How Farmland Mortgages Could Stimulate Rural Entrepreneurship in China

In this Paulson Policy Memorandum, Yanling Peng, Calum G. Turvey, and Rong Kong note that many Chinese farmers face considerable constraints in their effort to obtain access to credit. And a significant source of these constraints involves policies related to land use rights.

The very nature of such rights in China has, until recently, precluded farmers from transacting land for rent. Chinese farmers have also lacked the typical ownership rights seen in most other developing or developed nations. In this sense, Chinese land use policies long stymied progress and precluded economic efficiencies of scale, size, and scope and the ability to borrow against the land to advance more entrepreneurial activities among farmers.

To address these issues, China’s policies related to land for agricultural and rural development have gone through significant transformations since 2003. Perhaps the most significant change that was needed to encourage credit creation was a recognition that savings alone would be inadequate to meet the financial needs of Chinese farmers. Viewed through this prism, some of the recent moves in China have been significant. For example, some policy changes have aimed to reduce or remove liquidity and credit constraints by permitting a broader range of transactions in land among farmers through formal rent agreements. China has also taken steps to encourage credit creation by allowing farmers to mortgage loans against the collateral value of land use rights.

But looking ahead and moving forward, a balance must be struck between the rates at which farmers rent out their land use rights to leave agricultural pursuits behind—a number the authors believe to be quite high—and this group’s subsequent absorption into China’s non-farm economy as wage laborers or entrepreneurs. At the same time, it is important to question whether the reforms to date have adequately met rising credit demand or serve policy objectives aimed at building a more efficient, commercially oriented agriculture by a smaller number of farmers.

After providing some background on the history of land use rights in China, the memo looks, first, at the evolution of new land use transactions and mortgage policies. Peng, Turvey, and Kong then analyze the economic considerations and consequences of China’s new policies, and particularly how land use rights are valued for the purpose of mortgages, current rural credit conditions, and rural entrepreneurship.

The memo’s recommendations are partly based on findings from a survey they conducted of 1,465 farm households in China’s Gansu, Henan, Shandong, and Shaanxi provinces, as well as case interviews and surveys of new Land Transaction Centers in Shaanxi, Henan and Ningxia provinces.

Their memo provides preliminary evidence that mortgaging land use rights could enhance rural entrepreneurship in China by a relatively small number of farmers, a progression that needs to be encouraged. But it also highlights four areas where further policy actions are required to maintain, enhance, and make more sustainable these various land use rights-related reforms.

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