Benchmark pricing behaviour of land in China's reforms

Abstract

Following open door policy, China is allowing a major and valuable national resource, namely land, to be privatized in the market. Land has not been allocated according to the market since the Communist party took power in 1949. Without extensive market activities it has become imperative for both central and local government to devise guidelines when selling land to developers who have found great potential in this market. After initial pilot studies in some cities, a benchmark pricing model was finally devised to provide guideline land prices. In theory, this model has the role of leading the existing land allocation system into a price mechanism similar to a market economy. However, the legacy of the socialist ideology concerning the assessment of value exerts a strong effect on the benchmark pricing model which makes the behaviour of the benchmark prices inconsistent with market prices. An examination of the benchmark pricing of land in various Chinese cities has revealed that China is still favouring the use of a production cost function when valuing land. A combination of the cost and market value approaches has produced the first guidelines for land prices since 1949. These guidelines represents a compromise which may be useful in the short run but which cannot be effective in establishing market land price behaviour in the long run.