from Follow the Money

Another great irony of history: The Chinese Communist party is a very profitable real estate company

January 28, 2006

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Max Sawicky noted that key source of recent job creation in the capitalist United States has been the US government, which itself is financed, in no small part by the People's Bank of China.  The ex-KGB guy running Russia chips a bit too, as do the traditional monarchies in the Gulf ...   

That prompted prominent press critic Brad DeLong to add:

One of the great ironies of economic policy is that the historical role of the Vietnamese Communist Party has turned out to be that of a union-busting gang labor boss for Nike and other first-world manufacturing corporations

Let me add another: the Chinese Communist party may have the most valuable real estate franchise in the capitalist world.

The revolution ended private land ownership in China. So if you want to develop a bit of real estate outside Shanghai, you negotiate with the party.  Not with the peasants who work the land, often under a long-term lease.  And in a country with lots of people, not so much land, rapidly expanding cities, and banks flush with deposits that they would love to lend out, the right to turn rice paddies into apartments and factories can be rather valuable.

Joseph Kahn of the New York Times:

Peasants are not allowed to own the land that they farm and have little say if the government decides to sell it for commercial development. Compensation is assessed according to complex formulas but rarely approaches the market value of the land, leaving many feeling disenfranchised by the development around them.

China hasn't gotten its version of the original homestead act, let alone a modern version

Disputes over changes in land use certainly seem to be the common denominator behind most violent social unrest in China. 

Chinese peasants do not have clear title to the land they work.  Or perhaps that should be peasants clearly don't have title to the land they work.  That is one of many ways China has followed policies that do not fit well with the Washington consensus.  Dani Rodrik is right to note that if China were not growing as fast as it is, western economist would say that China's slow growth stems from the absence of sufficient reforms.

We often extol speaking truth to power, but sometimes it is nice to hear power speaking the truth.   Via ex-Treasury beat reporter Joseph Kahn, China's Prime Minister Wen Jiabao:

Land grabs by officials eager to cash in on China's booming economy are provoking mass unrest in the countryside and amount to a ''historic error'' that could threaten national stability.

''We absolutely cannot commit a historic error over land problems,'' Mr. Wen said in an address delivered to a party meeting in late December and released in Chinese newspapers on Friday. ''In some areas, illegal seizures of farmland without reasonable compensation have provoked uprisings. This is still a key source of instability in rural areas and even the whole society.''  .... 

In the last two years China abolished taxes on peasants and staple farm crops, relieving one historic source of grievance in the countryside. But even that advance, Mr. Wen said, risks being undermined by local officials who impose ''arbitrary fees'' on farmers.

Beijing has backed its words with a series of policy measures designed to bridge the rural/ urban divide.  Free schooling, steps to improve rural health care and the like.

But not title to the land peasants now work.  That would be too big a redistribution from the Communist party to poor Chinese peasants.   

At least for those peasants lucky enough not to get land in the Chinese equivalent of Western Kansas. 

Technically, land is owned by the state.   But it is managed by the party.

Even implementing these modest reforms will be challenge.   Remember that the Chinese government also introduced policy steps designed to stop over-investment, which, judging from the recent monthly fixed investment numbers (up 30% y/y), seem to have had only a limited effect.  There is a serious point here.  The modern-day emperors in Beijing do not necessarily exercise perfect control over all parts of China.  Particularly when one of their instrument of control - the party - isn't entirely committed to their agenda.  Edward Cody of the Post:

But the party's efforts to better manage tension between urban growth and squeezed farmlands repeatedly have faltered in the hybrid of socialism and capitalism that has developed here in 30 years of economic liberalization. In the new era, the Communist Party's main ideology has become growth, creating a natural and often corrupt alliance between officials and businessmen that leaves farmers with no advocate.

Joseph Kahn made a similar point:

Local officials operate with impunity in the one-party state and have little to fear from a legal system that answers to the party. Endless exhortations by central government leaders to pay more attention to inequality have done little to address the root causes of the wealth gap and surging social unrest, Chinese and Western political experts say.

Mr. Wen did not announce any fresh steps to curtail land seizures, which many experts say stem from deep-seated problems in the way China manages land.

After all, the close alliance between the party, local banks, local firms and local real estate developers has been rather lucrative for all involved.   Rapid local credit growth tends to feed rapid local growth and drive up local real estate values.   And if the loans go bad, the local government assumes - probably correctly - that Beijing will be forced to pick up the bill.

Seizing land upsets peasants.  Seizing bank deposits (or freezing them) -- even if the deposits have been used to finance a bunch of dud loans -- upsets the urban middle class.
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