SHANGHAI -- A Shanghai land auction scheduled for next month, open to both foreign and domestic firms, will be a dry run for setting up a land and property market throughout China, a city official said this week. Jiang Rugao, director of Shanghai's Land Administration Bureau, said in an interview that if the first sale goes smoothly other sites would also be auctioned with successful bidders getting full land right use, but not ownership, for up to 50 years.

Buyers must pay in foreign exchange but may resell land use rights, he added.

A market in land and property is a controversial idea in communist China where all land belongs to the state. It is especially sensitive in Shanghai, where large areas were controlled by Western nations before World War II.

But Shanghai has been driven to the land market because of a lack of money to rebuild its decaying infrastructure.

"We have the most valuable property in China, but those who occupy it have not paid a penny for it since 1949, and the city does not have enough money to build all the roads, homes and many other things it needs," Jiang said.

The city is China's largest commercial and industrial center. It has provided the central government with one-sixth of its national revenue since 1949 but has received little in return.

While Peking spent the money elsewhere in China, Shanghai decayed and has some of the country's worst pollution, overcrowding and traffic chaos. The city has been discussing the idea of selling land use rights to foreigners to raise capital since 1986, but there has been strong opposition.

Communist Party veterans who remember the special privileges enjoyed by foreigners before 1945 and the humiliations some of them inflicted on the Chinese have been particularly opposed.

But city party secretary Rui Xingwen, since elected to the party's national secretariat, said last September that Shanghai had no option but to follow Hong Kong and raise money from its most precious asset -- land.

The first land site, currently empty, includes 129,000 square feet in a zone near Shanghai airport set aside for foreign factories, residences, consulates and hotels. The city government is also considering requests from foreign firms to buy land use rights in central Shanghai, which would bring a much higher price.

"But the land there is densely occupied. Such sales would be much more complicated," Jiang said.

Chinese firms usually need not pay for land allocated to them by the state.

Jiang said that in Shanghai's busiest shopping street, a department store earned $2,700 a year in profit per square yard but did not pay a cent in land tax.

Four cities in China -- Chongqing, Fuxun, Nantong and Canton -- had started charging a small land use fee, and Shanghai plans to begin charging this year.

"It is of course opposed by firms who ask why they have to pay this fee when they did not in the past," Jiang said.