The public land transfer system adopted nationwide since September 1 is expected to reduce corruption, lower the administrative threshold for real estate development and bring about a more transparent property sector.

But to ensure the policy reaches these goals, a series of co-ordinating measures must be worked out to avoid having a short-term impact on the property market, housing prices and people's investment decisions.

Public land transactions have long been pushed by the Ministry of Land and Resources. In an order issued by the ministry in March 2002, all land for business purposes had to be transferred through auction and public tender from the following July 1.

Before 2002, land was transferred through closed deals in most Chinese cities. Landlords and developers struck deals as to price, and land-transaction fees were paid to local governments in return for the legal right to develop the land.

Land transactions made through closed agreements were also part of this transfer system.

Despite the ministry's order, transactions were still not being carried out according to the regulations.

In May, the ministry issued a new order to make it clear that there would be no exceptions made in land transactions as of August 31.

The delay in the implementation of the 2002 order indicates that the policy has been harming the vested interests of certain groups -- many of whom are local government officials and real estate developers who have links with them.

In China, the local government is the public administrator of land transactions as well as the biggest land owner in any region. If a ban on this closed land transfer system was properly implemented, developers would no longer be able to get cheap land by using their guanxi, usually government officials, who in turn would not be able to use their connections to make underground and illegal deals.

Banning the closed land transfer system has long been called for and is now finally coming into force.

For local government officials, the system -- in which local authorities will become the sole agents selling the land -- means more tax revenue and a greater capability to control the process of urban development. The elimination of closed land transfer should also eliminate the incentive among local government officials to seek rent from land which can no longer be sold in private or via under-the table deals.

A more open system means property developers can use their own financial strength to win bids in open auctions rather than through the back door because of industry contacts they may have. Foreign investors should also find it easier to tap into the profitable real estate market in China, where despite the potential for profit, it remains a sector with incredibly low foreign investment -- less than 2 per cent.

For the average property buyer, the enforced rule will help flush out poorly-financed property developers and leave those with a better reputation for developing products with higher quality.

The potential benefits cannot be realized over night. There is still work to be done.

The government, or authorized land agents, should publicize their plans for land sales as soon as possible. Plans for at least two years should be released to potential buyers and developers so they can prepare for any approaches and arrange for the release of any needed capital.

At the moment, cities with the land-transfer system in place provide land sales plans of no longer than six months. Their lack of transparency is often to blame for severe price fluctuations, which eventually only hurt land buyers. The government should make sure there is enough land sold by auction or public tender as this is the only way some developers can gain access to what is on sale. A limited supply will inflate prices.

In fact, in the past seven months of this year, just 20 per cent of land was transferred through auction or public tender in China. The average price of land sold in this way is consequently four times that of the average price of land sold in private deals.

Higher land prices through auction or public tender will finally be borne by home buyers.

Before land can be transferred publicly, primary land development -- which includes requisitioning the land from farmers, building infrastructure and relocating residents -- has to be carried out by the government. Because of the huge outlay this entails, most local governments have very limited capability to take it in hand.

This makes it unlikely that local governments will supply enough land to the market in the near future, which will cause surging land prices and again, a burden on home buyers.

A solution to this could be for local authorities to give up their monopolization of primary land development and hire agents to do it for them. More private capital could help increase land supplies through the public transfer system and curb land and property price hikes.

Price should not be the sole consideration when land is put up for auction. The developer should also be looked at as to whether they can improve the local environment in other ways -- such as traffic jams, or providing jobs. Care is needed in assessing criteria like these which are not as clear cut as price, where corruption is possible in the evaluation process for the auction. Discussions among members of the evaluation committee should be highly representative and made as public as possible.

When conditions allow, the public should be allowed to participate in discussions or hearings about land to go under the hammer.

The whole sector may be challenging and difficult to organize, but it is worth trying, simply because a sound, transparent, fair and efficient land transfer system would benefit not only the development of the property sector and the Chinese economy, but also the interests of millions of average home buyers.

(China Daily September 14, 2004)