Two recent articles about China, one in Bloomberg on ambitious plans by Chongqing municipality (with population of 30 m) to spend 1 trillion yuan ($147 bn) on infrastructure and property projects to bolster economic growth, and another in the Times chronicling the excesses involved in its urban re-development projects have great relevance for India.
The Chongqing municipality's plans covering 323 projects, including construction of the world’s tallest twin towers, two-thirds of which will be financed by government, will be completed in 3-4 years. Further, it is part of a more ambitious five-year plan, starting 2011, to spend upto 2 trillion yuan on "key projects".
It is estimated that land (local government control much of the land) sales provide up to 60% of local government revenues and in its 70 biggest cities, government land-sale revenues leaped 140% in 2009, to $158.1 billion. Local governments have reaped huge profits — up to 100 times the compensation amounts — by such commercial re-developments and sales. With land sales and commercial sales being amongst the largest sources of incomes and a critical engine of growth, local governments have played a major facilitatory role in keeping the property bubble inflated.
The existing loophole-ridden land rules, dating from 2001, give governments and private developers wide leeway to clear property and settlers are ousted from their homes with cut-rate compensation and scant legal recourse. As the Times reports, local governments pick renewal sites at will; leave negotiations with residents to developers, demolition companies and low-level 'demolition and relocation offices'; low-ball home-purchase offers; cut off utilities; and even hire gangs of thugs to terrorize homeowners.
A series of protests and immolations forced Beijing into passing a legislation two years back to strengthen individual property rights in cities and regulations on dispossession from urban lands, though it has not yet been translated into rules. The draft rules require developers and officials to consult homeowners, pay market rates for homes and put off demolition until sales and relocation details are settled — and, sometimes, approved by two-thirds of homeowners. It also would prohibit governments from forcibly seizing homes, in a process akin to condemnation in the United States, without specific 'public interest' purposes.
Arguably two of the biggest challenges facing the infrastructure sector in India are those relating to mobilization of financial resources and accquisition of land for project implementation. China enjoys inherent institutional advantages in both these areas - since most land is government owned, it can be sold away or developed to raise resources, and the political system ensures that all opposition to the exercise of government's powers of eminent domain are easily swept away.
An apple to apple comparison of India and China would involve calculating growth rates after controlling for these two factors. What would have been the trajectory of Chinese economic growth in the absence of government ownership of property and stronger political and property rights?
Update 1 (2/6/2010)
See Mathew Yglesias here.
Update 2 (25/7/2010)
See this NBER working paper on Chinese urban land lease auctions.
Update 3 (31/7/2010)
Yongheng Deng, Joseph Gyourko, and Jing Wu (bigger pdf article here) claim that a housing bubble may be developing in China. Chinese government still owns all the land in urban areas and leases its use for long periods of time. The major contributing factor to the increase in land prices have been the massive purchases by government agencies, flush with funds and access to capital at cheap rates. The graphic below is the constant quality price index for newly-built private housing in 35 major Chinese cities, 2000-2010
Update 4 (2/8/2010)
Land records show that 82 percent of land auctions in Beijing this year have been won by big state-owned companies outbidding private developers — up from 59 percent in 2008. Land prices in Beijing had jumped by about 750 percent since 2003, and that half of that gain came in the last two years.
Last year, state banks made a record $1.4 trillion in loans, nearly twice as much as the year before. Analysts say they believe much of that money was diverted into the property market through off-balance-sheet maneuvers, leading to the record land bids and soaring property prices. A growing number of municipalities have formed local investment vehicles that borrow heavily from state-owned banks (local governments cannot directly borrow from banks or issue bonds for real estate development) to pay to relocate residents and build infrastructure around big plots of land they intend to sell at auction.