We now have a decision in the widely watched case of illegal land use involving BYD, the fast-growing compact automaker in which American investor Warren Buffett has a 10% stake. The Ministry of Land and Resources has announced that BYD is being fined 2.95 million yuan ($443,000) and that the seven factories the company built in Xian on 49 hectares of land bought from an economic development agency in Shaanxi, 45 hectares of which was zoned for agriculture, will be confiscated.
Construction had started last December and the plants weren’t due to start production until 2011, so the practical effect on BYD will be to constrict future, not present capacity, and the ruling lifts some uncertainty over the company for investors. In one sense BYD has got off lightly. The ministry had previously hit five companies this year for illegal land use, following a tougher inspection regime launched in February that found examples of illegal land use in more than half the 13 cities examined in an initial spot check and officials cooking the books in four. In those cases buildings were ordered to be demolished, land taken back, executives imprisoned and officials reprimanded. BYD’s high-profile and famous foreign investor may have helped it escape the most severe of those punishments, as least as far as we can tell at this point.
The question now is what sort of signal BYD’s punishment will send, and who will see it. One audience is foreign companies. As the China Law Blog pointed out in response to our preview post on the ruling, “if China is going after Chinese companies for putting manufacturing facilities on agricultural land, what in the world makes you as a foreign company think you will be able to get away with doing the same thing?”
The bigger audience is local officials, at least a dozen of whom in this case have been censured for not exercising effective supervision, including one, the director of the planning department in Shaanxi’s local Land and Resources office, who has been removed from office. It is not unknown for local officials to turn a blind eye to such land-use violations in the drive for economic growth. Companies want to bring new production capacity on stream without waiting for all the red tape to be dealt with, while officials themselves are judged on their promotion of local economic growth and local governments have become hooked on land sales for their revenue.
The ministry has said that 7,800 hectares of land had been used illegally in the first half of this year, a 14% increase over the same period last year. That reversed the trend of the figures of the past three years. They had shown the issue was shrinking, but that may just have reflected lax enforcement and reporting. The country’s farmland has continued to be eaten up by industrialization and urbanization. It has shrunk by 6% over the past decade to 122 million hectares, barely above the minimum arable land the ministry reckons China needs to be self-sufficient in food. The summer’s floods and the drought earlier in the year in some parts of the country have reduced that margin further. Food self-sufficiency is considered a national security issue. Getting permission to change agricultural land to other uses, particularly commercial uses, is now tougher than ever.