Figure 1: Before redevelopment
Financing Urban Redevelopment through the Market? – An Institutionalist Analysis of Shenzhen’s Evidence
Abstract:
Urban redevelopment’s financing gap necessitates market-based investment. Drawing on the case of Shenzhen, China, this field-based research examines the real estate sector’s cost-control mechanisms and explains how certain place-based institutions reduced land procurement’s transaction costs and hence incentivized the market. Primary data reveal that the developer could leverage the place’s indigenous culture, negotiation policies and power relations to obtain land in a low-cost, low-risk way. Such deals propelled by mixed formal and informal techniques could, however, engender social and political risks that impair the prospect of continued development.
This study offers novel empirical evidence regarding the complex, non-linear relationship between institutional arrangements and economic activities. By investigating the sociopolitical nature of transaction costs in urban redevelopment, this research offers more nuanced perspectives regarding the economic role of property rights. The findings suggest that in the particular developing context of Shenzhen, the communal land’s initially weak legality, if accompanied by strong communal bonds and political power influences, might actually accelerate the institutional transformation towards formal, sellable landownership. In this regard, institutionalization is not an exogenous factor required prior to market investment. Instead, during urban redevelopment, institutional change both shapes and is shaped by the heightened interactions and quasi-formal negotiations between the real estate firm, the government, and the community.
Recommended Citation:
Luo, Yuxiang. 2016. Financing Urban Redevelopment through the Market? – An Institutionalist Analysis of Shenzhen’s Evidence. London School of Economics and Political Science, MSc Dissertation.
Glossary:
CDB – China Development Bank
CNY – the Chinese currency Yuan
CRLand – China Resources Land Limited
DVR – the Dachong Village Redevelopment project
PPP – public-private partnership
SCD – Shenzhen Center for Design
SEZ – Special Economic Zone
STI – China’s shantytown transformation initiative
UPDIS – Urban Planning and Design Institute in Shenzhen
Table of Contents:
I. Introduction
II. Conceptualizing Urban Redevelopment’s Partnerships and Institutions – Theories and the Chinese Experience
III. Research Design and Methodology
IV. Empirical Evidence
V. Discussion: An Analysis of Institutional Change
VI. Conclusion
I. Introduction
Urbanisation drives economic development (Henderson et al. 2009; Overman and Venables 2005; Logan and Molotch 2007), yet cities undergoing drastic transformations also encounter socioeconomic challenges and hence necessitate readjustment. Across the world, rapid urbanisations are accompanied by poverty and inequality (Ravallion et al. 2007), inefficient land use (Brueckner and Lall 2015; Lall 2013) and dysfunctional housing markets (Satterthwaite 2002; Hoek-Smit and Diamond 2003; Okpala et al. 2006). These threats, if not effectively addressed, may impair the economic prospect of cities.
As the World Bank suggests, rebuilding existing urban areas, known as urban redevelopment, is a solution to the challenges of equity, land use and housing supply faced by cities (Lozano-Gracia et al. 2013). There are various forms of redevelopment. The US and Britain have used neighbourhood revitalization since the end of WWII to improve districts which are physically and economically degraded (Edgar and Taylor 2000, 153; Roberts and Sykes 2000). For developing countries, international agencies have been promoting slum upgrading since the 1970s (Wakely and Riley 2011). In these redevelopment endeavours, a key task is to resolve previous disinvestment and leverage market-based financing for economic and community revivals (Weiss 2006, 1).
China is currently dealing with the complexity of market-based redevelopment. The country’s rapid urbanisation has introduced pressing challenges, but policy and market responses are relatively recent. The central government is particularly encouraging nationwide public-private partnerships (PPPs) for urban redevelopment, yet local responses are sparse and at best uneven (Liu et al. 2015). It is still not clear how the urban redevelopment policy could utilise market forces more effectively.
Therefore, my research zoomed in on the experience of Shenzhen, a southern Special Economic Zone (SEZ) where developers have largely replaced the government in financing urban redevelopment (Lin and Xia 2016). Specifically, I scrutinized the real estate firm’s financial and developmental behaviours, in order to reveal and understand the intricacies behind real-world urban PPPs. I collected primary case data with 23 in-depth interviews and 38 relevant documents and drew on New Institutional Economics to explain how place-specific relational assets could motivate a market firm to take initiatives and share risks of financing urban redevelopment.
For decision-makers trying to fully integrate urban policies with the real estate market, this up-close, institutionalist analysis might shed some light on the complexity of multi-sector collaboration. My results suggested that market investment and urban PPPs’ feasibility not only relate to material assets determined by capital markets and national policies, but that local institutional arrangements also matter with regard to how economic actors organize themselves and utilize resources. Specifically, as the case suggests, certain indigenous social structure, political power relations and negotiation-based policy framework could help the developer to build consensus and obtain land with low risks, hence ameliorating urban redevelopment’s transaction costs.
Nevertheless, in a dynamic view, although the bottom-up process could facilitate market investment in a cost-effective way, such a redevelopment strategy based on quasi-formal, relaxed negotiations might induce some unaccountable behaviours, break the social ties of the community and raise institutional costs yet again, which could endanger the prospect of continued development.
In all, by adopting an institutionalist lens to examine China’s real estate market, this in-depth case study raised questions about the non-linear process of institutional change and its complex relationship to city- and district-level socioeconomic transformations. I therefore recommend reassessing local institutional endowment before tailoring specific targets and tools that enable urban policies to utilize the real estate market in a more feasible and sustainable way.
This report contains five sections. Section II introduces China’s urban redevelopment in greater detail and explains theoretical building blocks regarding partnerships and institutions. Section III defines the research methods, while Section IV and V present and analyse the evidence. Finally, Section VI draws the conclusion, policy implications, the project’s limitations and the direction for further research.
II. Conceptualizing Urban Redevelopment’s Partnerships and Institutions – Theories and the Chinese Experience
II.1 Partnerships and financing
In the face of the growth and development challenges of urbanisation, developed and developing countries across the world have responded with urban redevelopment initiatives. However, financing urban redevelopment is difficult without the market. Rebuilding cities requires large amounts of resources in relatively short periods of time (Edgar and Taylor 2000; Nie et al. 2015; Roberts and Sykes 2000), and across countries, government-led development has been ‘seriously limited by cost and management capacity’ (Wakely and Riley 2011, xi).
The financing challenge has motivated governments to diversify funding channels and gradually acknowledge market forces. In the early period, many countries relied upon a single source to finance urban redevelopment (Nie et al. 2015), the public sector having been the main funder (Noon et al. 2000). By the 1960s, however, governments in developed countries began to use incentives to leverage private money. For example, the US and Britain used tax relief, fiscal assistance, low-interest loans and rental subsidies to guide or to partner with developers for urban redevelopment (Nie et al. 2015). Using this leverage approach, public investment was aimed at ‘raising additional private resources…so as to increase the net benefit of public spending’ (Robson 1989; Noon et al. 2000, 74).
Besides helping with financing, such a partnership also reflects a shift of development ideology. According to De Magalhães et al. (2002, 45), the increasing popularity of PPPs demonstrates the change from ‘State delivery of…universally-targeted…mainstream expenditure programmes, to differentiated ad-hoc public private arrangements based on time-limited, issue- or place-specific programmes.’ Such a trend towards context-specific solutions is also evident in the broader realm of territorial development policies. As Amin (1999, 366) argues, the place-based approach, unlike the uniformly-applied top-down policy, enables ‘action at the local level…based on the mobilization of local resources.’ When more actors are included, the role of governments also changes. Ever since the 1970s, governments in developed countries have ‘sought to reconfigure their relationship with society and its various sectors, redefine their spheres of influence vis-à-vis economic forces and with citizens and their mechanisms for accountability and legitimacy’ (De Magalhães et al. 2002, 45).
China has also been pushing the redevelopment of its informal settlement and degraded neighbourhoods for more inclusive urbanisation. The nation’s overall policy framework is called the ‘shantytown transformation initiative’ (STI),[1] which aims to supply new housing for former dwellers of degraded neighbourhoods. The STI is applicable to cities, the countryside and state-owned mining towns and it acknowledges urban redevelopment as one of its subcategories. With strong political support, this grand initiative plans to provide ten million low-income housing units nationwide between 2013 and 2017 (State Council 2013).[2]
In China, local governments’ financial constraint and enlarged debt necessitate market-based financing (Shi 2012). Even with China Development Bank (CDB)’s special loans, the STI still faces a financing gap of CNY 1,500,000,000,000. Historically, local governmental debt was the main source for filling that gap (Nie et al. 2015). However, if not controlled, such governmental borrowing could lead to a severe debt crisis. Therefore, Yu (2007) and Wang et al. (2008) caution that given the government’s fiscal challenge and urban redevelopment’s mixed social and economic goals, it is important to adopt PPP for China’s redevelopment.
A PPP for urban STI is an imperative policy option, but its application is still limited and very unevenly distributed. Although China’s central government has explicitly encouraged market firms to participate in the STI with a series of policy documents (Ministry of Finance 2015; State Council 2015), when firms did participate, they were mostly just employed as contractors rather than as developers that could manage the entire process, take fuller initiatives and share more risks. So far, truly feasible urban PPPs in which the market firm provided financing are concentrated in coastal regions such as Guangdong and Shanghai (Liu et al. 2015).
II.2 Institutions
To explain the uneven concentration of market-financed urban redevelopment, conventional wisdom and the economistic view allude to cities’ differential capital and real estate markets (Liu et al. 2015). However, real estate and city making are not merely determined by impersonal supply and demand curves – ‘markets also work as social phenomena’ (Logan and Molotch 2007, 1) and successful urban PPPs ‘require exceptional organizational structure and an efficient working mechanism’ to mobilize human actors, land resources and capital flows (Nie et al. 2015, 34).
Therefore, to understand urban redevelopment’s empirical variations, researchers need to pay attention to institutions and investigate the human agency (Logan and Molotch 2007). Redevelopment is a complex business shaped by the structure of urban governance and place-specific social milieux (Cars et al. 2002). The World Bank also suggests that it is indeed an important agenda to investigate the relationship between institutions, housing investment, land assembly and urban transformation (Brueckner and Lall 2015; Lozano-Gracia et al. 2013).
Existing research regarding the precise role of institutions on urban PPPs is inconclusive,[3] but the broader literature on institutions and economic development will guide this project’s theoretical trajectory. Generally speaking, institutions shape development through both formal and informal channels. On the formal side, ‘institutions are the humanly devised constraints that structure political, economic and social interaction’ of a society (North 1991, 97). Renowned economists Ronald Coase (1937; 1960; 1992), Steven N.S. Cheung (1998) and Douglass North (1991) all contend that, as long as the economy involves more than one actor and hence entails transaction costs, institutions matter for the outcome of the economy.
Empirical results linking formal institutions to economic development tend to be robust.[4] For urban policy specifically, property rights are considered as a key determinant for investment in redevelopment and slum improvement (Field 2005). According to Angel (2000, 83), ‘the establishment of individual property rights in land and housing is the cornerstone of an enabling housing policy regime,’ because the rules ‘governing property acquisition, sale, development and use are of critical importance in creating predictable, vibrant and efficient housing markets.’
Besides formal structures, informal institutions such as culture, ideology, customs and interpersonal relationships also matter for development (North 1992; Fukuyama 1999), although their mechanisms are less straightforward and evidences tend to vary (Rodriguez-Pose and Storper 2006). Among informal institutions, social capital is often discussed (Storper 2005; Rodriguez-Pose 2013). Putnam (1993, 38) defines social capital as ‘features of social organization, such as networks, norms and trust that facilitate coordination and cooperation for mutual benefit.’ Regarding how social capital relates to development, Fukuyama (1999) explains its economic function in reducing transaction costs, while Olson (1971) and Ostrom (1990) demonstrate that social trust and collaboration can mitigate large groups’ inherent collective-action problem and improve the accountability of local governance.
Another important notion regarding informal institutions is that, besides acting as a direct determinant for development, they also moderate, feedback to and interact with formal societal rules. Boix and Posner (1998) find that social capital improves governance quality, because communal trust and cooperation can lower the cost of local policy implementation, as well as improve civic participation that incentivizes officials to govern more responsibly. In the urban realm, Healey et al. (2002, 21) likewise contend that ‘governance capacity’ and a place’s ability to mobilize diverse resources are ‘embedded in complex local milieus.’ In all, whether diverse local actors can form effective partnerships may also depend on the social dynamics of the place.
II.3 The research question
By applying the institutionalist approach to China’s urban transformation, this research problematized the top-down view of the PPP that has traditionally focused on macro fundamentals and national policy agendas. Despite the global trend towards market-financed urban redevelopment as well as China’s determined initiative for urban PPP, there has still not been sufficient investigation into how exactly urban redevelopment policies could embrace market forces more feasibly and sustainably. Therefore, I investigated how real-world urban PPPs could be complicated by 1) local property right politics and 2) informal social mechanisms.
Specifically, I raised questions regarding how the real estate sector perceived risks and how the developer collaborated with communal and public sectors to manage those risks. Xu’s (2009, 14) quantitative analysis shows that, for China’s urban redevelopment, market firms demonstrate significantly strong sensitivity towards the balance between income and risk – the market firm’s motivation ‘in cost control and profit pursuit is bigger than the government’s.’ Therefore, in order to reveal the intricacies behind feasible urban PPPs, this research explains where risks came from and how the firm managed those risks during the heightened interaction between the market, the community and the government.
As any economy is moulded by both formal and informal institutions (Amin 1999, 367; Rodriguez-Pose and Storper 2006, 1; Rodriguez-Pose 2013, 1038), this research ultimately focused on how societal and communal arrangements contributed to the economics of risk control. I thus asked: 1) In what ways formal and informal institutions had different influences, 2) in what way they were closely intertwined and 3) how the relationship between formal and informal institutions has changed during the course of development and why? In all, China’s experimentalism in policy deployment and project delivery may shed light on the dynamic, non-linear process of institutional change and have broader implications for urban market integration.
III. Research Design and Methodology
III.1 Overview of the case and methods
In order to answer how institutions motivate market firms to share risks and take initiatives in China’s urban redevelopment and to understand the interaction between formal rules and informal dynamics, I conducted a case study in Shenzhen, the pioneering city for PPPs in urban redevelopment in China. The case-study approach uncovers the human agency nuances of urban PPPs’. As redevelopment’s processes and institutions are complex and non-statistical, the case study’s qualitative data could provide an up-close and in-depth investigation of the subject (Yin 2014).
I gathered primary data from 23 in-depth, semi-structured interviews and 38 project-related documents. The research triangulated the data to ensure validity and reliability. Via snowballing, I sampled stakeholders with different perspectives (the developer, government, community and planners) for balanced views as well as independent experts for cross validation. I then conducted thematic analysis with NVivo 11’s technical assistance. The more detailed case description and research methods, as well as analytical caveats, are described in Part III.2-5.
III.2 The case
Shenzhen’s urbanisation is one of China’s fastest: from 1980 to 2014, the population grew from 30,000 to 10,778,900. Currently, 77.23% of Shenzhen’s population are migrants without local household registration. The city is struggling with ‘urban villages’ – they are high-density communities in which there are informal buildings, insufficient infrastructure and an unregulated housing market.[5] My case, Dachong Village, used to be one of those settlements. Before redevelopment, Dachong housed 71,000 people, 2.8% of whom were original villagers while the remaining 97.2% were migrants. The original villagers had lived there from the time when Shenzhen was still an agricultural settlement, and they started building dense properties after Shenzhen urbanised, leasing apartments informally to incoming migrants.
The redevelopment of Dachong (also known as Dachong Village Redevelopment, DVR) broke ground in 2011 and is so far Shenzhen’s largest and most complex redevelopment project. DVR demolished 1.03 million square metres of buildings on 69.46 hectares of land and the entire neighbourhood was re-planned with new residential towers, offices, hotels and shopping malls. The new design increased the overall density by a factor of 2.8 while eradicating congestion and informality (see Figure 1–4 for comparison).
DVR is representative of Shenzhen’s unique redevelopment practice, as most STI projects elsewhere in China are government funded. The Shenzhen government politically supported DVR, but it was the market that financed it fully. With no governmental debt involved, China Resources Land Limited (CRLand, publically listed on the Hong Kong Stock Exchange) financed the entire investment (approximately CNY30,000,000,000). Currently, Dachong’s original villagers have returned to the new apartment towers after temporary relocation. Other developer-owned commercial buildings are still under construction.
Figure 1: Before redevelopment
Figure 2: After redevelopment, computer-generated image
Figure 3: Before redevelopment
Figure 4: After redevelopment
III.3 Data collection methods
When collecting data, I aimed to ensure validity and reliability via methodological triangulation. Table 1 lists my data sources: I resorted to both in-depth interviews and documentations (contracts, government policies, planning files, news, archives and secondary studies and discussions). For interviews, I contacted multiple informant groups for a balanced picture – besides interviewing the four parties directly involved in DVR, I also cross-validated the information with other independent experts.
Table 1: Data sources
I selected the interviewees using purposive and chain sampling techniques. For key organizations, my personal acquaintances first warranted my trustworthiness and introduced me to local stakeholders. In order to reach non-elite residents, I lived in Dachong during the entire fieldwork and gained access to their gated community after a developer friend introduced me to my first villager interviewee. Snowballing continued until I observed no marginal new information.
The final sample included 23 interviews from six informant groups. A typical interview took 60 minutes and I used Mandarin Chinese during conversations. The fieldwork was done in Shenzhen during June and July 2016, with preliminary interviews conducted remotely in London from March to May 2016.
The interviews were in-depth and semi-structured. I developed a case-study protocol, which contained a series of data collection questions, to guide the fieldwork along the research’s analytical purposes (see Appendix 1). Specifically, I decomposed the general research question into four distinct yet interconnected subcategories, in order to 1) identify the source of project risk, 2) describe the formal and informal institutions in Dachong, 3) explain the linkages between institutions, risk management and cost control and 4) explore alternative explanations and generalizations. These questions then helped me to customize for each informant group a balanced yet focused conversation guide (see Appendix 2 for an example).
III.4 Analysis methods
I reported and analysed my findings using the thematic analysis technique. I did transcriptions in NVivo 11 on the same day as the interviews – the notes were in Chinese, with key quotes translated into English for referencing. As I had used a case-study protocol to structure my interview questions, the texts came with identifiable segments based on distinct yet related categories of inquiries. Therefore, I used the same protocol to develop my codebook for structural coding.
I analysed my data both during and after data collection. During the data collection period, I did real-time preliminary analysis to evaluate my interview skills, identify new concepts or facts that needed further verifications and hence enhance data’s overall quality (Guest et al. 2011).
After data collection, I coded all data and constructed overarching themes to explain what the case means under the theoretical framework of New Institutional Economics. I aimed to eliminate as much bias as possible by placing equal weight on the developer’s data and the community’s data. Sensitive and pivotal claims made by one informant group were verified by at least another source.
Finally, while discussing the findings, I aimed to generalize the case analytically instead of statistically. I considered how parts of the case could corroborate existing knowledge on institutions and development and how DVR’s experience might suggest new ways of conceptualization.
III.5 Caveats and limitations
Readers should consider two important caveats. Firstly, while the research addressed the financing aspect of China’s urban redevelopment, it did not aim to conduct a conclusive investigation of market investment and urban transformation. A more complete analysis of urban PPPs’ determinant factors would explore not only institutions, but also other control variables such as macroeconomic fundamentals, banking regulations and case-specific design schemes. Such a broad, statistical agenda was not within the scope of this research. Instead, my goal was to provide novel empirical evidence regarding the under-investigated institutional factors that may affect Chinese urban PPPs (cf. Yu 2007; Wang et al. 2008) and to answer the series of ‘how’ questions via in-depth, up-close case analysis.
Secondly, the effectiveness of data collection varied between different respondents. When interviewing elites who were very sensitive to the subject and were very experienced in answering questions, I sometimes had to triangulate my questions from other angles. Interviewing non-elites could be equally, if not more, challenging, as Dachong’s villagers were known to be ‘afraid of interviewers’ due to past tension with the media (Cheng 2015, 13). In some cases, I handed small gifts (coffee or tea), guaranteed anonymity and turned off the recording device to encourage free speech and to protect my informants. In fact, most of my in-depth conversations took place only after my connections personally introduced me to the interviewees. While this trust-establishment mechanism did improve the quality of conversations, it might have limited the quantity of samples. Therefore, although information did reach saturation with 23 interviews, I still contrasted and compared the interview data with documentation data to increase validity and reliability.
IV. Empirical Evidence
IV.1 Overview of results
In this section, I will explain the market firm’s perception of risk factors and demonstrate that certain place-specific institutional arrangements could mitigate project risks by facilitating collective action in a low-cost, purposeful way.
Essentially, to finance urban redevelopment is to take risks. Data collected shows that during DVR, CRLand managed risks via a series of negotiations. The process was effective because Dachong community’s unique social and governance structure helped reduce the nominal as well as the time costs of negotiations. In addition to human dynamics, power relations mattered too: the Shenzhen government’s exceptional policy framework and discretional handling of property rights were the ultimate ‘risk cutter’ for DVR. Parts IV.2-5 will examine the case in detail and Section V will draw transaction cost theories to discuss the findings’ broader implications.
IV.2 Risk, cost and concerns for negotiation
A market firm carries out urban redevelopment for profitability, meaning that costs and risks must be reasonably controlled. For DVR, the developer’s primary risk came from Dachong’s reluctant villagers – if they eventually refused to sign contracts, all the preparation work would be futile. There were various reasons behind the villagers’ reluctance,[6] yet the ultimate contention was about how much cash and/or new properties CRLand should give back to the villagers as compensation (Southern Metropolis Daily 2011; Interview 5; Interview 21).
Therefore, CRLand needed to negotiate with Dachong, talking the villagers into agreement so as to ensure the project’s feasibility. However, negotiations also came with their own risks. First, opportunity costs would escalate if the process took too long (after all, negotiations by themselves generated zero positive cash flow). Second, total expenditure might be too large if CRLand’s offer were too generous (even if that package could indeed accelerate the process). In other words, the developer must control both the nominal and the opportunity costs.
Consequently, in order to minimize costs and control risks, CRLand must adopt a negotiation strategy that could 1) ensure agreement, 2) reduce negotiation time and 3) claim as much value as possible. CRLand’s senior director in charge of DVR explained: ‘Whether or not negotiation went smoothly was vital for the cost control. Before construction, DVR was costing us over CNY1,000,000 per day. The faster the negotiation went, the better our situation was’ (Interview 6). A manager of CRLand also added: ‘The years spent in negotiations could have made other smaller developers bankrupt already’ (Interview 5).
Having established negotiation as the crux of cost control, the remainder of Section IV will explain how Dachong’s social structure, property right policies and governmental involvement affected the costs and risks of DVR.
IV.3 Social structures and communal governance
DVR’s negotiation process deliberately internalized Dachong’s communal dynamics, as CRLand spent more than five years working with the community before project construction (Interview 2; Interview 5; Interview 12; Interview 15). This part will scrutinize Dachong’s social and governance structure, which is a particular, traditionalistic mixture of informal and formal mechanisms for collective action.
Dachong had strong communal bonds with highly homogenous demographics. Eighty percent of Dachong’s original villagers shared three common family names – Zheng, Ruan and Wu (Cheng 2015). The kinship culture, influenced by Hakka traditions, shaped Dachong’s psychological sense of community (Interview 6; Interview 7). A villager said: ‘Because Dachong’s people belonged essentially to the same families, we were very close to each other, shared the same way of life and observed the same customs’ (Interview 8). As outsiders, CRLand’s project team considered the villagers to be ‘honest and simple’ (Interview 6) and observed that ‘kinship members tend to keep on good terms with each other and act in the same way’ (Interview 5).
The strong tradition of trust and kinship culture, however, does not mean that Dachong lacked more organized ways of governance. In 1992, Dachong Corporation was established as the official governing body of the village economy. The Corporation used to run the village’s economy by constructing and leasing commercial and industrial properties. Today, this Corporation is still the legal entity that owns Dachong’s collective assets. On the formation of the Corporation, 725 villagers (one from each household) became the initial shareholders (Cheng 2015, 105).[7]
Despite the corporate name, Dachong Corporation is by no means a modern company per se its institutions and cultures are essentially rural and traditional. According to one of the Corporation’s employees: ‘Dachong Corporation does not have adequate institutions – there is neither human resource management,[8] nor reward or punishment incentives…The Board of Directors all call each other ‘uncles’ or ‘brothers’ and they talk about family affairs during Board meetings…A typical corporation maximizes profits, but our leaders feel little pressure – they want stability and peace. They think they can manage the Corporation with their experiences, so there’s no need for any formal rules’ (Interview 12). A high-level leader of Dachong Corporation agreed that the Corporation’s governance ‘is heavily influenced by traditional village culture’ (Interview 11). In fact, the rules for shareholders are no less traditionalist than they are for the managers: shareholders cannot buy or sell their equity shares – instead, shares can only be inherited following the family lineage (Interview 8). In all, as the interviewed employee of the Corporation summarized: ‘Here, Dachong’s villagers have made the Corporation’s governance mechanism exactly the same as their traditionalistic way of life’ (Interview 12).
Traditionalism is evident not only within the Corporation, but also in the way that Dachong Corporation interacted with the villagers – a relationship characterized by strong local leadership, representative democracy and small-group collective actions.
Firstly, the Corporation had very persuasive leaders. In 1992 when the Corporation was formed, it officially replaced the former village government as the administrator of Dachong and it has since then been the community’s highest authority. According to SCD’s director of research, who had years of experience in urban villages, ‘urban-village governance is very traditional, in the sense that the Corporation’s President is like a ‘parent’ whom the ‘children’ must obey’ (Interview 23). The Corporation’s leader confirmed that villagers were very obedient – especially before DVR and when it came to important issues, they listened to what the Corporation said (Interview 11).
Secondly, Dachong’s decision-making mechanism is relatively efficient as a result of its mixture of direct and representative democracy. Each villager votes to elect the Corporation’s management – this direct democracy is a tradition of rural China and the ultimate source for the leadership’s strong legitimacy (Huang 2010; Interview 11). Then, when it comes to communal issues, the Corporation represents the entire village in making final decisions. Within the Corporation, it is the Representatives of Shareholders or the Board of Directors that pass proposals by unweighted voting – not every public decision involves all shareholders.
Thirdly, when the Corporation directly interacted with community members, it reorganized the village into smaller groups that boosted governance efficiency. During China’s Communist period, Dachong used to have six Production Units and when Dachong Corporation was formed in 1992, those Production Units naturally transited into the Corporation’s six Subsidiaries.[9] These Subsidiaries brought spatial and social proximity into the large village. ‘People belonging to the same Subsidiary lived close’ (Interview 11) and ‘even if you don’t know every person in the entire village, you will be familiar with people in your own Subsidiary’ (Interview 6). This organizational strategy made collective governance easier: when the Corporation needed to communicate with the entire village, it tended to let the six Subsidiaries organize their own meetings with smaller groups of villagers.
In all, the Dachong community was effectively organized via common kinships, shared culture and the presence of Dachong Corporation. Despite its urban location and realty-driven economy, Dachong was tied to rural traditions – interviewees from both inside and outside the village spoke about ‘Village Head’/’Corporation’s President’ and ‘Production Units’/’Subsidiaries’ interchangeably. Such a rural identity both shaped and was shaped by Dachong’s strong autonomy in the city. Indeed, Dachong was essentially self-governed: in China, village governments and the municipal government are two parallel administrative systems – neither of them is considered to be ‘above’ the other. Across Shenzhen, as urban-village corporations have replaced village governments, it was the Corporation, not the municipal government, that managed Dachong’s economic, social and political life (Huang 2010).
IV.4 The linkage between social dynamics and cost control
Dachong’s autonomy and solidarity facilitated consensus-building during negotiation. Before obtaining the right to construct on Dachong’s land, CRLand needed each villager’s formal agreement to have his/her existing properties demolished. The village’s strong leadership, social structure and group mentality, instead of forming solidary forces against CRLand’s plan, actually helped CRLand to control the time spent in achieving popular consent that was needed for the developer’s subsequent obtainment of land right.
Although it was each villager’s signature that was required for demolition and construction, in practice, CRLand tackled the Corporation first before dealing with the individuals. The Corporation, as the highest authority in Dachong, approved DVR’s overall plan as well as the preliminary compensation rate and those decisions were later communicated to the villagers in general. According to the archive, on September 28th, 2008, CRLand and the Corporation signed the Cooperation Agreement, whose draft was passed by the Board of Directors. Later in early November 2008, 66 Representatives of Shareholders met to ‘study the Agreement’s specific content’ (Cheng 2015, 50). This meeting was then followed by information sessions open to all villagers, which 500 out of 2000 villagers approximately attended. The Corporation’s leader remembered those meetings: ‘Small meetings first, then big ones. For Directors first, then for Representatives, all shareholders and all villagers – in that order’ (Interview 11).
Therefore, DVR’s pre-construction negotiations actually consisted of two phases: Phase I was between CRLand and the Corporation’s management, during which leaders decided whether to pursue redevelopment and what the compensation rate should be. Phase II’s goal was to let each villager accept the plan and give permission to demolish villager-owned properties. Phase I determined whether DVR could happen, while Phase II determined how soon the land could be transferred.
The Corporation’s strong leadership accelerated both phases of the negotiation. As observed by CRLand, during Phase I, the Corporation’s leaders knew the villagers well and could thus ‘gauge their demand, ensuring that the compensation package would be likely to be accepted during individual-level negotiations’ (Interview 6). The representative democracy of Dachong eased DVR’s negotiations from the outset, as the Corporation passed the compensation rate and then distributed it to individual villagers. A villager reflected: ‘CRLand and the government first ‘took care of’ the boss and then the boss joined the developer team to push DVR’ (Interview 8).
Besides acting as a welcoming gatekeeper, the Corporation also actively persuaded villagers to accept the offer in Phase II. From 2008 to 2010, Dachong Corporation organized communal meetings, distributed various propaganda materials and offered Q&A sessions in order to promote consensus (Shenzhen Nanshan DVR Authority et al. 2014). According to opinion polls, the villagers’ support rate rose from 60% to 80% during 2008 (Shenzhen Government 2016). CRLand considered the Corporation indispensable for the success of Phase II: ‘The Corporation took charge of working on the villagers’ minds, because the leaders know how people think and are very persuasive’ (Interview 6). As long as there was trust between authority and community, negotiation should be frictionless. A leader of Dachong Corporation reflected: ‘Most of the work went smoothly. If someone would not accept the offer, the reason must be that he did not trust the Corporation in the first place’ (Interview 11). Here, the process of economic transformation is embedded in social relations of trust.
Besides relying on the Corporation’s facilitation, the developer and the government also actively promoted the villagers’ agreement by tapping into Dachong’s finer social structure. Being outsiders made it hard for CRLand and the government to address the entire village abruptly. Therefore, they reorganized themselves into six teams, each working with one of the six pre-existing Subsidiaries. Smaller group size shortened the insider-outsider distance and enabled CRLand and the government to ‘go deep into the household and talk to villagers face-to-face’ (Shenzhen Nanshan DVR Authority et al. 2014, 148). The spatial and social proximity also allowed the developer to befriend the villagers: before directly discussing compensation plans, some CRLand employees interacted with the villagers on a daily basis, driving them to hospitals if needed and playing games of Mah-jong[10] with them for two years (Interview 2; Interview 5; Interview 15). CRLand’s senior director wrote the following statement at the mid-point of DVR: ‘Only by gaining the villagers’ trust will you get support. If you can reach their hearts, the negotiation time could be cut in half…. Spend time with them. Drinking teas and having small talks could gain more trust than talking about plans and rates’ (Wu 2009). In other words, CRLand knowingly internalized and constructed social relations to reduce negotiation cost.
In addition to the work done by the Corporation and outsiders, villagers’ own crowd mentality was the final push for their consent. After the negotiations, contract signing officially started on October 23rd, 2010. Family relatives and kinship members tended to sign together (Interview 5). The villagers also followed their leaders during contract signing – according to CRLand’s respondent, ‘the Corporation’s Directors took the lead; Communist Party members in the village were also required by the government to sign on the first day. Villagers demonstrated herd mentality. When they saw that all the leaders had signed, they wanted to sign too. This is how snowballing worked’ (Interview 6). Indeed, DVR’s contract-signing went rather fast: 168 households signed on the first day and within 60 days, 97.4% (907 households) of the entire village had agreed to hand over their properties and supported DVR (Cheng 2015, 52). In comparison, another redevelopment project of comparable scale in Shenzhen took more than two years to reach a 96% agreement rate (Gangxia Corporation 2011).
In all, the social and governing structure of Dachong contributed to CRLand’s risk management by facilitating collective actions during negotiations. Phase I was efficient because, as explained by a government official, ‘the developer only had to deal with one entity – the Corporation, instead of many’ (Interview 16). In subsequent individual-level negotiations, Dachong’s strong leadership, small-group organizations, trust and crowd mentality also made villagers quickly accept CRLand’s offer. According to the Corporation, the honesty and simplicity of villagers did make redevelopment much easier (Interview 11). When I asked whether the social and governance structure had an impact on the developer’s negotiation time and project cost, CRLand’s senior director replied: ‘During urban redevelopment, you experience with the people matters the most. After all, urban redevelopment is about human dynamics, interactions and trust’ (Interview 6).
IV.5 Power relations and property right transfer
Although Dachong’s communal characteristics and informal mechanisms eased DVR’s negotiation, it is hardly the whole story – in fact, power actions were the cornerstone of land transaction and DVR’s deal could not be completed without the government’s formal and informal handlings of property rights.
The Shenzhen government always had its own interest in DVR. Part of the government’s goal was to resolve Dachong’s historical landownership dispute via redevelopment. Dachong’s building ownership was relatively clear,[11] but regarding land, both the Corporation and the Shenzhen government claimed ownership.
Dachong’s unclear landownership was due to imperfect local policy interventions historically. Overall, China grants no private landownership: according to the Constitution (China 2004), urban land in is owned by the State and rural land is collectively owned by rural residents. The urban government could, however, pay the rural residents and convert their collective-owned land into State-owned land according to Land Management Law (China 1998). In 1992, Shenzhen announced plans to nationalize Dachong’s rural land; nevertheless, due to the municipality’s financial constraints at that time, the government did not pay the conversion fees. Consequently, the villagers continued to occupy the land and started building denser housing and the Corporation, as the village economy’s legal-person representative, held the de facto ownership over Dachong’s land. The Corporation’s leader argued: ‘Dachong’s land had been used by us, occupied by us, so it belonged to us’ (Interview 11). Nevertheless, the Corporation’s land rights were not formally registered and the equivocal Shenzhen government never officially acknowledged Dachong’s land titles (Southern Metropolis Daily 2011; Interview 6; Interview 15).
In this regard, the government could use DVR to officially nationalize Dachong’s land, because Land Management Law (China 1998) requires landownership to be nationalized before developers can carry out any construction.[12] In other words, during DVR, a land-registration process had to take place after the Dachong community gave its consent to redevelopment and before new construction began. This registration would convert landownership from ‘unclear’ into formally State-owned.
Nevertheless, landownership nationalization could have deterred market participation, because in China generally, once landownership is nationalized, the government should transfer the land’s construction right via public bidding.[13] Were Dachong’s land to be publically bid on, CRLand, after having spent all those years in negotiations, would face the risk of being outbid by others.
Fortunately, Shenzhen’s unique land policy eliminates such risk for the developer. Instead of requiring public bidding, Shenzhen’s legislature enables the government to transfer the urban-village land’s construction rights to a designated developer via exclusive negotiations – no bidding required (Shenzhen Government 2004; 2009; 2011; 2012). Such policy essentially eliminates the developer’s risk of losing the bid after preparatory expenses, creating ‘extra incentive for the developer’ (Lin and Xia 2016). The developer reacted well to such policy. CRLand’s senior director explained: ‘Shenzhen’s land policy is special compared to the rest of China. Without public bidding, urban redevelopment became much more feasible’ (Interview 6). A senior manager of CDB also considered such permission for negotiation ‘the key to market participation in urban redevelopment’ (Interview 21).
‘The Shenzhen government was helpful to firms’ – CRLand considered this to be so (Interview 6). In fact, besides using formal policy frameworks to incentivize the developer, the Shenzhen government also helped push DVR via its quasi-formal involvement in the negotiation between CRLand and the Corporation. After CRLand’s individual-level negotiations with villagers, buildings were about to be demolished and the right to construct on Dachong’s land was about to be transferred. Reflecting upon that moment, the Corporation’s leader stated: ‘When the government saw that so many villagers had signed contracts and realized that DVR was finally feasible for sure, they made us sign the landownership registration papers and single-handedly gave the land’s construction rights to CRLand. We were surprised. We didn’t want to accept such a transfer, because in our original agreement, we and CRLand should be DVR’s joint-developer – if we were the joint-developer, we could have maximized the village’s benefit even more. Otherwise we would never want to forgo our landownership or agree with DVR in the first place. However, the government just took the land and transferred its construction right to CRLand, without either public bidding or negotiation, but solely at the government’s own discretion’ (Interview 11).
The Corporation’s account implies that the government might have been biased when handling the transfer of the land rights. The negotiation regarding land transfer, from the Corporation’s perspective, was skewed towards CRLand’s benefit via tacit power dynamics. The Corporation’s employee spoke euphemistically: ‘The government was very powerful and skilful. That’s why DVR went so smoothly…The government and CRLand collaborated very well’ (Interview 12). Regarding land right transfer for urban village’s redevelopment, CBD’s senior manager added: ‘It is possible to see some government-firm collusions’ (Interview 21).
Ultimately, when faced with power dynamics, the Corporation’s own interest did not end up postponing the negotiation. As explained by DVR’s chief planner (Interview 15), the Corporation was not successful in claiming joint-development right – instead, the Corporation gave the landownership to the government, the government sold the land’s full development right to the developer and the developer gave Dachong new buildings, not shared development right, as compensation for loss of land and property. Regarding such arrangement, the Corporation’s leader said: ‘After I said ‘no’ during some negotiations, the government would let higher-level officials talk to me, working on me, pressing me’ (Interview 11). According to a planner from UPDIS with extensive experience in urban redevelopment, ‘even though the Corporation wanted joint-development rights as the compensation for losing de facto landownership, that demand might be suppressed when they dealt with the government’ (Interview 14).
In all, the Shenzhen government was a key facilitator for DVR’s progress – not only did its unique policy framework enable negotiations to happen in the first place, its powerful involvement in the actual negotiation process also accelerated DVR’s landownership formalization and subsequent transfer of construction right. In other words, for the developer, the government’s hard rules and soft influences helped eliminate CRLand’s final risk before construction – the risk that the exclusive right to construct would be outbid by other developers or shared by the village.
V. Discussion: An Analysis of Institutional Change
V.1 Overview of theoretical generalization
This section will generalize DVR analytically. Instead of extrapolating statistical probabilities, I will scrutinize here what the case means in the framework of New Institutional Economics and further examine potential pitfalls regarding the mixture of formal and informal institutions and their interaction with the market.
Firstly, based on DVR’s experience, I will argue that certain place-specific institutions could motivate market investment by jointly inducing a process of institutional change that helps reduce transaction costs. The case demonstrated the endogeneity between institutional change and economic activities, as the low-cost, low-risk way of clarifying landownership both depended upon and enabled the market firm’s involvement.
I will then use additional data to expand the analysis and critique the relationship between power and social cohesion that existed in this case. I will scrutinize how certain actors utilized DVR to formalize landownership, during which the place’s initially weak legality gave room to political power that tacitly influenced the outcome of negotiations. Furthermore, in a dynamic view, although institutionalization could indeed encourage market investment, the one-off, non-repetitive nature of land-related profit distribution may shred the very social tissue that facilitated institutionalization in the first place. Such loss of social trust as a result may put future development at risk.
V.2 The economics of land-market institutionalization
Urban policymakers need to be concerned about the cause of and the solution to real estate market’s transaction costs. Actually, with the approval of Coase, Cheung (1998) suggests that transaction cost should be renamed institutional cost and DVR aptly demonstrates how institutional cost arises and how it can be resolved in a non-linear, endogenous way.
Dachong used to be a forbidding site for investment due to inefficient institutional arrangements. Indeed, ‘an economy of more than one individual would necessarily contain institutions’ and if the particular institutional arrangement is too inefficient, ‘the costs that arise as a result may entail no transactions at all’ (Cheung 1998, 515). Before DVR, the government’s imperfect intervention and the village’s autonomy led to contested landownership and such lack of clear property rights made Dachong difficult for market integration. Dachong’s history supports the theory that inefficient institutions are the obstacle to development, as Dachong’s weak land institutions induced mounting informality and hence deterred inward investment.
To attract market investment requires more efficient institutions. In this regard, urban redevelopment essentially hinges upon a process of institutional change. During DVR, economic actors drove Dachong’s landownership toward formal clarification, which reduced the transaction cost for further market investment and development.
Nevertheless, as the case suggests, institutional change is not an exogenous process that occurred independently. Redevelopment efforts did not happen after landownership was clarified – instead, the process of redevelopment included institutional change itself. It was the market force’s involvement (including its interaction with public and communal sectors) that facilitated landownership formalization.
The market, sensitive to transaction costs, acknowledged land transfer as a major source of project risk and actively tried to control that risk by directing purposeful collective actions. CRLand understood that for urban redevelopment involving pre-existing property owners, popular consent was a precondition to demolition, landownership formalization and subsequent transactions. In order to accelerate those procedures, CRLand internalized Dachong’s pre-existing social dynamics to gain villagers’ collective consent. The negotiation was effective thanks to the community’s culture of social trust, strong local leadership, representative democracy, small-group social structure and group mentality.
DVR corroborates the theory that social trust and informal governance dynamics can help reduce transaction costs (Fukuyama 1999; Boix and Posner 1998). Specifically, informal institutions help with cost reduction by mobilizing the actors efficiently for the motion of institutional change. Dachong’s land was finally nationalized and legally sellable thanks to the series of negotiations that closely incorporated Dachong’s local human dynamics.
V.3 Intertwinement between formal and informal institutions
The transformation toward strong, formalized landownership institutions was not entirely due to the interaction between the market and the community. In fact, DVR also shows that formal and informal mechanisms could interact, during which the government, while co-producing the institutional change, may take a larger role in affecting the direction of change.
On the one hand, the Shenzhen government designed formal frameworks to permit negotiation-based land transfer in the first place – this policy directly eliminated the risk of land bidding and incentivized market participation. On the other, during stakeholder negotiations, the government indirectly affected the negotiation outcome, as political, power factors propelled the final agreement during key stages of DVR’s bargaining. The Corporation’s initial interest in joint-development rights might have prolonged the negotiation process and escalated the cost for CRLand; however, the power of government officials ultimately did away with this hassle. Dachong’s strong autonomy and solidarity did not lead the course of institutional change towards any form of shared development rights; instead, with political power involved, the community’s popular consent was purposefully employed to transfer the formalized land to the developer. Here, the government did not formally intervene with law or coercion; its influence over the negotiators was mainly via soft, less visible channels.
After all, during the process of institutional change, communal dynamics can facilitate the happenings of change, but power influences can affect the direction of change. Given the Shenzhen government’s paramount interest in resolving Dachong’s historical landownership dispute, government officials used formal policy frameworks and informal power influences to achieve the land’s formalization and its subsequent market transaction – the preparatory negotiations had attained public consensus, so the government could intervene without violence or perceivable conflict. This closer examination of DVR’s negotiation mechanism reveals that, while social structures and communal relations could reduce the cost of mobilizing people and resources, power and political momentum could influence where those organized assets are heading. In Buitelaar and Needham’s (2007, 119) words, the State can achieve ‘purposeful institutional change.’ Ultimately, formal and informal dynamics from government, community and the market closely interact with each other in the process of institutional change and development.
V.4 Dynamic view: the changing prospect of development
Longitudinally, Dachong’s land institutionalization process involved a mixture of official and relaxed mechanisms, which in fact produced varying consequences on different phases of development.
Counterintuitively, although Dachong’s initially weak landownership institutions did impede market investment, the very weak legality regarding urban-village land at that time actually accelerated the process of institutional change. UPDIS’s planner said: ‘Before Shenzhen formalized the laws of urban redevelopment, many policies had been unclear. Therefore, DVR’s specific arrangement was a result of negotiations. Back then, even when there were some relatively clear policy guidelines, the final scheme tended to reside in the grey areas of policies. Right now, it is much slower to deliver urban redevelopment, because the policies are too clear and leave no room for negotiations’ (Interview 14).
Indeed, institutional change, including those purposefully directed toward formalization, can occur via formal or informal routes (Musole 2009) and DVR suggests that negotiation-based transactions might be more cost-effective than bureaucratic actions. As long as social and political dynamics were jointly deployed, negotiation can proceed quite smoothly: during DVR, it was the relaxed negotiation process that effectively propelled the pro-formalization institutional change, with communal-based collective action being the ‘gas’ and political deliberation being the ‘steering wheel.’
Nevertheless, this bottom-up, not-entirely formal process of institutional change, aided partially by the community’s strong social trust, could gradually crush social cohesion itself. After DVR, the community’s internal bonding waned. ‘The village’s affinity no longer exists,’ said the Corporation’s leader (Interview 11). CRLand’s employee also added: ‘Faced with such big profits, of course villagers will fight and not agree among themselves’ (Interview 4). The leadership’s legitimacy dwindled too. Some villagers suspected: ‘The Corporation and CRLand are the same gang! Together they sold us out and sacrificed our land!’ (Wang 2010). The villagers no longer listened to the Corporation or came to them for help (Interview 11). The senior director of CRLand also observed: ‘In the past, Dachong’s people tended to follow the Corporation; now the power dynamic is more pluralistic’ (Interview 6).
Indeed, as the institutional change brings huge profits to stakeholders, the very one-off, non-repetitive nature of land-related formalization and transaction could induce unaccountable distribution of profits, shattering the social tissue that had tied together the rural community for generations (Mattingly 2016). Dachong’s diminishing communal trust might become a problem for DVR’s future. For example, at this moment, villagers cannot agree on the tenant selection scheme for those commercial spaces that CRLand gave back as part of the compensation (Interview 4; Interview 15). Office leasing faced the same issue as villagers and the Corporation often found themselves involved in disputes (Interview 11).
In a way, although DVR delivered landownership formalization and initial capital investment quickly, future commercial and community development may be at risk due to the broken social bond and the hereby threatened collective action in the future. Reflectively speaking, since the landownership formalization process sacrificed the community’s informal trust, the overall institutional cost could still be deemed high – high enough to halt economic transactions (Cheung 1998; North 1991), costly enough to clog Dachong’s ongoing property leasing and endanger its continued economic and community development.
VI. Conclusion
Institutions both shape and are shaped by development efforts and the mechanism behind such relationship can be non-linear and highly complex. As the case of DVR suggests, on the one, strong, formalized property rights institutions are indeed a necessary condition for urban market integration as existing literature suggests (North 1991; Coase 1937; 1960; Cheung 1998). On the other, however, the road to institutionalization could be paved with a mixture of formal and informal elements, which may have varying consequences at different stages of development.
Understanding the sociopolitical nature of transaction costs is a key to implementing market-financed urban redevelopment. By analysing DVR’s intricacies, this research revealed some of the institutional origin of transaction costs, the real-world techniques for their mitigation and potential limitations regarding the current cost-reduction approach.
First of all, DVR corroborates the existing theory that strong landownership institutions are crucial for cities (Angel 2000; Field 2005). For urban areas, landownership disputes may deter inward investment and economic actors need to reform the area’s land institutions in order to enable feasible, market-based redevelopment.
However, according to Shenzhen’s evidence, the place’s initially weak formal institutions might open a window for low-risk, low-cost institutional change – as long as that transformation process aptly integrated communal and societal dynamics. During DVR, the community’s indigenous cultural and governance structure facilitated collective action and helped to achieve the project’s popular consent. Meanwhile, the Shenzhen government’s formal policy framework and tacit power influences also helped mitigate the project’s risks. DVR suggests that institutionalization is not an exogenous process that happens independently prior to market investment. Instead, economic activities and the interaction between market, public and communal sectors both shape and are shaped by institutional change.
Nonetheless, DVR’s substantial delivery was not without potential pitfalls. Although formal and informal mechanisms could jointly leverage cost-effective land transaction, such fast-paced institutionalization may harm the very social cohesion that facilitated institutionalization in the first place, because quasi-formal negotiations and the rapid, non-repetitive profit distribution may induce unaccountable behaviours that prevent stakeholders from further collaboration. Consequently, in a dynamic view, overall institutional costs may still be deemed high, which could halt transactions in the future.
For policymakers, this analysis has implications regarding how urban policies could embrace the market more effectively and sustainably. Given the market firm’s cost-sensitive nature and its intrinsic need for profit maximization, urban policies shall intervene where sociopolitical dynamics comply with the real estate firm’s risk management concerns.
First, although it is premature to draw firm conclusions regarding the correlation between sociocultural factors and investment feasibility, if confirmed by further research, these findings would suggest that the implementation of urban PPP initiatives may be particularly difficult in places with ‘thin’ communal bonds. Market capital may be attracted to some places but not others, because in China, the degree of cultural sociability varies across districts, cities and regions. Shenzhen’s urban villages are fortunately pro-redevelopment, as their tradition and governance structure tend to facilitate collective action.
Second, besides the importance of social dynamics, my findings also suggest an active role for local-level governments. Negotiation-based land transfer incentivizes developers yet such an arrangement is not China’s default policy. Therefore, cities might need to frame their own policies, which implies greater devolution of authority. However, negotiation-based land transfer brings less land-based municipal revenue, which might turn out to be unfeasible for some cities’ fiscal structures that rely heavily on land bidding.[14]
Last, as expedient land transaction is prone to moral hazard and unaccountable profit distribution, there might be a need for more transparent regulations of the land market. The regulating mechanism, however, requires careful policy innovations. On one hand, the system needs to be formal and impartial so that all actors can abide by it justly. On the other hand, it still needs to allow the kind of flexibility that enables negotiations and reduces transaction costs.
In all, the traditional, top-down view of designing and implementing urban PPPs across China might have under-investigated the real estate sector’s financial and developmental behaviours. By analysing the interaction between the market, the community and the government, this research suggests that policymakers should 1) understand the sociopolitical nature of risk management, 2) assess each place’s institutional endowment and 3) tailor appropriate policy targets, tools and investment for different areas.
It is useful to point out, however, that my findings do not imply that it is institutional factors which determine the feasibility of urban PPPs. The scope of this case study was to investigate how mixed institutions could mobilize people and resources in a low-cost way, yet it did not aim to trace the availability of material assets themselves. In fact, capital markets, real estate trends and design-specific decisions (such as floor-area-ratio) may also relate to the project’s profitability and hence influence market participation. A more comprehensive analysis of urban redevelopment, which indexes and regresses both the relational and the material aspects of redevelopment, is an important area of future research.
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[1] STI is the author’s translation of the Chinese name – 棚户区改造 (peng hu qu gai zao).
[2] Despite the national tone, Chinese redevelopment actually demonstrates strong local experimentalism and variation. Before 2012 when the central government formally advocated the STI (Ministry of Housing and Urban-Rural Development 2012), various local governments had independently delivered their own revitalization projects with different focuses. The north-eastern region redeveloped its mining towns, while Guangdong had a history of rebuilding urban areas.
At both the local and the national level, governments carry out urban redevelopment for economic as well as social goals. The Chinese government stresses that in addition to solving the low-income housing problem and improving land-use efficiency, the STI and especially its urban subcategory will also boost domestic consumption by stimulating sectors such as steel, concrete, construction and household electronics (Ministry of Housing and Urban-Rural Development 2015). Such a macroeconomic ambition is especially paramount during China’s current slowdown. The Chinese government ‘gave full consideration to the relationship between shantytown transformation and the city’s economic and social development’ (Nie et al. 2015, 48).
[3] For some China-related literature, see Hsing (2010) from urban studies and Mattingly (2016) for emerging evidence from political science.
[4] See Rodriguez-Pose (2013) for a more extensive summary of statistical findings.
[5] See Wang et al. (2009) and Al et al. (2014) for more detailed depictions and explanations of their origins. Shenzhen has actively sought to redevelop these urban villages and China officially acknowledged their redevelopment as part of STI (State Council 2015).
[6]Including the fear of unfinished construction, the loss of jobs, the uncertain prospect of local public school(s), and the attachment of the elderly to the land (Shenzhen Nanshan DVR Authority et al. 2014; Interview 8).
[7] Some households did not gain shares because they did not reside in Dachong in 1992.
[8] The management is not separate from ownership. All directors of Dachong Corporation are shareholders (Interview 11; Interview 12).
[9] Production Units were historically the lowest administrative level of agricultural production. They owned the cropland and were responsible for income distribution.
[10] Mahjong is a traditional Chinese game commonly played by 4 players.
[11] They belonged to either the Corporation or individual households.
[12] The law requires urban constructions should take place on land clearly owned by the State.
[13] The process is called ‘招拍挂 (zhao pai gua),’ namely public bidding, tender, and listing of qualifications. In China’s urban development, developers can obtain urban land’s ‘use right’ for 40-70 years, while government holds the land’s permanent ownership. See Tao et al. (2010) for more details.
[14] Shenzhen is ‘lucky’ again in a sense that its SEZ status enables the local government to implement more progressive policy innovation. Furthermore, Shenzhen also differs from most of China’s local governments, as land bidding has contributed to a very small percentage of Shenzhen’s municipal revenue (Interview 21; Interview 6).
Bibliography:
List of Interviews:
Figure Credit:
Figure 1: Photo courtesy of UPDIS.
Figure 2: Image courtesy of CRLand.
Figure 3: Map courtesy of Google Earth (2004); alteration by the author.
Figure 4: Map courtesy of Google Earth (2015); alteration by the author.