China has approved reform to enable 730m peasant farmers to trade their land use rights more freely and provide greater legal protection for existing landholders.

The Communist party will “construct a healthy market for the transfer of land contract rights . . . based on the principles of legality, free will and adequate compensation for the peasants,” wrote Chen Xiwen, director of the office of the central leading group on rural work, in a party magazine published on Thursday.

The first land use rights exchange was set up on Monday in the western city of Chengdu to allow farmers to sell or rent out the rights to use their land.

Qin Shikui, head of the state-owned Chengdu United Assets and Equity Exchange, which opened the exchange, said: “The peasants are very excited about this platform being set up. We have had lots of phone calls and people coming to our offices to find out more about the rules and hoping to transfer their land.”

Land has been owned by the state or by rural “collectives” since the the communist revolution in 1949 and cannot be bought or sold by individuals. Under current laws, peasant farmers have mostly been given 30-year land use contracts that allow them to farm plots allocated by local party officials but make it very difficult to sell those contracts or use their land as collateral for loans.

The decision to loosen the constraints on transfers of land use rights and allow exchange markets for trading land titles was made last weekend behind closed doors at a plenary session of the party’s central committee.

Before the meeting, senior officials, including Hu Jintao, the president, had hinted strongly that there would be a breakthrough on rural land reform but a communiqué issued on Sunday at the end of the meeting made only passing mention to perfecting the “land management system”.

Some observers said the omission signalled serious disagreement among China’s top rulers over how far the reform should go towards de facto privatisation of rural land.

Many policymakers have argued that allowing rural citizens to sell their land freely would result in a return to the pre-revolution days of feudal landlords and create a flood of landless poor into the cities.

Mr Chen’s article emphasised the delicate balance the party is trying to strike between its ideological roots and raising productivity in the countryside by encouraging concentration of land in larger, more efficient farms.

“We cannot change the collective ownership status of the land,” Mr Chen said. “We cannot change the land-use designation [from arable to commercial, residential or industrial] and we cannot damage the peasants’ land use contract rights.”