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

by Brad Setser
January 28, 2006

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.

29 Comments

  • Posted by Michael Robinson

    One major point of clarification: the land doesn’t belong to the Party (unless it specifically does), it belongs to the State. It’s a distinction that historically may have been inconsequential, but with reforms now has ever-growing significance.

    Brad: “Seizing land upsets peasants.”

    And you know what? They fought long and hard for a system without property rights, and they won. On the “being kicked off the land issue”, they don’t have much of a case.

    The problem, in any case, more often comes down to disputes over compensation than the eviction per se. But the rise in the value of their land (the source of the dispute) does not derive from their own input, but from the development of the overall economy in general (of which urbanization is an indispensible component), and of development of adjacent land in particular.

    In other words, the peasants demand the windfall they feel due them as a consequence of their neighbors having been kicked off the land next door first.

    The problem isn’t peasants being kicked off the land. The fewer peasants China has on the land, the better for everyone, peasants included. The problem is the lack of any sort of social safety net for just about anybody, peasants included.

    And yes, it would be nice to see more rapid development of the rule of law, and checks on the abuse of local power, and all that. But fundamentally, the land issue is a problem of implementation, not a problem of principle.

  • Posted by bsetser

    In a one party state, I am not sure the state/ party distinction has enormous consequences. But I modified the one place where my language perhaps implied ownership rather than management by the party.

  • Posted by Gcs

    nice post brad if a tad too glowering

    mao’s party
    now the landlord party ??

    yes there’s a small irony in that perhaps

    michael r :

    rural safety netting i think you will see
    unlike fair land comp for village plot takings
    the net makers will not fudge up
    the self enrichment dreams
    of
    local … party cadre

  • Posted by Gcs

    safety netting should needless to say expand at gret leap speed

    say in rough numbers
    zero to 100 billion in two years

    not likely
    perhaps the answer is more …bourgoise
    one party deaf adder suggested to my
    maybe “we ” should
    let the banks lend the peasants savings
    to the developers to pay the villagers
    handsomely for any and all pending
    land deals

    thats only helpful
    if the peasants spend a little of it
    this second time around

  • Posted by bsetser

    GCS — glowering or not, i like mao’s party is now the landlord party, wish I had thought that line up.

  • Posted by OldVet

    What about this: CP stops lending money to American peasants to buy Chinese refrigerators and blue jeans. And starts lending to Chinese peasants to buy property in China? There’s the answer to the “conundrum” of US interest rates and the high value of the dollar.

  • Posted by Michael Robinson

    Brad: “In a one party state, I am not sure the state/ party distinction has enormous consequences.”

    Like I said, historically, you would have been right. However, the state/party distinction lately has become the cornerstone of anti-corruption reforms (such as they are).

    You may recall that one of the big items at the last People’s Congress was a change to make the Party subservient to the constitution, rather than vice-versa. To be sure, this change was mostly cosmetic, but it does reflect an underlying political trend.

  • Posted by HZ

    Brad,
    I readily agree that the more serious problems China faces today are of political nature along the one party state line. A more democratic state will automatically create more consumption even without exchange rate reform.

    Michael Robinson,
    Very good point that peasants did not create the new value of land in the first place, but neither did party officials (not those personally profitting from the sales anyway).

  • Posted by HZ

    Brad,
    I would readily agree that the more serious problems that China faces today are political in nature along the one party state line. A more democratic state would automatically create more consumption given resources currently available to China.

    Michael Robinson,
    Very good point that peasants did not create the new value for the land. But neither did the party officials personally profitting from the sales.

  • Posted by jm
  • Posted by Gcs

    michael r :
    here’s the present formula in abstracto:

    the party politbureau produecs the laws
    thru the people’s congress
    the laws controls the local party cadre

    the results…..mixed

    your point about the shaddy side of the actual
    plots into lots morph
    is really the nub here

    Rx
    tax free plots and
    tax loaded lots

    read henry george if you want a vintage rationale

    and frank ramsey for the math of it

  • Posted by Joseph Wang

    This article misses the fact that local governments are broke.

    First, it’s pretty important to get the party-state distinction right. They are two interacting chains of command, it’s always important in a bureaucracy to get job titles right, so that you can figure out who has the power to do what. The land is not “managed by the party.” It’s managed by the local village committee.

    The peasant land issue is much more complicated than has been often portrayed. One of the big issues that is missed is that local governments in China are basically broke. They have no tax base, and they have basically been cut off from money from the central government. Land sales are the basically one of the only ways that local governments can pay for things like schools and social services.

    Peasants do not technical own private lands, but they have durable land use rights to farm land from the village pool. When the village sells the land, land is taken out of the pool and theoretically distributed to the peasants. There’s actually no interest to fundamentally change the basic system, and moving to a system of privately owned individual lots would make the system a *LOT* worse.

    The dispute is basically over who gets the money from the land sales, and the portion that gets divided among the villagers and the amount which goes to the local government.

    The initiative to start funding education and health expenses directly from the central government should help a long way.

  • Posted by Joseph Wang

    Also, when I was at a recent conference, I was rather surprised (somewhat pleasantly) that the consensus among the bankers is similar to my own view that the NPL problem has been resolved and is probably history.

  • Posted by Joseph Wang

    Party subservience to the state was established in the early/mid-1990′s. The general pattern is that the party sets very general policy guidelines which the state executes. But in the economic sphere, those policy guidelines are so vague that pretty much all of the real decisions are made in state organs.

    The type of decision making that the Politburo does is on the level of “do we focus on GDP growth or economic equity?” They aren’t involved very much with most of the day-to-day economic decisions or even some of the high level policy issues.

  • Posted by bsetser

    Joseph — did any of your banker friends care to estimate what fraction of the current lending boom will go bad? NPLs are lagging not a leading indicator.

  • Posted by Dave Chiang

    Hi Brad,

    Chinese economic growth is largely driven by the manufacturing sector; its industrial production is growing at double the rate of GDP. While investment in China’s real estate sector surged to an estimated $657.6 billion during the 10th five-year plan period, it contributed only 4.5 per cent to that nation’s GDP.
    (ie. http://www.financialexpress.com/latest_full_story.php?content_id=116095 ). Western pundits overestimate the potential bad loan exposure by Chinese banks to any property bubble.

    Moreover, China’s Economy is rapidly evolving into higher value added production with the rapid expansion of the engineering workforce. China-based IC production will rise to $12.1 billion in 2010 for a compound annual growth rate of 36%. Any company that competes with Chinese rivals in manufacturing will face even greater competition when the global economy is thrown into a deflationary environment, since the incentives to lower prices when fixed costs are high are too great to resist.

    During the latter two-thirds of Greenspan’s reign, his highly inflationary easy-money policies led to enormous misallocations of capital into first “dot-con” stocks and then houses. With capital flowing into these counterproductive bubbles, industries that really needed this very capital starved and withered. Rather than save capital and put it into productive industrial assets that will make the United States a stronger nation, many Americans instead stuck it into overvalued real estate and created the housing bubble.

  • Posted by Joseph Wang

    bsetser: The sense that I got was they felt that NPL rates were going to be in the single digits because the banks and the banking regulators had their act together during the last round of lending. (Which is an assessment I share.)

  • Posted by bsetser

    Joseph — I think we have agreed to disagree on this; i tend to think that the npls this time around will be a bit higher than single digits, if for no other reason that the scale of the credit expansion.

  • Posted by Gcs

    jw comments:

    “First, it’s pretty important
    to get the party-state distinction right”

    really ???

    ” They are two interacting chains of command”

    only because
    inertia and sheer size and complexity
    are in themselves a solid defense
    for the civil bureaucrats

    motive power rests with the party

    “The land is not “managed by the party.”
    It’s managed by the local village committee”

    “Peasants do not technical own private lands”

    its far more then a mere technicality

    the village has often redistibuted these plots among households ase labor power and other considerations have dictated

    “but they have durable land use rights
    to farm land from the village pool”

    indeed today
    but
    this right has been consolidated
    in stages over the last
    years
    most recently
    these (30 year)usafruct rights
    are now “transferable”by the household itself
    effectively
    ending the far more frequent village
    rounds of redistribution
    of plots

    that in a wonderfull expression of fairness and equality
    have turned the countryside into a rag tag of tiny strips all cheek by jowl all worked by different households

    ie

    each household working a scatter of fragments

    ” When the village sells the land
    land is taken out of the pool and theoretically distributed to the peasants’

    this sentence i can not follow …

    ” There’s actually no interest
    to fundamentally change the basic system”

    if by this you mean at the village level

    as a social unit and if the lot men haven’t yet started to push in
    i agree

    “, and moving to a system
    of privately owned individual lots
    would make the system a *LOT* worse”

    very very true

    what is needed is effctive taxation of non village “takings”
    this however flies in the face of cadre self enrichment

    true for plots not true for lots

  • Posted by Gcs

    brad:

    i’ll bow to your keen sense of balance sheet banking

    but i see a fairly useful system overthere

    npl’s are “sterilized ” in free floating
    “investment funds ”

    to clean up the operating enterprises BSs

    no reason this can’t be applied each iteration

    moral hazard ???

    hey
    thy name is socialism

  • Posted by Lord

    Does the government ‘sell’ the land in any real sense, or do they only lease it for a limited time? Of course, if they collect taxes on their development of it, even a sale can only be considered temporary.

  • Posted by Anonymous

    Synthesizing historical parallels with Setser’s thread re: party land grabs and OldVet’s comment about Chinese wealth fueling American peasant spending…

    Walter Scott’s novel Ivanhoe comes to mind. The landed Norman gentry, the recently-landless Saxon Ivanhoe (also called the “Disinherited Knight”) entering the knighthood meritocracy, and in the middle, the merchant Isaac, forbidden by religious law from owning land. Instead, he owns gold and currency.

    So the Party officials are the Normans, Saxons are the peasants, and Isaac and Rebecca are the emergent Chinese middle and upper class. Not being able to own land, they instead have to choose to consume or save (hold securities). The lack of a public health system, property rights, single-child demographics that require one child to care for Mom & Dad, all lead them to save instead of consume.

    But the Normans won’t let them own domestic land or means of production. So our Isaacs hold gold… and U.S. Treasuries… and U.S. agency debt… and U.S. mortgage-backed debt… and U.S. corporate debt…

  • Posted by Joseph Wang

    The land tenure system is important to describe, since almost every article I’ve seen in the Western press fails to describe how it actually works.

    What technically happens in rural areas is that the land gets reassigned from agricultural use to industrial or residental use, with the developer being the holder of the land use certificate. At that point the land gets taken out of the village land pool, and the remaining agricultural lands are redivided among the villagers, who hold land use certificates to their plots. The land user certificate lasts several decades.

    The system as a whole has a number of benefits over freehold systems. First, it is impossible to completely dispossess a peasant. If you take a peasants particular plot, then he still entitled to land from the village pool. Second of all, there is a bit of social insurance. A peasant can move to the city, and which point his share of the land pool is divided among the remaining peasants, but if he wants to come back, he can get back his share. Finally, if you move land from agriculture to industry, you hit all of the villagers, and it is impossible to use divide and conquer tactics.

  • Posted by Joseph Wang

    Actually fixing this problem is pretty much a no-brainer.

    First you start funding a lot of social service network with money from the Central Government, so that local governments don’t find it necessary to force land sales. Second, you tighten rules on compensation so that projects are not green lit without first paying the village and change the rules on cadre promotion so that there isn’t so much emphasis on economic development.

  • Posted by Charly

    So if i read this good than what happens in China is that the state changes the use of land from agricultural to residental/industrial. etc. and than forces the farmers to sell their land for a price higher than farmland but much lower than what it will be worth for the developer.
    How is this different from the West? I do know that economists don’t really deal with reality but emminent domain should ring a bell.
    AFAIK the only important country that doesn’t have rules that allow the state to confiscate land is Japan. But there the mob has taken over that important job which i doubt is an improvement

  • Posted by DOR

    It is sad when someone as knowledgable and respected as Brad DeLong forgets that Nike doesn’t manufacture anything.
    .

  • Posted by Michael Robinson

    Joseph: “Actually fixing this problem is pretty much a no-brainer.”

    True, but this problem (“dispossession” of land) isn’t really a problem that needs solving. Solving it just keeps a larger population living dirt-to-mouth that much longer.

    The problem that needs to be solved is the equitable distribution of gains from conversion of land from low productivity (i.e. manual subsistence agriculture) to higher productivity.

  • Posted by Gcs

    “The problem that needs to be solved is the equitable distribution of gains from conversion of land from low productivity (i.e. manual subsistence agriculture) to higher productivity”

    indeed henceapply the george formula socialize the wind fall
    thru a lot value tax

    i agree no transfer of ownership from
    the state is necessary anymore then the feudal landlord ownership of london
    then : long leases and ground rent
    now: long leases and a lot tax revalued periodically
    by marking to market

  • Posted by Anonymous

    True, but this problem (“dispossession” of land) isn’t really a problem that needs solving. Solving it just keeps a larger population living dirt-to-mouth that much longer.

    The problem that needs to be solved is the equitable distribution of gains from conversion of land from low productivity (i.e. manual subsistence agriculture) to higher productivity.

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