“Hong Kong-ization” of Beijing and Shanghai
In recent years, two major cities, Beijing and Shanghai, are more and more similar to Hong Kong, and the biggest similarity lies in fetching ridiculously high housing prices. Among Chinese residential areas, it is extremely difficult to purchase a property in Hong Kong. But now, the unit price of real estate in Hong Kong is just $1,568 per square foot, which is equivalent to that of “school district house” (property located adjacent to a good school that guarantees any entrance to the school for the children of the buyers) at Zhongguancun in Beijing. Moreover, the housing price of new real estate in the New Territories fluctuates at $600 per square foot, which is equivalent to the housing price at middle ring closed to inner ring in Shanghai. It will be not unimaginable for the housing prices in Beijing and Shanghai to catch up with that of in Hong Kong.
Of course, “Hong Kong-ization” of Beijing and Shanghai is not limited to housing price, as these cities are characterized by high living cost, high business cost and high access threshold. High housing price results in high living cost, which enables rentals to increase year by year. As a joke goes, “in Hong Kong, half of a dish is house rent”, so is Beijing and Shanghai.
Secondly, under the increasingly consolidated social hierarchical system, the lower class can hardly climb up the economic ladder. With huge housing price-to-income ratio, a majority of young people cannot afford an apartment independently without financial support from their parents. The wealth effect generated by rising house prices further deteriorates the gap between the rich and the poor, and hinders the communication between different classes. In addition to the barrier of household registration system, the majority of migrant young people who are not natives in Beijing and Shanghai will choose to make a living in their hometown.
“Hong Kong-ization” in Beijing and Shanghai is not just similar in phenomenon but is consistent with the logic of urban development. By monopolizing primary land market, implementing land leasehold and conducting urban construction with the income from land leasehold. Although this method solves the financing predicament of short-term urban development, it also allows the government to become the manager of the market, which has broken the equity of market.
The house prices in Hong Kong is the first to rise, but it does not have a long history. The rising house prices in Hong Kong results from strict land use control system. The Sino-British Joint Declaration in 1984 prescribes that only 50 hectares of land can be sold per year from 1984 to 1997. The original reason is that Chinese government is worried about British to overbook land, which leaves Hong Kong without land to be sold in the future. This policy objectively limits the land supply, which results in a long-term rise in housing prices in Hong Kong and enables the Hong Kong government to become the vested interests. Around 2003, the Hong Kong property market looked grim, and the traditional Conventional Land Sale had made land oversupply, resulting in “failed auction”. Therefore, the government actually had started to adopt Land Sale under the Application System to maintain land prices since 2004.
Hong Kong is a small city, with a total area of only 1,100 square kilometers. It is slightly higher than Shanghai’s 1 / 6, and slightly lower than Beijing’s 1/15, but its population is as high as 7 million. The population density is already high, what’s worse, 75% of the land is still countryside due to historical, geographical and political reasons. The developed land area of the whole region is less than 10%, which leads to an unimaginable land waste. However, these can be attributed to Hong Kong's Land Leasehold Policy which benefits the groups with vested interests who has no slightest incentive to release the land supply and stabilize housing prices.
The same is true for Beijing and Shanghai. The housing prices of first and second-tier cities are rising dramatically in 2013, and the fundamental reason is that housing demand has increased by 18 %, while the residential land supply has dropped 13 % year on year. In this year, the national total land-transferring fees have over $450 trillion which counts for 150% of 2012. In 2013, Shanghai has planted to use 1,000 hectares for housing land supply, less than the annual actual average land supply of seven years since 2005. But the land-transferring revenue of Shanghai is nearly $32 billion which is more than the history peak of 2010.
Let’s have a look at Beijing. Its residential land supply in most recent years is reducing annually. In 2011, the resident population of Beijing was 20 million, while its real estate construction area was 16,390,000 square meters. At the same period, the real estate construction area of ordos was 10.09 million square meters which counted for Beijing’s 60%, but its population was less than two million which counted for Beijing’s 10%.
It is no doubt that the land supply under Land Leasehold System will be suppressed, because only in this way can the monopoly profits be obtained. As a city with net inflow of population, it has to face two facts: one is the growth in demand, the other one is shortage of land supply. As a result, rising housing prices does not unexpected, and the difference is just rising “very quickly" or “extremely quickly”. Compared with most of the second-tier cities, the residential land supply in Beijing and Shanghai relative to their resident population scale is too little.
In order to maintain the nominal land prices, Beijing maintain a high pressure situation on land use control. Beijing’s population is equivalent of more than 80% of that in Shanghai, while its land is 2.5 times of Shanghai’s. A large amount of land exists in the form of unused land and rural collective land. Farmers secretly lease agricultural land to developers to build houses, and then the developers sell the houses to city residents with half of the price or even lower, commonly known as the "limited property house". If this becomes a trend, it is bound to suppress the price of state-owned construction land, and may be legalized relying on the will of the people after growing stronger in the future. Therefore, the government of Beijing is resolutely clearing limited property houses: in the second half of 2013, Beijing cumulatively cleans up nearly 4 million square meters of limited property house.
What makes “Hong Kong-ization” attractive?
Interestingly, the population movements in Beijing and Shanghai also have the same effect as in Hong Kong. Although Hong Kong is a free port, in and out of Hong Kong shall be regard as entry and exit, except Filipino maids, overseas can only be employed by graduating from the local universities or through the talents introduction program. This enables Hong Kong to obtain inflow of high-quality talents continually, which is the part of Hong Kong’s competitiveness.
Theoretically, population mobility and employment are originally unrestricted in both Beijing and Shanghai, and of course they cannot refuse the inflow of low-end labors, while the latter may be destabilizing factor of social order. But in reality, due to the presence of household registration, Beijing and Shanghai can select a specific population inflow through the management of group-oriented leasing and renting out basements, temporary residence permit (residence permit) and so on, push back the low-end labors by this way, attract top talents through financial talent apartment, and screen inflow population by residence permits and other policies at the same time. According to the research of SIFL Institute, the per capita labor productivity and GDP per capita in Beijing and Shanghai are much higher than that in other regions, which is the result of differential management of floating population.
Beijing and Shanghai have supplemented strict social control, which enables their social security to be better than other second-tier cities. Beijing and Shanghai not only enjoy the advantages of being located in big country (abundant labors, unified national market etc.), but also avoid the financial burden caused by excessive supply of public services (not provide education for outsiders’ children); moreover, they also inhibit high crime rates in big cities. Beijing and Shanghai have got more benefits than Hong Kong on talent introduction.
Regardless of Land Leasehold System, the housing prices in Beijing and Shanghai will remain high in the future, even if the housing prices are reducing nationwide, the housing prices in Beijing and Shanghai will also remain a stronger resilience and achieve earliest recovery. The main reason is that China is on the mainstream road of urban development in East and Southeast Asia, and mega-cities and urban agglomerations will become the main form of urbanization in China. Beijing and Shanghai, as China's most important political and economic centers, their economic agglomeration effects are obvious.
In this perspective, it is meaningless to calculate the purchasing power of resident population in Beijing and Shanghai, but should be extended to the potential homebuyers under nationwide perspective. According to the statistics from Chinese Household Financial Investigation hosted by Gan Li, in 2011, the top 1% of the annual income of the households national wide is over $83 thousand, while the top 1% of the annual income of the households in eastern cities is more than $166 thousand, and top 1% of the Fortune households, with a wealth over $1.5 million, will have less pressure to buy a house.
The housing prices in Beijing and Shanghai are rising in the same way as Hong Kong. The native residents in Beijing, Shanghai and Hong Kong cannot escape two fates in the face of the impact of the nonlocal elites: making great fortune overnight or gradually being marginalized. The former will benefit from relocation compensation or real estate appreciation, while the latter means that the living space of small service industry will be squeezed, when big business district are developed. If the natives fail to improve their capability, then they will be squeezed out of the high-end jobs.
Result of “Hong Kong-ization”
For Beijing and Shanghai, “Hong Kong-ization” is not a deliberate choice, but just the result of urban development logic. This model has pros and cons for the cities themselves, but from the perspectives of overall and future development, Beijing and Shanghai will pay an extremely heavy price for gradually “Hong Kong-ization”.
More attention shall be paid to maintain the cost of “Hong Kong-ization”, in addition to geographical and economic agglomeration and other natural endowments and advantage from market, the housing prices in Beijing and Shanghai are based on irreplaceable public resources, preferential policies depressions and monopoly land supply, these factors are likely to change in the future. Once the situation is reversed, the collapse of housing prices will not be far away. In order to prevent this situation, Beijing and Shanghai can only passively maintain this difference. One can go to anywhere in Beijing with 2 RMB subway fare, and the government has to compensate more than 10 billion RMB a year. It is not just price, but is unfair, as it squeezes the opportunities for other cities to obtain net inflows of population and development. In addition, the housing prices in Beijing and Shanghai have long maintained rapid growth, which results in the phenomenon of finance squeeze industry and strikes a serious blow at entrepreneurship and the real economy. This is fatal for Beijing and Shanghai. A city without innovation and entrepreneurial passion has no future.
What strange is that, the process of “Hong Kong-ization” is like a pawl wheel, once entering, it can only continue to strengthen but not quit. Under “Hong Kong-ization”, a large number of natives and new property owners in Beijing and Shanghai become vested interest groups, and they do not allow house prices to fell slightly, while the government and banks will not allow housing prices to enter into a descending channel for the reasons of revenue stability and the soundness of the financial system. On the surface, only the new outsiders in Beijng and Shanghai will suffer from disadvantages, because they are scattered, weak and difficult to gather the political power to change this policy.
Purely from a logical point of view, the key to break “Hong Kong-ization” lies in cutting off the hand of government intervention. Firstly, the government should be out of the land market, and is no longer a participant. Only in this way can cut off the most important chain in the process of “Hong Kong-ization”. Secondly, from the perspective of the central government, local governments shall be given sufficient autonomy so as to eliminate the advantages of Beijing and Shanghai as preferential policy depressions and achieve no artificial restrictions on the flow of capital and labor. Then the real estate can no longer be a deal that will never loss. The capital can flow from real estate to real economy, which enables Beijing and Shanghai to achieve more dynamic economy. The only question is that, if the government can cut off his hand and make this come true?
Published in Phoenix Weekly | 2014-3-13
