The State Council has issued a directive urging cities to refrain from using rural farmland for development, according to an article published in the People's Daily Newspaper.

The article says: "China has a large population, and the supply of farmland is scarce. Now that we are undergoing industrialization and fast urbanization, there have appeared many contradictions in the supply and demand of land for construction".

Basically, in an effort to preserve farmland, land elsewhere will be in higher demand, thus raising its value.

Private farmland ownership is still forbidden by the Constitution. That leaves farmers vulnerable to land being acquired by developers, who often pocket the gains.

And even when it is lawfully taken, the land is often compensated with a portion of the value of its annual crop yield. That's a pittance when compared with the profits gained if it is sold for industrial use or developed as real estate projects.

Meanwhile, the mainland's supply of agricultural land has plummeted - displaced by urban sprawl, factories and "development zones". Last year, the area of land under cultivation was only 1.5 percent above the benchmark that the central government deems necessary for maintaining the food supply.

Now comes a plan to raise the land-requisition compensation for farmers by 20 to 30 percent. That's on top of the 40 percent increase in compensation since 2004.

Last month, the central government quintupled the land tax to between 5 and 10 yuan per square meter to discourage the use of arable land for non-agricultural purposes.

Farmers will not expect a windfall too soon since the government is still investigating ways to implement the plan. But as near as I can tell, the central government's attempts to limit farmland conversion by administrative measures are likely to tighten the supply of land for real-estate development in the future.

A rigid land-protection system will boost the value of real estate due to the scarcity of land supply on the mainland.

The author is the managing director of Vigers Asia Pacific.

(HK Edition 03/12/2008 page3)