiation, tender or auction after
land expropriation. As a typical administrative allocation me-
thod, negotiation between the land user and the government
about leasing terms is the least transparent approach. Both ten-
der and auction, which are market-oriented mechanisms, take
place through public bidding. The highest bidder might be se-
lected, but other factors, such as the land developers’ reputation
and the purpose the land is to be used might be taken into ac-
As of Figure 1, local government plays an important role in
the formation and dynamics of the dual land market. State-
owned units can apply for a land expropriation permit from the
local government. They can then expropriate rural land by pay-
ing a standard compensation fee to the farmers. The local gov-
ernment can expropriate land directly from farmers and then
allocate it to state units for public purposes. The government
would also negotiate with the occupiers for public purpose and
compensate them for their loss (Lin & Ho 2005; Yao, 2002).
The use right of state-owned land can be exchanged in the
market, but rural land can not. The local government monopo-
lises land supply, it can expropriate rural land at a low price and
sell it at a market price. Huge profits generate from the great
difference between land expropriation compensation fees and
land leasing prices (Tan, Xie, & Lu, 2005).
Since the early 2000s, the revenue from residential and
commercial land leased out by tender or auction has been in-
creasing, while that of industrial land leased out by negotiation
almost stable. Table 1 presents the national total area of leased
land in 2007. As shown in Table 1, the proportion of land
manufacturing accounted for 57.7 percent, while the residential
and commercial land was the second and third. However, land
revenue from the residential land is the highest while the reve-
nue from the manufacturing purposes is the least. These figures
show that land development activities have been rapidly grow-
ing as local governments have become increasingly involved in
industrial development and urban expansion (Chai & Wu,
Table 1 also presents the structure of land sites leased out by
negotiation, auction or tender. The national total number of
land sites leased out by negotiation accounts the large share, but
the revenue of land sites leased out by auction or by tender
share more. Leasing out industrial land at low prices implies
that local governments are incurring net losses.
Figure 1.
The formation of dual land market in China.
Table 1.
Land leasing in 2007 in China.
Total land sites leased outSettled amount Net reven u e
Land leas ing t ypes Land usage types Mu PercentageMillion yuanPercentageMillion yuan Percentage
Land lea si n g price
Total 3524408.9 100% 1221672.1 100% 454141.6 100% 34.7
Manufacture 2034428.4 57.7% 211020.3 17.3% 6335.4 14.0% 10.4
Commercial 404619.5 11.5% 234950.5 19.2% 83327.2 18.4% 58.1
Residential 998628.3 28.3% 753088.4 61.6% 300116.5 66.1% 75.4
Total land leasing out
Others 86732.7 2.5% 22612.9 1.9% 7340.5 1.5% 26.1
Total 1764941.4 100% 214186.2 100% 75067.1 100% 12.1
Manufacture 1505055 85.3% 146975.2 68.6% 45253.1 60.3% 9.8
Commercial 73003.7 4.1% 23469.6 11.0% 11473.3 15.3% 32.2
Residential 119098.4 6.8% 29765.7 13.9% 13854.5 18.4% 25.0
Others 67784.4 3.8% 13975.7 6.5% 4486.3 6.0% 20.6
Total 1759467.3 100% 1007485.9 100% 379074.5 100% 57.3
Manufacture 529373.3 30.1% 64045.1 6.4% 18104.3 4.8% 12.1
Commercial 331615.7 18.8% 211481.0 21.0% 71853.9 19.0% 63.8
Residential 879530.1 50.0% 723322.7 71.7% 286262.0 75.4% 82.2
Tender or auction
Others 18948.3 1.1% 8637.2 0.9% 2854.3 0.8% 45.6
ote: Mu, a unit of ar ea in China (Per Mu = 0.0667 hectares); Source: China statistical yearbook of land and resources (2008).
Copyright © 2012 SciRes.
Local government monopolies land supply in China. In order
to extract more land revenue, many local governments set up
Land Reserve Centers to limit land supply for commercial and
residential purposes by auction or tender for a higher price.
Local governments prefer maximize current-period land reve-
nue by under-supplying residential and commercial land. Al-
though land sites leased out by tender or auction is less, the
revenue obtained constitutes a majority of local extra-budgetary
revenue (Table 1). Between 2000 and 2010, the average leasing
price of industrial land almost stable while the prices for com-
mercial and residential land rose several times (NBS 2011).
Economic efficiency was not a factor in site determination
under land leasing by negotiation. That was why low and flat
land-use density buildings could be seen in the downtown area
in China (as Table 2). Table 2 reveals a land-use pattern
unlikely to be observed in western countries where industrial
use accounted for only four to ten percent of built-up areas. The
share of industrial use in China was more than twice as high as
that in industrialized countries. Industrial land use accounted
for 20 - 30 percent of the urban land in China. Residential land
use accounted for less than 50 percent of all urbanized land.
From three to five percent of industrial land in cities was vacant
and 40 percent was used inefficiently (Yang & Ralph, 2007).
The reason why local governments sacrifice the extra-budge-
tary revenue by negotiation with manufactures is mai nly rela ted
with the current political system. According to the public fi-
nances reform implemented in 1994, all of the revenue from
land leasing belongs to local governments’ extra-budgets, so
they should lease the land out by tender or auction for residen-
tial or commercial usage in order to generate more extra-budge-
tary revenue. Leasing land to manufacture sector may lead to a
gain in local budgetary revenue through value-added tax, but
the gain is limited after 75 percent of them turn over to the
central government.
Current Political System Drives Local
Government Excessive Land Expropriation
Under the current Chinese political system, local officials are
mainly evaluated by economic indicators, which mainly include
GDP growth, employment, and the fiscal revenue. Therefore,
local officials like to lease land for manufacturing purposes at
low prices because the manufacturing sector can generate local
GDP and employment. Then, they would have a potential
chance for political promotion (Chan, 2003). Land revenue
accounts for a large part of local fiscal income. Sales of land
use rights increased from 231.3 billion yuan in 2001 to 1423.6
billion yuan in 2009 (Table 3). Major cities, such as Hangzhou
and Shanghai, collected about 100 billion yuan recent years
(NBS, 2010).
Excessive land expropriation partly contributed to social in-
justice and economic inefficiency. The industrial investment
with low land incentive leads to serious waste of rural arable
land, for example, there were 6015 industrial parks set up by
various levels of local government across the country in 2006
(Zhai & Xiang, 2007). A survey of 16 cities in 2005 showed
that about 50 percent of the new land was under development
(Xinhua News, 2006).
So far, most of the policies taken by the central government
have not addressed the roots of land-related issues in the dual
land market. For example, the state requires local governments
to raise the compensation to maintain the farmers’ living stan-
dards. However, the local governments have no incentive to do
so. When the land leased at low prices, the central government
require local governments to lease by auction or tender, but the
local officials evade such regulations.
Prospects of the Dual Land Market
Market mechanisms need to be introduced into land expro-
priation. Land property rights to the farmers need to be estab-
lished. Granting farmers to negotiate with land users about
compensation fee would improve their welfare and contain the
manufacturing investment by cheap land. It is crucial to distin-
guish public purpose from commercial purpose. The state
should not be responsible for land expropriation for commercial
purpose; instead, it should be decided by negotiation between
the farmers and potential land users (Ding, 2003). All land for
commerce, tourism, recreation, finance, services and commercial
housing must be supplied by tender and auction. Government
Table 2.
Land use in major Chinese cities in the 1991. Unit: %.
Residential Industrial Infrastruc tur e Green space Special uses
Shanghaia 49.6 30.5 7.3 - 12.6
Beijinga 39.1 20.1 5.5 - 35.3
Tianjin 26.1 35.0 29.6 4.3 4.3
Guangzhoua 35.9 37.0 17.1 - 9.9
Shenyang 29.6 28.0 23.8 6.9 11.8
Chongqing 34.0 33.4 27.0 3.1 5.4
Wuhan 26.8 30.4 25.0 7.0 8.8
Zhenzhou 25.5 28.3 37.8 7.9 0.6
Xi’an 44.5 29.3 25.9 0.1 0.2
Harbin 38.0 26.3 26.6 6.6 1.8
Note: Infrastructure includes public services a nd transport a tion, etc. Source: Nanj ing University of Geography and Lake Study, 1999. a Shanghai, Beijing, and Guangzhou
id not survey public services and infrastructure. d
Copyright © 2012 SciRes. 3
Table 3.
The revenue from land leasing and its position in the local fiscal reve-
Year Local fiscal revenue
(billion) Land revenu e/local fisc al
revenue (%)
2001 780.3 -
2002 851.5 34.8
2003 980.5 37.8
2004 1244.1 47.4
2005 1509.2 36.5
2006 1828.1 42.0
2007 2356.5 50.9
2008 2864.5 33.5
2009 3285.1 48.8
2010 3538.3 76.6
Source: China statistical yearbook of land and resources (2002-2011).
should encourage fair land transaction within market channels
(Zhu, 1999).
The collective should have a bundle of complete land prop-
erty rights, and the farmers would be allowed to rent and trans-
fer the rural land (Zhang, 2000). Land privatisation is helpful to
unify the dual land market. Thus, local governments focus on
regulating land use through effective urban and land use plan-
ning (Yi, 2009).
The root of land-related issues in urban expansion lies in the
dual land market and low-cost land expropriation, unifying the
dual land market and allowing farmers to negotiate with poten-
tial land users is an ideal choice. That would help dispossessed
farmers to benefit from the land appreciation in urbanization
Local extra-budgetary revenue reduction would be offset by
property tax. A property tax on existing residential and com-
mercial real estate can be introduced to consolidate local tax
bases. With the introduction of property taxes, the negative
impacts of marketizing land expropriation on local fiscal reve-
nue would be offset.
Thank the critical comments given Prof. Jianping Xie,
Southwest University of Chongqing, and Dr. Xinchuan Wang,
Economic Daily of China.
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