Divided World: China’s Land Tenure System and Implication to Foreign Investment in China

Abstract

This article reviews China’s land tenure system, which is featured with differential treatment of rural and urban citizens with respect to three types of land tenure: urban land tenure, arable land tenure and rural residential land tenure. With the urban residents fully participated in the market economy started in early 1980’s in China, rural residents in China are far left behind in terms of entitlement to property protection in land tenure. These differential treatments are analyzed along two dimensions that are central to any discussion of property in land: rules on possession and restrictions on alienability. Applying economic theories about property in land and collective decision making, each dimension of the three regimes were analyzed. While most current scholarship recognized such a difference, they did not distinguish legal rules for, arable land tenure, on one hand, and rural residential land, on the other. This article therefore fills a gap in providing an economic analysis of the legal regime for rural residential land as separate from arable land tenure. Going beyond the institutional details of the legal and regulatory land regime, this paper addressed the economic development in China that has shaped such divided legal regimes and caused tension between the current law and changed economic and social circumstances. Instead of treating the land regimes as a domestic issue, this paper concluded with two implications of such divided legal regimes over foreign investment in China. The first implication focuses on the function of land tenure as a critical, if not the single most important, input to foreign direct investment in China. The second implication meanwhile addresses how the legal regimes would affect the prospect of foreign banks in China’s rural economy.