**4. Informal Land-Use Practices, Economic Growth and State Governance in the Changan Town Since 1978**

#### *4.1. Deregulation and Active Support for Informal Land-Use Practices in the Early Days of the Transformation (1978–1986)*

Gaps in land institutions led to the emergence of informal land-use practices in Changan in the context of deregulation, decentralization, and globalization in China. The state actively supported informal land-use practices in the early days of the reform and opening in China, with the institutional transformation from the planned economy to a market-oriented economy. The Chinese central government delegated powers to Guangdong Province, as a pilot area for the reform, to experiment with market-oriented economic institutions, to support economic growth in the PRD. Meanwhile, the government of Guangdong Province delegated powers to city, county, and town governments, to ultimately extend the grassroots level. Additionally, there was a great disparity in economic development between the PRD and Hong Kong, as Guangdong, in particular, was one of the poorest regions in China, before 1978. Under the pressure of the international industry, the institutional balance was shifting from Hong Kong to the PRD, paralleling the global development of an international division of labor. Under these circumstances, the PRD gradually received more overseas investments from Hong Kong and Taiwan, which was initiated in the early 1980s. A consensus to promote economic development in the PRD was reached among four stakeholders: the state, local governments, investors, villagers, and village collectives.

Although China did not have market-oriented land institutions before 1978, all government levels actively supported institutional experimentation for economic growth. Growth in Changan, which was mainly driven by investments from Hong Kong, increased under a special economic model called "the three-processing and one compensation" economy. Specifically, the Hong Kong investors supplied raw materials, machinery, equipment, and

product samples, while the local villagers and village collectives supplied the land and labor. The manufactured products were sold overseas, and the Hong Kong investors paid remuneration for the land and labor to the villagers and village collectives. As the villagers received more compensation through this model, they continued to supply land and labor, and additional rural collective land was converted into industrial land. This process promoted rural industrialization in Changan.

To further promote economic growth in the PRD, informal land-use practices were actively supported by states at all levels, as formal land institutions were insufficient. For example, the secretary of the Guangdong Provincial Party Committee, Ren Zhongyi, gave a public speech in 1980, actively supporting the exploration of informal practices; the speech emphasized that extant institutions should be flexible, or be replaced with new ones, if found lacking in contributions to economic growth [56]. After "the three-processing and one compensation" economic model progressed, the Guangdong Province government enacted *The Interim Provisions on Strengthening the Management of the Foreign Processing and Assembling Businesses* in 1983 to provide institutional support for foreign investment. Dongguan County government issued *Ten Preferential Treatments for Foreign Investors in Setting up Factories in Dongguan County* in 1984. Term one provided that foreign investors who established factories in Dongguan would be offered land at a preferential price, that was lower than in the Shenzhen special economic zone; investors interested in building villas in Dongguan could also benefit from the preferential land price. Moreover, the Dongguan local government developed a strategy for rural industrialization after the county was upgraded to a county-level city in 1985. All of these institutions promoted the growth of informal land-use practices because formal market-oriented land institutions in China were insufficiently appealing to investors.

Another reason for the emergence of the informal land-use practices in Changan was a persistent misunderstanding of the land institutions by the villagers and village collectives. China's constitution of 1954 stipulated that villagers and village collectives were the joint owners of the rural collective lands, which ensured their high degree of autonomy over that land. Market-oriented land institutions were lacking in the early days of the reforms, and access to industrial land was usually acquired free of charge through administrative allocation. The state enacted the Household Contract Responsibility System and subcontracted the collective land to households in 1980, which led to the mistaken belief that rural collectives were privately owned. Information gleaned from village interviews in January 2016, revealed that the villagers believed they possessed ownership rights that would allow them to change the function of the rural land. Furthermore, along with the collectives, the villagers believed there was more to gain by converting rural land to industrial land under the "three-processing and one compensation" economic model. For instance, local villagers were typically appointed as factory directors or workers, allowing them to earn greater remuneration from the land. Under these conditions, landowners typically actively supported the informal land-use practices.

The number of "three-processing and one compensation" factories continued to grow from the early days of reform in Changan, increasing to 45 by 1986. The village collectives could acquire more processing fees and remuneration from these factories than from agriculture, which they either redistributed to the villagers or used to build roads or more factories. As rural land became the key factor in attracting additional investment, informal land-use practices, mainly changing agricultural land to industrial land, continued to increase, driven by the economic interests of villagers and village collectives. Initially, existing structures, such as ancestral halls, dining halls, and conference halls, were used for factories in Changan. Later, agricultural land was taken too, decreasing the overall area by 794.47 km<sup>2</sup> by 1985.

In an interview with the secretary of Xiaobian village in Changan in December 2015, a research interviewer learned there were two primary types of informal land-use institutions involving the grassroots and investors from Hong Kong during the early days of reform in Changan. The first type was land leases. In order to reduce the cost and lower the risk

of investment, investors usually leased the village's factories when they founded their enterprises in Changan. The second type of informal land-use was land transfers. The "three-processing and one compensation" enterprises usually intended to expand their production scales after generating initial profits, but the crude factories provided by the villagers in Changan failed to meet their production needs. In such cases, the poor villagers sold the rural collective land to the Hong Kong investors, signing informal land transfer agreements, enabling the investors to design and build more advanced factories. In an effort to promote economic growth, the village collectives and the township governments typically supported these informal institutions.

#### *4.2. Re-Regulation and Toleration of Informal Land-Use Practices (1986–2005)*

With the rapid rural industrialization in the PRD, a large amount of agricultural land was informally leased and transferred to foreign investors, then converted into industrial lands. This informal agriculture land conversion was extensive and disorderly, causing two major problems: the loss of arable land and land-based social unrest [6,7]. Although the grassroots accrued some gains from the industrialization of rural areas, they lost their farmland. The per capita farmland in China began decreasing annually, gaining the state's attention, which made the protection of farmland part of its national strategy [2]. The state issued the National Land Management Law in 1986 to regulate land use, to maintain national food security and social stability. However, informal land-use practices continued to increase in Changan after 1986 for four reasons.

First, the villagers misunderstood the nature of formal land institutions. For instance, Article 2 of the National Land Management Law stipulated that no unit or individual could legally appropriate, sell, lease, or transfer rural land. Article 39 of the law required that construction on rural land by township and village enterprises be approved by a local government above the county level and that the scale of rural construction projects should be rigorously controlled. The law was formally implemented on 1 January, 1987. In addition, to adapt to economic development, the state revised the constitution in 1988, separating land ownership and land-use rights, regulating land-use rights transactions. Although the rural land was owned by villagers and village collectives in China according to the constitution, they had no right to transfer or change the nature of rural land [12]. If the villages wanted to repurpose rural land into industrial land, the requirement stipulated the land must first be designated as urban land, owned by the state. This meant that the development rights for rural land still belonged to the state and its agents, the city governments. Although rural land use was rigorously regulated by the National Land Management Law, the villages and village collectives in Changan only had a tenuous understanding of the laws. In their opinions, they held ownership of the rural land and could transfer or use it in any way under the constitution and the Household Responsibility System.

Second, there were conflicts between the rigorous land management law and the landuse demands of villagers. Foreign direct investment (FDI) in Dongguan increased rapidly in the 1990s, fuelling rural economic growth in Changan. Given the favorable economic development opportunities, the village and village collectives endeavored to transition additional rural land into industrial land. Informal land use, especially the unauthorized conversion of cultivated lands for non-agricultural uses, is a persistent feature of the reform era in China [7]. According to the formal land institutions, the amount of rural land that could be designated as industrial land was limited and the duration of the approval process was lengthy, it would lead to the villagers lose their land-use rights. A village cadre stated that the grassroots typically used any informal means to reclassify rural land as industrial land as quickly as possible under such conditions. Factories were built across the PRD, and rapid urbanization occurred such that "every village has spark, and every household was smoking" [56].

Third, the informal land-use practices were driven by the economic interests of village collectives. Land rental by the grassroots increased rapidly in Dongguan in the 1990s. The village collectives borrowed loans from banks to build factories and then rented

or transferred them to investors, generating significant returns for the grassroots. To encourage the expansion of the rental economy, the Dongguan City government issued *The Provisions on the Management of Rural Collective Assets in Gongguan* in 1997, and *The Measures for the Administration of House Leasing in Dongguan* in 1998. The grassroots rented their rural land or factories to investors because it generated more income than farming. In Dongguan, 70% of the village collective's income had originated from rural land or factories since the 1990s. Additionally, the grassroots earned income from "the three-processing and one compensation" factories. The proportions varied from a few to a dozen percent of the profit, and this income increased from CN 4.55¥ million in 1986 to CN 1.7¥ billion in 2002. The income was invested in building factories, constructing roads and public facilities, and funding sanitation, public security, endowment insurance, and bonuses for villagers. Rent became a stable source of income for villagers and provided maintenance funds for local public facilities.

Fourth, informal land-use practices were tolerated and given tacit approval by local governments. China began building the socialist market economic system in 1992 and reformed the tax redistribution system between the central and local government in 1994. With the decentralization of the state, those reforms increased the enthusiasm of local governments for economic growth. In this context, the government of Dongguan City projected an economic development strategy called "the second industrial revolution" in 1994 to promote rapid urban development. The Dongguan City government adopted a tolerant attitude towards informal land-use practices. According to a public statement by a spokesman of the land and resources bureau of Dongguan, the city government neither supported, encouraged, nor interfered with informal land-use practices. In fact, both the city and town level governments permitted informal land-use practices, especially the transfer of rural land prior to gaining formal approval. This led to the increased use of informal land-use practices in Changan.

In the meantime, there were two methods of informal land use adopted in Changan to cope with the re-regulation by the state. First, enterprises usually registered with the village collective and applied for land-use certificates in the name of the village collective, bypassing formal land regulations. With the rapid growth of the enterprises in Changan, the state began to monitor land use. As the transfer of rural land was strictly limited by the National Land Management Law, it became difficult for the village-township enterprises to obtain land-use rights. However, in an effort to attract more investments, the rural collectives actively helped the enterprises obtain land-use rights. A common informal practice evolved where the village collective registered the enterprise, secured the certificate of land-use rights, and then transferred the certificate to the enterprise in exchange for a "transfer fee". Because formal land institutions hindered economic development, a consensus developed among the actors in favor of this informal land-use practice.

In addition, village collectives managed rural land through the rural land stock cooperative system, which was an informal land institution innovation. The village land stock cooperative system, which evolved within the PRD in the early 1990s, successfully circumvented the National Land Management Law. On the premise of following the rule of rural land collective ownership, the rural collectives divided the collective land property rights into shares held by the villagers and initiated joint-stock companies for land management, including the development of industrial zones, attracting FDI, and informally leasing, or transferring the rural land. Seven different modes of developing rural collective land into industrial zones are utilized in Changan, with 56 industrial zones, 1162 enterprises, and 19, 657 mu rural collectives are utilized in total in 2002 (see Table 2). However, this informal land-use practice has not yet been accepted by the state, and the land-use rights in these industrial zones have not been approved by local governments. Compared to direct land transactions between the villages and enterprises prior to the issuance of the National Land Management Law, this collective action effectively reduced or avoided the risk of rural land transfer. Economic growth in Changan was rapid under this type of informal land institution. The flexible strategy of land use in Changan successfully

circumvented the state's formal land management system and served the interests of the local government, enterprises, village collectives, and villagers.



Source: The Annals of Changan Town.

#### *4.3. Institutional Innovation and the Elimination of Informal Land-Use Practices Since 2005*

Informal land-use practices have gradually become an obstacle to urban transformation and the upgrading of industries in the PRD. With globalization and the state's deregulation since the 1980s, the city-region has become the primary spatial unit participating in global competition [57]. Despite experiencing rapid economic growth after the reform and opening of China, the PRD has been faced with a series of developmental problems, such as low-end industrial structures, low land productivity, shortages of land for construction, and a large amount of informal land use. In addition, the institutional advantage the PRD once enjoyed has been lost and the region's development model has become unsustainable, placing the PRD at a disadvantage in regional and global competition. Moreover, China's central government announced its "scientific development" views and called for comprehensive, harmonious, and sustainable development in 2003, to promote city-regional transformation and productive efficiency. At the local government level, in order to return the PRD to regional competitiveness, the Guangdong Province government issued *The Outline of the Plan for the Reform and Development of the Pearl River Delta*. Along with the "dual track transformation", and the "empty the cage for new birds" development strategies in 2008, this plan was designed to foster industrial upgrades through the replacement of low-end and high-pollution manufacturing in the PRD with the addition of high-value industries.

However, formal land institutions have made it challenging to adapt to the new needs of the urban development in the PRD. Construction projects, 87.7% of which were located on rural collective land, had developed in 42.1 km2 of Changan in 2005, accounting for 43% of the town's overall land. Informal industrial land, which was primarily developed without approval, accounted for 47.03% of the total industrial land area. In addition, rapid industrialization brought a large number of immigrants, many of whom rented housing from local villagers. Additionally, the development led to the emergence of informal residential land use in Changan. Nevertheless, the restrictions of the National Land Management Law on rural collective land transactions were still the primary reason for the emergence of informal land use in Changan. The law prevented urban transformation and the upgrading of industries in the PRD, generating an urgent need for innovation in land institutions.

Land institutional innovation was led by the Guangdong Province government. In an effort to promote industrial upgrades and urban development in PRD, the government of Guangdong Province applied for central government authorization of a land institution and issued *The Measures for the Administration of Circulation of the Collective Construction Land Use Right* in 2005. The basis of this measure was the deregulation of transactions involving rural collective construction land, allowing the land to be rented and transferred at the same price as urban land. As De Soto observes, the reason for the disparity in economic development between developed and developing countries is that the former have clear formal property rights, while the latter, do not [22]. The innovation by the Guangdong Province government transformed rural collective construction land, especially some of the informal land, into assets. The rural collective construction land and part of informal land at the grassroots level in Changan was intended to be formally authorized by the state to allow this transfer of land within the formal land market. This was the first time that an informal land-use practice at the grassroots level became a foundation of institutional innovation.

Informality is the primary characteristic of the land institution modifications in the PRD. As Roy notes, urban informality is a mode of governance, and it is the production of the state within its territory [22]. The state promotes institutional innovation or issues new formal institutions by flexing its power to define and redefine formality and informality, advancing urban development, and serving political interests. Furthermore, the government of Guangdong Province announced the acceleration of regional development and industrial advancements in 2008. After the introduction of *The Measures for the Administration of Circulation of the Collective Construction Land Use Right*, the Guangdong provincial government continued to apply for central government approval of land institution innovations. It issued *Some Opinions on Implementing the 'Three Old' Transformation to Promote Economical and Intensive Land Use* in 2009, and its experimental stage lasted from 2009 to 2012. The policy stipulated that if informal land use occurred before the enforcement of the National Land Management Law commenced on January 1, 1987, villagers could apply for formal land-use rights certificates and registration, as state-owned construction land. If the informal land use occurred between January 1, 1987 and June 30, 2007, the villagers could pay a small penalty according to the National Land Management Law and then apply for a land-use rights certificate and registration as state-owned construction land. The "three old" redevelopment policy permitted villagers who desired to transfer their rural collective land to negotiate directly with developers without first reclassifying the land as state-owned construction land. The "three old" redevelopment policy availed more rural land to the market, including some informal lands that became assets for the holders. Moreover, the local city government encouraged the "three old" transformation project by returning land transfer payments to enterprises and village collectives to accelerate urban redevelopment and industrial advancement.

Led by the Guangdong provincial government, the "three old" redevelopment policy has been widely implemented in Dongguan, but as a local agent of the state, the Dongguan City government also exhibited the substantive characteristics of urban informality in the "three old" redevelopment project. For instance, one of the "three old" projects in Xiaobian village, Changan is named Ding Feng community redevelopment. The Xiaobian village collective applied for the "three old" redevelopment policy, and the city government encouraged the developers and social capital to participate in the "three old" redevelopment project during the experimental stage. The village collective directly negotiated the transfer of old informal industrial land to a developer, which formalized what had been an informal use of the rural collective land supply. Both the village collective and the developer benefitted from economic gains, and the developer had 30% of the land transfer payment returned from the Dongguan City government for participating in the "three old" redevelopment project.

While this policy effectively promoted urban development and economic growth in Dongguan, new problems did arise. The Dongguan City government lost significant revenue due to its debasement to a passive and marginalized role. In this context, the government issued *The Operation Guidelines for the Cooperative Enforcement* of the *'Three Old' Transformation between the Collective Economic Organization and the Enterprises* in 2015, which banned direct negotiation of the transfer of rural land between village collectives and developers. Instead, land transfers were required to be conducted under the supervision of the city and township governments. The introduction of this policy meant that the rural collective land transfers between village collectives and developers became informal again, which was a reiteration of the urban informality led by the Dongguan City government as

promoting land institutional change (see Table 3). The policy served the interests of the city government and would be continually adjusted on that basis.


**Table 3.** The change of informal land practice in Changan since 1978.

To summarize, the spatial effect of the "three old" redevelopment policy on Changan was primarily the promotion of urban redevelopment and industrial upgrading, allowing informal land to enter the formal land market. The plan included 187 redevelopment projects covering an area of 8.29 km2, and involving the industrial zones of 13 villages. Changan had completed eight "three old" redevelopment projects by 2015, covering a 0.34 km<sup>2</sup> area in which 80% of the previously industrial locations were informal land uses.
