Land Prices and the Chinese Public Sector

By Matthew Yglesias
On the morning of May 29 my group was taken to see the village of Cha’an outside Dalian. Or perhaps I should say the former village. What happened, essentially, is that back in 2006 the former “village” of rudimentary structures was razed and the government constructed a large and extremely nice park (it’s in a very scenic area), reforested the hillsides, and constructed a series of apartment complexes. The former villagers now live in modest but up-to-date structures. You see some stories of Chinese people being serious dispossessed in this kind of process, but in the case of Cha’an the local authorities seem to have decided (wisely, in my view, as well as fairly) that it doesn’t make sense to treat people poorly. So people who lost homes in the reconstruction were compensated with multiple homes in the new Cha’an.

We spoke to one retired couple who was given four apartments—they live in one and rent out the other three to families who’ve either moved out to Cha’an from the central city or else moved to the area from less prosperous regions of China. The town’s current party boss said he was given five apartments.
This all naturally raises the question of how the village government was able to finance all this. The answer is that they used the rising price of land near prosperous Chinese cities to do it. Transforming Cha’an into a more modern, more compact, less agricultural area freed up plenty of land to sell to developers on which to build factories and offices and that gave them the money they needed to update the infrastructure and give everyone one or more free apartments. In principle, this is exactly what governing authorities in a rapidly growing country ought to do. Indeed, this is precisely the strategy Paul Romer recommends for his “charter cities” concept.
It does however put the apparent real estate boom in China in a somewhat different light. I was told earlier in the trip that Chinese banks are actually not particularly exposed to the real estate market with regulators mandating that mortgages compose no more than seven percent of the total assets of any bank. But insofar as Chinese land is also experiencing a price bubble, this means that Chinese municipalities may actually be quite exposed to a potential sudden crash in revenues. I’m not sure that’s what’s happening since a bubble in land prices and a bubble in housing prices are different things (Robert Shiller lays this out nicely in The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It by the way—you can’t build more land, so land prices really should escalate over time as long as GDP grows, whereas increased demand for physical structures should just spur construction and not sustained price increases) but the psychological predicates of the two seem similar enough that they probably go in tandem.
Which is really too bad, because in a lot of ways a look into the modest homes of today’s Cha’an really does drive home the extent to which the improvements in human welfare that China has achieved over the past 20-30 years have been absolutely enormous.