Power allocation and reform efficiency: The distortions in urban renovations in China, 1992-2012

• Main Author: HE, Gang
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: old city reconstruction; land property right; incentive compatibility; urban renewal; Asian Studies; Business; Urban Studies and Planning
• Online Access: https://ink.library.smu.edu.sg/etd_coll/436; https://ink.library.smu.edu.sg/context/etd_coll/article/1431/viewcontent/GPBA_AY2016_DBA_HE_GANG.pdf
• Institution: Singapore Management University

The world has been paying close attention to the achievements of China's industrialization and urbanization since it started reform and opening up in 1978. However, there have been considerable controversies about the repetitive development plans in major Chinese cities and the rough demolition and reconstruction in old urban areas. Systematic explanations for the underlying causes and in-depth studies are limited, especially on the division of powers, responsibilities, and interests between the government and the market especially from 1992 to 2012, when old city reconstruction swept across China. This paper focuses on the temporal and regional differences in land property rights systems, the examination and approval authority, and the development rights for the old city reconstruction during this period. This paper analyzes the institutional factors and incentive mechanisms of large-scale old city reconstruction and discusses the short-term incentive compatibility and follow-up adverse effects of such large-scale reconstruction. This paper first introduces a theory to closely analyzes the relationship between urban land and housing property rights, the examination and approval authority for the old city reconstruction, and the old city reconstruction and development rights, and suggests that the land property right system and authorization under relevant regulations play a key role in the process. From the legal perspective, urban land property rights are held by the state and retained and exercised by the central and local governments on behalf of the state, who are the real controllers of old city reconstruction. Therefore, there is no essential difference in urban housing property rights attached to state-owned urban land involved in the old city reconstruction. From the perspective of administrative authorization, the central and local governments share the same interests in accelerating the large-scale old city reconstruction. Therefore, the examination and approval authority for the old city reconstruction has been authorized to lower levels and mainly held by local governments at or above the county level or, to be more specific, the local government departments in charge of land and urban construction. Thus, there exists distortions in property rights, examination and approval authority, and development rights. The paper then applies the theory to explain why large-scale old city reconstruction occurred China's major cities from 1992 to 2012. Through the comparison between cases in Beijing, Shanghai, Guangzhou, and Chongqing, it is found that the local governments with legal and administrative authorization are the real controllers of old city reconstruction in China's state-owned system of land property rights though the number of urban residents is huge. Holding the examination and approval authority, local governments define the boundaries of old city reconstruction and decide how to allocate reconstruction and development rights among local urban construction and housing management departments, local urban construction state-owned enterprises, Hong Kong-invested enterprises, foreign-invested enterprises, and private real estate companies. As a result, there is a de facto progressive relationship among property rights, examination and approval authority, and development rights involved in old city reconstruction, and players other than local governments have limited influence on the decision-making in old city reconstruction. The theory further sheds light on the regional differences in old city reconstruction around China. Comparative analysis also shows that there are both similarities and differences in old city reconstruction in cities across China. Super mega-cities such as Beijing and Shanghai prioritized large-scale old city reconstruction before expanding into new areas. In contrast, some other mega-cities, such as Guangzhou and Chongqing, started the initial old city construction, focused on the industrial development and new urban expansion around the city proper, and then shifted to old city construction. Through the old city reconstruction and new urban expansion, local governments saw economic growth and obtained increased revenues; local officials got promotions and sought rents with power; enterprises harvested commercial benefits; residents improved their living conditions due to property appreciation. All parties also achieved incentive compatibility during large-scale old city reconstruction. However, the power and responsibility mismatch between the government and the market has also left adverse consequences from old city reconstruction, leading to unsustainability of such mismatch, and forcing China to re-explore a new model of old city reconstruction from 2012. The incentive mechanisms for public officials and the administrative system have yet to be adjusted by deepening the reforms.