In the past 20 years or so, China’s real estate market has experienced phenomenal growth. Hundreds of skyscrapers bursted into the sky during the two decades and many more are coming. This dramatically changed the landscape of many cities in China. All these skyscrapers and other real estate developments are built on a unique land ownership system. The system is still in its primary state of formation, thus uncertainties exist in many crucial areas. In 2007, the first Property Law of People’s Republic of China was enacted and clarified some of the uncertainties but it is far from eliminating them all. Many land ownership issues are still left undefined. The following is an overview of some aspects of China’s unique system.
In China a private party cannot “own” land. All land is either “owned” by the State or by the Collectives. The State owns most of urban area land (i.e. commercial land) and the Collectives are the owners of most rural land (i.e. farm land). Under the current system, even though the land itself can not be transferred, the State may pass the right to use its land to private parties through the granting of “Granted Land Use Right” (“GLUR”) or “Allocated Land Use Right” (“ALUR”). In contrast, Collectives are not allowed to transfer the use right of the land they own. Collectives’ land must be converted from Collective ownership into State ownership before the use right of the land can be transferred. There are efforts, including legislative and administrative, to “free” the land owned by Collectives. The general purpose behind these efforts is to give farmers more “property right” to energize the rural economy in China.
The major difference between GLUR and ALUR is that GLUR is limited in time (ranging from 40 years for commercial use to 70 years for personal residential use) against payment, whereas ALUR is usually given for free without fixed time limit. ALUR could only be granted for specific purposes. For example, the government could grant ALUR to an agency for the building of a public hospital or public school on a specific piece of land. ALUR was the product of the old planned economy and does not fit in well in a market oriented economy, and therefore becomes less relevant for commercial purposes. After the 2007 Property Law, the distinction between GLUR and ALUR is further diminished and ALUR is set to phase out completely. GLUR has become the main stream for a private party to acquire and transfer land use right for commercial purpose.
GLUR market in China can be divided into three tiers. The first tier is the original granting from the government to a state owned enterprise (“SOE”) or a private party. Typically, the grantee is a real estate developer. The second tier is the market for the transferring of GLUR from one holders to another. A typical case would be that one developer transfers its GLUR to a piece of land to another developer. The third tier is the market for the end users of GLUR who are only entitled to a piece of the GLUR, such as apartment owners or lessees. The second and third tiers are regulated free markets. The first tier is traditionally strictly controlled by the government and involving layers of administrative process. GLUR could be confiscated if the land is not used or developed within two years of granting.
To invest in China in the areas other than real estate development, a foreign entity is usually advised to partner with a local entity which presumably should handle the land use right issue with the local government. Often, the land use right held by the Chinese local partner is to become a part of its capital contribution.
If a foreign entity plans to invest in China without a local partner, the entity must form a Wholly Foreign Owned Enterprise (“WFOE”) under the relevant Chinese law to conduct business. The land used by a WFOE should be arranged with the local government at or above the county level. Usually, local governments that try to attract outside investments offer land use rights as part of their incentive packages. The specific contents of these incentive packages vary dramatically from region to region. If land use rights are offered as an incentive, the right should be confirmed before the WFOE sets off. The land use right, likely in the form of ALUR, is commonly recorded by a Memorandum of Understanding (“MOU”) between the WFOE and the granting local government. If a foreign entity invests in China and land use rights are involved, the entity should be prepared to deal with various government agencies. In many cases, a local Chinese partners are more than just helpful in this respect to navigate these unsettled waters.