The financialisation of urban development and associated financial risks in China

ESRC project (2017-2019): Professor Fulong Wu (PI), Dr. Fangzhu Zhang (Co-I), Professor Nicholas Gallent (Co-I)

NSFC (国家自然科学基金委员会) project: Professor Jie Chen (PI) and ten co-Is.



The Chinese financial system has fostered rapid economic growth in recent decades through so-called ‘land-based financing’ (tudi chaizhen) in housing, land and infrastructure development. The ‘financialisation’ of Chinese housing, land and infrastructure – the use of financial instruments to convert the built environment into investment opportunities – generates momentum and vitality in the Chinese economy and has led to wealth accumulation. Real estate financing instruments such as the real estate investment trust (REITS), mortgage securitisation, reverse mortgages and public- private partnerships (PPP) in infrastructure have been recently invented. On the other hand, traditional real estate financial products such as household mortgages and real estate loans benefit from new internet-based finance. Chinese real estate finance has now entered a phase of ‘financial explosion’.

However, the concrete channels, complex arrangements and new instruments are not entirely known. This research project aims to investigate how housing, land and infrastructure are actually financed, what are the new financial instruments, to what extent there is a trend of ‘financialisation’, and what are the risks associated with this transformation. We examine the recent trend of financialisation in terms of the forms and extent of the involvement of both the formal and the unofficial (‘shadow banking’) sectors in real estate development. Recent developments in REITS and PPP will be examined to show the inflow of financial capital in housing, land, and infrastructure projects. We explore how the Chinese housing boom has been financed in the absence of a more developed financial system, and to what extent the financial sector has contributed to the overall appreciation of housing and land assets. We will also try to understand the potential impacts of financialisation on households, enterprises and local government finances (i.e. the issue of ‘local debt’) and what are the main factors affecting financial stability.

The project investigates three levels of financing mechanisms: projects and enterprises, local governments, and individual households. We choose six case cities: in the coastal region, Shanghai and Shenzhen; the central region: Zhengzhou and Changsha; the western region: Chongqing and Chengdu. At the project level, we will conduct in-depth interviews with developers, real estate agents and local government officials so as to understand the complex financial arrangements of these projects. At the local government (city) level, we will examine the institutional environment and policies regarding built environment finance, including the involvement of housing provident funds. At the household level, the project will conduct a survey of 3,000 homeowners in these cities to understand household access to the financial sector.

This research project will assess the recent trend of financialisation in Chinese housing, land and infrastructure sectors and provide a nuanced understanding of the changing financial mode, its dynamics and the new institutional environment. The project will examine emerging financial products and new channels in these sectors and their operational mechanisms. The project will focus on household financial behaviour to understand the new trend of financialisation of real estate and its impact on housing consumption, investment behaviour, and job preference. The project will further assess macroeconomic implications such as the impact on the Chinese financial system, financial product innovation, fiscal policies and company investment. Finally, these findings will lead to an assessment of the potential risks associated with financialisation and recommendations for risk management.