Strict limits imposed on local government use of reserve land

With a view to regulating the use by local governments of reserve land for financing purposes, the Ministry of Land and Resources, the Ministry of Finance, the People’s Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC) jointly issued and implemented the Notice on Strengthening the Administration of Land Reserves and Financing (document No. 162) on 11 May 2012; and on 24 December 2012, the Ministry of Finance, the National Development and Reform Commission, the PBOC and the CBRC further jointly issued and implemented the Notice on Putting a Stop to Illegal Financing by Local Governments (document No. 463).

The Ministry of Land and Resources will establish a directory of land reserve organisations, incorporating information on the qualified organisations in the directory and updating it regularly. The land reserve organisations listed in the directory are required to forward to the website of the Ministry of Land and Resources information on land included in the reserve, land that has been provided from the reserve, the receipt and expenditure of reserve funds, and the various types of financing. Local governments may not authorise financing platform companies not entered into the directory to assume land reserve functions or secure financing using the land reserve. Reserve land under the names of organisations other than those in the directory prior to the issuance of document No. 162 is required to be gradually subjected to compliant administration in strict accordance with document No. 162.

Under this new policy, those financing platform entities that have been delegated land reserve and listing functions by local governments will face severe challenges. Not only will the lawfulness of the land secured by real estate developers and infrastructure investors through such financing platforms be brought into question, but also the lawfulness of the relevant undertakings given by such financing platforms in the course of infrastructure projects.

Further restrictions

Size of land reserve. Document No. 162 requires land reserve organisations to strictly control the total size of the land reserve and the scale of financing, the objective being to control the uncontrolled expansion by local governments of the total size of land reserves. A land reserve organisation is required to prepare during the third quarter of each year the land reserve plan for the next year. In the annual land reserve plan, the size of the newly added reserve land – including reserve land added in the year and already provided in the year – is to be kept at the average quantity of reserve land provided annually during the previous three years at the municipal or county level. Reserve land is also to be used preferentially for low-income housing projects and other endeavours for the public good.

Temporary use of reserve land. Pursuant to the Administrative Measures for Land Reserves and document No. 162, until reserve land has been provided, the land reserve organisation may use the reserve land, together with any buildings and structures, by such means as leasing it out, or temporary use. Temporary use of reserve land may not exceed two years, may not affect provision of the land and may not be subcontracted.

Temporary use of reserve land is subject to the consent of the land and resources authority and finance authority of the people’s government at the same level. If reserve land being temporarily used is located in an urban planning area and buildings and/or structures need to be erected upon it – the construction of permanent buildings is prohibited – the consent of the urban planning authority is required. If the reserve land being temporarily used is encumbered by a mortgage, the written consent of the mortgagee is required.

Scale of financing obtainable using reserve land. Under the new policy, financing by land reserve organisations is subject to an “annual financing scale control card” system. The scale of the financing of a land reserve organisation may not exceed the limit of this system, and if it does exceed the limit, new project financing of the land reserve organisation for the year in question may not be approved. (The procedure is shown in the chart.)

Uses of financing. Pursuant to the above regulations, the procedures for a land use rights certificate can only be carried out for the reserve land under the name of a land reserve organisation when carrying out land reserve business, and reserve land may only be used for reserve mortgage loans once a lawful land use certificate has been secured. The use of loan proceeds must fall within the prescribed scope of use of land reserve funds, and may not be used for urban construction or other projects unrelated to land reserve business. Land that has been incorporated into the reserve may not be used to provide security for the financing of any organisation other than the land reserve organisation.

Financing platform companies not listed in the directory may not obtain financing using reserve land. Additionally, no local government at any level is permitted to inject reserve land as assets into a financing platform company, or undertake to use the anticipated proceeds from the grant of reserve land as the source of funds for the repayment of the debts of a financing platform company.

This provision slams the door on the non-compliant operation of many local governments. Some local governments have, for the purpose of promoting construction of infrastructure projects, used reserve land to provide security for the source of the buyback moneys in BT concession projects, and certain local governments have, for this purpose, even gone as far as requiring land authorities to provide their co-operation, by carrying out the procedures for the land use rights certificates for such land, or even carrying out mortgage registration. Such illegal acts of circumventing the above regulations will often give rise to erroneous notions among investors, but such non-compliant operation actually exposes investors to great risks.

Administration of land reserve funds. A land reserve organisation must use land reserve funds for the prescribed purposes, and may not divert them for other uses. Pursuant to the Interim Measures for the Financial Management of Land Reserve Funds, land reserve funds may only be used for such land reserve expenditures as the requisitioning, acquisition, preferential purchase and recovery of land, and for preliminary development before land is provided. Document No. 162 goes into further detail on the foregoing basis. Construction expenditures, such as those for cadastral surveys, land registration, land price valuation and for perimeter fences/walls in the course of custody incurred in the course of land reserve work are to be included in the scope of use of the land reserve funds subject to the approval of the finance authority at the same level.