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Twisted tale of kings and markets


For a while it seemed that everybody in Guangzhou wanted to be the Land King of Pazhou. In March of last year, the city government announced an auction for a prime piece of land adjoining the city's new convention centre on Pazhou Island. The government took the bold step of setting the opening bid at a whopping 854 million yuan, an unheard of sum for a single plot as far as local auctions were concerned.

Undeterred, would-be developers bid 204 times during a marathon 90-minute auction. A weary auctioneer raised the bid increments from 2 million yuan to 3 million, then to 5 million before the hammer finally sounded on a winning tender of 1.38 billion yuan, hundreds of millions more than the city had made at any previous sale through public auction.

Local press heralded the winning developer as the 'Land King of Pazhou' - that was, until a few months later at an auction of a nearby plot, when an anonymous Beijing buyer tendered a bid equal to 6,223 yuan per square metre and set a separate local record for price per unit. Pazhou now had two land kings.

Or so it seemed. By January, neither party had produced the required initial investment, and the land bureau was forced to fine both and cancel their usage rights to the properties. The old land kings were dethroned.

By the time the Guangzhou government re-offered the land for auction in February, the market had cooled substantially. Both plots sold, but at a 357 million yuan discount to what the original bidders agreed to pay.

Land auctions on the mainland have come a long way in the two decades since the government gave up its role as the country's sole leaseholder. But as the example of the Pazhou land kings shows, the state's monopoly grip on the release of land for development still paves the way for market distortion.

Of course, all land across the border is state owned. Two things must happen before private investors can build factories, housing or other projects on undeveloped land.

If it hasn't already done so, the government must requisition the land. Most commonly this involves re-zoning farmland and relocating villagers - and this is the root cause of much unrest across the country.

Illegal transfers are often to blame. In April, a Ministry of Land Resources official announced there were more than a million cases of illegal land use reported between 1999 and 2005 involving 330,000 hectares.

But the state remains the only entity legally permitted to transfer farmland to development projects. Under current policy, it needs only to compensate farmers based on the agricultural output of the land.

The difference between that compensation and the market price fetched by the rezoned land is the government's profit margin. It is significant that neither the central nor provincial governments can requisition farmland, but for cities and townships this can be huge business. Beijing's campaign in recent years to scrap taxes on rural residents has taken a significant bite out of local government revenues. As a result, land requisitions in some areas account for up to 50 per cent of revenue at the sub-province level, according to Li Guo, a Washington-based agricultural economist at the World Bank.

Getting the land on to the market - hopefully at the right time and the right price - is the second step.

From 1949 until about 1983, all land was free: real estate was allocated to state entities by central planning agencies or local governments. The early 1980s saw some cities experiment with charging land-use fees, but leases remained technically illegal as they bordered far too closely on an acknowledgement of private ownership. In September 1987, Shenzhen took the lead on early reforms, paving the way for Pazhou by conducting the first auction of land-use rights and issuing the first long-term leases. The legal framework for that bold move did not come until 1988, when China revised the constitution to allow the transfer of land-use rights between individual entities.

The results were both spectacular and immediate. According to a government survey, by last year the mainland's top 100 real estate firms recorded total revenue of 188 billion yuan ... and that accounted for just a tiny 14 per cent of the large and fast-growing market.

'Land auctions have come a long way

... since the government gave up its

role as the sole leaseholder'