Developmental state, property‐led growth and property investment risks in China
| Pages | 162-179 |
| Published date | 06 March 2009 |
| DOI | https://doi.org/10.1108/14635780910937854 |
| Date | 06 March 2009 |
| Author | J. Albert Cao |
| Subject Matter | Property management & built environment |
Developmental state,
property-led growth and property
investment risks in China
J. Albert Cao
Department of Real Estate and Construction, Oxford Brookes University,
Oxford, UK
Abstract
Purpose – This paper aims to apply the developmental state theory to examine the institutional
arrangements that support the widespread adoption of the property-led urban economic growth model
and generate risks on property investment in Chinese cities.
Design/methodology/approach – This paper conducts institutional analysis on the behaviour of
the Chinese state and examines results from major interview programmes and field investigations on
six cities in China.
Findings – The Chinese state deviates from other developmental states and is polymorphous, i.e.
lacking an effective central state to maintain the standard of governance and regulate the behaviour of
local states. The weak central state is responsible for failures to implement national policies on land
supply and housing price inflation, to nurture the development of professions like valuation, and to
formulate policy on commercial property. The local states, on the other hand, intensify risks in
property investment by poor plan making and implementation that create chaos in urban development
and intensive competition among projects, and by poor data services and legal support for market
operations. Such risks, however, seem to be played down by Chinese property professionals.
Research limitations/implications – This paper uses the summarised opinions of interviewees
who have varied expertise on different issues in China. Further research could be conducted on a
number of fronts, say risk perception by different professions such as valuers or investors.
Originality/value – This is the first paper to apply developmental state theory to examine the roles
the Chinese central and local governments play in using the property-led growth model on the
generation and intensification of property investment risks.
Keywords Property, Investments, Financial risk,Local government, China, Organizational analysis
Paper type Research paper
Introduction and background
In December 1978 the Chinese government initiated the Reform and Opening-up
Programme to improve the efficiency and productivity of the economic sector and to
raise the very low living standards of the country’s citizens. Now tremendous
transformation has been brought to the country. With an average annual growth rate
of 9.8 per cent for the last 30 years, China’s economy in nominal gross domestic product
(GDP) terms has risen from the tenth largest in the world in 1978 to the fourth largest in
2005 (NBSC, 2008a) and is poised to become the third largest in 2008[1]. Such a growth
record has made the Chinese economy the fastest growing one among major economies
in the world (see Table I). Even with substantial population increase, per capita gross
national income (GNI) in China has risen from US$190 in 1978 to US$2,360 in 2007
(NBSC, 2008a). Furthermore, China became the third largest trading nation in 2004,
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JPIF
27,2
162
Received March 2008
Accepted November 2008
Journal of Property Investment &
Finance
Vol. 27 No. 2, 2009
pp. 162-179
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780910937854
rising from the 29th in 1978, and will probably become the second largest within two
years[2].
Equally significant is the pace of change in urbanisation and infrastructure. Urban
population in China has risen from 172.45 million in 1978 (17.9 per cent of the total
population) to 593.79 million in 2007 (44.9 per cent of the total population). Yet per
capita housing space in gross floor area has increased from 7.8 square metres (sq.m) in
1978 to 28 sq.m in 2007. Urban infrastructure has shown similar improvement, with
total urban road space having a 16-fold increase and per capita parkland and green
space having a nine-fold increase from 1978 to 2007 (NBSC, 2008b). Nationally the total
mileage of highway was extended from 890,000 kilometres (km ) in 1978 to
3,580,000 km in 2007, with motorway growing from zero to 53,900 km in the same
period. Total mileage of railway rose from 52,000 km in 1978 to 78,000 km in 2007, with
electrified railway rising from 1,000 km to 24,000 km. The number of fixed line
telephones jumped from 1.93 million in 1978 to 365.64 million in 2007 (NBSC, 2008c).
China’s phenomenal growth in the last 30 years has been made possible by key
reforms on the use and ownership of land and buildings. When the Reform and
Opening-up Programme started, a major barrier was the lack of funds necessary to
enable thousands of industrial and infrastructural projects to go ahead, even though
the state was in control of all the domestic financial resources. Attention was turned to
land, which was under state ownership in the urban areas[3] and under collective
ownership in the countryside[4]. The land use reform to allow the sale and other
market transactions of land was initiated to derive money for investment. Early trials
to generate funds from land were conducted in Shenzhen Special Economic Zones in
1981, with 30-year land leases sold to entrepreneurs and developers from Hong Kong,
at that time a British colony (Cao, 2003). The cash from land sales became one of the
key factors to turn this small town into a modern business and manufacturing hub in
less than a decade. In 1988, the sale of land leaseholds, or Land Use Right (LUR), on
state-owned land was legalised by the Constitution and the 1988 Land Administration
Law, and the property rights created from such sale were delineated by the 1990
Provisional Ordinance for Granting and Transferring Land Use Rights over
State-owned Land in Cities and Towns[5].
The land use reform and a parallel housing reform, which intends to transform
housing allocation from state to market, have together created a dynamic property
1978 1979 1990 2000 2006 2007 1979-2007
World 4.4 4.2 2.9 4.1 3.9 3.8 3.0
USA 5.6 3.2 1.9 3.7 2.9 2.2 2.9
Euro zone 3.1 3.9 3.6 3.9 2.7 2.6 2.2
UK 3.3 2.7 0.7 3.8 2.8 3.0 2.4
Japan 5.3 5.5 5.2 2.9 2.2 2.1 2.4
China 11.7 7.6 3.8 8.4 11.6 11.9 9.8
India 5.7 25.2 5.5 4.0 9.7 9.0 5.7
Russia 23.0 10.0 7.4 8.1 0.1
a
Brazil 3.2 6.8 24.3 4.3 3.7 5.4 2.7
Note:
a
1989-2007 only
Source: World Bank Database
Table I.
Economic growth of
major economies from
1979 to 2007
Property
investment risks
in China
163
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