Urbanisation has swept over China in recent decades.
Since the 1990s, over 250 million people from rural areas have migrated to Chinese cities, helping it to become the second largest economy in the world recently, according to a report by the World Bank.
Land financing has played a huge role in this urban and economic growth. Leasing or selling public land to the private sector has monetised local Chinese governments’ most valuable asset, with much of their annual income raised from land sales alone in the last few decades.
But while a step forward in many ways, land financing has brought with it a number of challenges for the country which it is now being forced to confront, including corruption, rural land grabs and looming property bubbles.
Where it all began
Former Chinese leader Deng Xiaoping began his transformative market-reforms in the late 1970s. In the 1980s, learning from Hong Kong’s successful use of land assets to fund its government and infrastructure projects, the Chinese government embarked on land-use rights reforms.
Deng created the Shenzhen Special Economic Zone in an attempt to marry market-oriented forces with socialist principles. Under the structure, many reforms, which could not occur in other localities, have been rolled out in the Special Economic Zones (including Shenzhen, Xiamen, Zhuhai, Shantou). A series of land-use rights reforms were introduced. This included the establishment of land tenures and auctions, which created a template for land-use that other Chinese cities could model themselves around.
“The transfer of the use rights of government-owned land to the private sector has profited local governments while developers and the general public could have some benefits of developing property and promoting home ownership,” Professor Alfred M. Wu, co-author of Land Use Reforms: Towards Sustainable Development in China notes. He is an Associate Professor in the Lee Kuan Yew School of Public Policy at the National University of Singapore.
“Over the past three decades, the Chinese have espoused a super successful urbanisation process, which was quoted by Joseph E. Stiglitz as one of important forces shaping the development of the whole world,” added Prof. Wu.
Facing up to challenges
Since its adoption, however, land financing in China has had a number of problems. The rapid pace of development of the land market since 1990, when foreign capital was permitted to enter the country’s real estate market by the State Council, has not always allowed a level playing field.
A two-tier system of rich and poor and various problems in land administration have meant that rural farmland has been encroached upon and backdoor negotiations have resulted in rampant corruption and land hoarding.
Of particular concern to the central government has been rural land grabbing without sufficient compensation and, more keenly, the risk of rising house prices within the economic zones.
This can be seen in China’s Shenzhen region, which is currently experiencing a property bubble.
As China’s tech hub, the southern city has seen an influx of young graduates and professionals, leading to a greater demand for housing.
In a single year between March 2015 and March 2016, house prices in the city rose by 62% as a result of this demand and speculation. Further pressure was added with the government’s relaxation on lending restrictions and a reduction on the down payment required for first-time home buyers from 30% to 20%. Silicon Valley Housing in the US is cheaper than that in Shenzhen. According to the latest international media coverage, the rise of the cost of living at Silicon Valley has driven away tech talent.
The result has meant that for many of the city’s workers, potential mortgage payments have outstripped their monthly salaries. These price rises threaten to discourage the flow of talent that made the city, and tech firms, such a success. Latterly, Huawei’s R&D and other departments have moved from Shenzhen to Dongguan (a neighbouring city of Shenzhen).
Speculation has not helped this property bubble. Investors see such high returns as greatly attractive, causing a housing shortage for those on middle and low incomes and creating a desperate need for public housing in a city where it has been historically low. Although the central government has asked local governments to promote public housing, the percentage of public housing in many cities such as Shenzhen has not improved substantially.
The Singapore model
This is why Shenzhen municipal government has latterly announced a plan for 1.7 million new housing units by 2035 — 60% of which will be made up of government housing. Some doubt that these housing units will benefit the poor as Shenzhen and other cities have made similar promises in the past and never delivered them.
Shenzhen’s new approach is similar to Singapore’s social housing model, where housing is managed by the country’s Housing Development Board under temporary leaseholds for 99 years. This model is held in high regard by countries all over the world, with 80% of the country’s total housing under public control, meaning most Singaporeans are largely protected from dangerous housing price bubbles that can affect the private market.
As for China, it is taking steps to address its issues around land financing by becoming more transparent and standardised. Land revenue figures are now open to public scrutiny and land reserve centres have been widely set up to provide for sustainable land-use.
This move towards transparency could help China drive its economy forward as urbanisation continues apace — particularly when it comes to building housing that is accessible for all.
In the long term, this could also serve as an example for developing nations like Vietnam, which is also tackling rapid urbanisation and could adopt a similar approach to fund infrastructure.
It is questionable if Western governments such as those at the state level within the US could also benefit from such a model to provide revenue for underfunded local projects in the future.
But, as Prof Alfred M. Wu notes, “The fiscal capacity of local governments in the USA has declined substantially over the past decades. Infrastructure development has been at stake for a while. Municipal debts have been on the rise.” However, the problems related to land use reforms in China and the property bubble, as manifested in higher housing price in Shenzhen than that in San Francisco, are worth noting. Other developing countries in Asia and elsewhere should be careful about the merits and demerits of the Chinese land system.
Wang, Wen, Alfred M. Wu, and Fangzhi Ye. "Land use Reforms: Towards Sustainable Development in China." In Fiscal Underpinnings for Sustainable Development in China: Rebalancing in Guangdong. Edited by Ehtisham Ahmad, Meili Niu and Kezhou Xiao. Singapore: Springer, 2018, 29-52.
Wu, Alfred M., Lin Ye, and Hui Li. "The Impact of Fiscal Decentralization on Urban Agglomeration: Evidence from China." Journal of Urban Affairs (2018): 1-19.
Ye, Lin, and Alfred M. Wu. "Urbanization, Land Development, and Land Financing: Evidence from Chinese Cities." Journal of Urban Affairs 36, no. s1 (2014): 354-368.