Australia-China Chamber of Commerce and Industry
of New South Wales







Stand on Solid Land: Land-Use Rights

By Yan Fang
Phillip Bushby International Lawyers

Phone: (61 2) 9223 7888

Posted to Web Site: 20 August 2001


For many foreign investors trying to set up business in China, a joint venture with a Chinese partner remains the most feasible way.  This arises since China still has a number of restrictions on establishing a wholly foreign-owned entity.  In addition, business strategies may also require forming a joint venture in order to absorb competitors, or to streamline sales forces.

Most of these Sino-foreign joint ventures invest in some form of fixed assets, such as buildings, machinery or equipment.  One of the main reasons why Chinese enterprises form joint ventures is to obtain cash injection from the foreign partner in order to make this investment.  You will often find that a large part of the Chinese party’s contribution is land value.

You must keep in mind that the land component of a joint venture can be extremely complex and open to dispute in China due to the variety of land-use rights, which create controversy over existing regulations and uncertainty about conflicting practices of different authorities. 

You must be careful, not only because it represents a large asset in the company’s books but also it can cause critical problems.

Types of Land Ownership:

As the most general level, there are two types of land ownership: collectively owned land and state-owned land.  Collectively owned land is rural land collectively owned by groups of farmers.  Urban land and all other unspecified land is owned by the state.  There is no privately owned land in China. 

Collectively owned land is of course mainly farmland, and very strict rules for governmental approval must be adhered to in order to acquire collectively owned land for industrial use.  This rarely happens for joint ventures as the Chinese government sees the increasing necessity to protect its already insufficient farmland.

State-owned land is mainly land for industrial use, urban residences and infrastructure.  Under the abstract concept of state-owned land, the user of a specific piece of land holds either one of two kinds land-use rights: an allocated land-use right or a granted land-use right.

Acquiring Land-Use Rights:

Before economic reform began in China, the traditional way for most state-owned enterprises, government or semi-government institutions to get land-use rights was to apply to government and get an allocation of a piece of land.

The acquisition of a land-use right itself was free, except for compensation to farmers if the land comes from farmland.  The rate of compensation was virtually independent of the market value of the land at a specific location.  The land-use right acquired in such way was called an allocated land-use right. 

An allocated land-use right is not transferable, and cannot be leased or mortgaged.  Today, holders of allocated land-use rights are required to pay a land-use fee each year.

An innovative way of extending land-use rights was created as result of the market economy.  This is a granted land-use right.  The holder of a granted land-use right needs to pay a significant land-grant fee to the government for acquiring it. 

The land-grant fee varies largely in respect to the market value at different locations.  For example, the land-grant fee for land at a remote suburb is much cheaper than that for land in the city centre.

Within the term of a land-use right, the holder of granted land-use right has a “user right” similar to that of an owner.  The land is transferable, and can be leased and mortgaged. 

Unlike the holder of allocated land-use right, normally the land user with a granted land-use right is not required to pay a land-use fee each year.  Where (exceptionally in some cities) both the allocated land user and granted land user are required to pay a land-use fee, the amount paid by granted land user is much less.

Land-Use Rights in Practice:

While the general legal concepts are relatively clear, the practice by different local governments can be very confusing.  In many cities, the state-owned land-use certificate (which is the only official certificate) for an allocated land-use right is virtually the same as for a granted land-use right, and it is very hard to tell from the certificate what kind of land-use right applies. 

There is no official database available for public search.  As mentioned above, some local governments require only allocated land users to pay a land-use fee annually, while some local governments require both to pay the land-use fee.

For some investors, the difference between land-use rights means a significant difference in the book value of the company.  For real estate developers, it can be crucial.  The properties developed are not saleable unless they are under a granted land-use right.

Even where the situation is not crucial, it can cause chaos.  I once observed a joint venture where the major part of Chinese partner’s capital contribution was a factory building and land.  The land-use right was valued at a large amount of money due to the size of factory, and, more importantly, the market value of the land was a major factor in the valuer’s judgment. 

However, the land-use right was an allocated land-use right, which was not marketable.  When the joint venture was asked by local land bureau to pay a significant amount of annual land-use fee, the foreign investor found out that the land-use right the joint venture acquired was not what it presumed it would be.

Never think it just a matter of size and cost.  Spending time to clarify with your partner, and the relevant authorities, will avoid problems later.


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