Financialisation

The financialisation of urban development and associated financial risks in China

ESRC project (2017-2020): Professor Fulong Wu (PI), Dr. Fangzhu Zhang (Co-I), Professor Nicholas Gallent (Co-I), with Professor Jie Chen (China PI of NSFC 国家自然科学基金 project) (£400,000 + China NSFC 2 million Yuan).

Project summary

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.

Publications

Fulong Wu, Jie Chen, Fenghua Pan, Nick Gallent, Fangzhu Zhang. 2020. Assetization: the Chinese path to housing financialization. Annals of the Association of American Geographers (on-line first)

Abstract: Although the literature on the financialization of housing pays most attention to mortgaged and securitized homeownership and the penetration of capital into subsidized rental housing, forms of financialization are varied. In China, housing commodification and privatization has underpinned a growth in homeownership. One of the outcomes of financialization of housing is the transformation of owner-occupied housing into a financial asset for households’ wealth. Despite a relatively low level of residential mortgage lending in China, both the absolute volume of mortgages and the proportion of gross domestic product they represent are now rising. Housing value appreciation has driven a significant increase in the financing of housing consumption through multiple channels. This article examines these channels and suggests that the financialization of housing in China is a critical part of the country’s overall development model. It is further argued that the root of housing financialization in China is not mortgage securitization but the creation of owner-occupied housing as a financialized asset to propel the wider financialization of the Chinese economy in the context of state-controlled financial environment.

住房所有权的抵押和证券化以及资本对廉租房的渗透，这是住房金融化方面的文献最关注的问题。但事实上，住房金融化的形式各有不同。在中国，住房的商品化和私有化提高了人们的住房拥有率。住房金融化的结果之一，就是促使业主的自有住房转变为家庭财富的金融资产。尽管中国的住房抵押贷款水平相对较低，但抵押贷款的绝对数量和所占国内生产总值的比例都在上升。住房价格上涨也明显增加了住房消费融资渠道。本文对这些渠道进行了分析，并认为住房金融化是中国整体发展模式的重要组成部分，进一步论证了中国住房金融化的根源不是住房抵押贷款证券化，而是在国家控制的金融环境下，将资助房屋变成金融化资产，以此推动中国经济实现更大范围的金融化。

Fulong Wu. 2020. Land financialisation and the financing of urban development in China. Land Use Policy (on-line first).

Abstract: There is a growing body of literature on China’s land reform, land system and land-centred urbanisation. While the contribution of land proceeds to Chinese local public finance and infrastructure investment has been widely acknowledged, few studies examine land through the perspective of financialisation, namely how land development uses financial instruments to generate development finance. The process of land-driven financialisation in China has not been well understood. This paper examines the land mortgage, which has accelerated since 2008, and subsequent waves of financialisation through local government financial vehicles (LGFVs) and Chengtou Bonds (urban construction and investment bonds). We highlight that the adoption of a fiscal stimulus package triggered land financialisation, which started as a development strategy for crisis management in China.

Yi Feng, Fulong Wu, Fangzhu Zhang. 2020. The development of local government financial vehicles in Chnia: a case study of Jiaxing Chengtou. Land Use Policy (on-line first)

Abstract: Financial intermediaries have been widely used in urban development. Since the global financial crisis, it has been an urgent task to understand their operation and implications for financial risks. This paper examines emerging local government financial vehicles (LGFVs) in China. We review their history, current status and underlying financial mechanisms. Confronting the global financial crisis, China has taken a stimulus plan to invest four-trillion Yuan in urban development to stimulate the economy. The plan has been largely fulfilled by the LGFVs. This paper investigates the case of Jiaxing City Construction Investment Corporation (Jiaxing Chengtou), which plays a role of LGFVs. We find that it mainly uses bank loans and bonds to finance land and infrastructure development. To borrow from the capital market, Jiaxing Chengtou collateralizes allocated state-owned land and enhances credits by build and transfer protocols with the city government. However, the enterprise did not manage to pay back its loans, which has led to further borrowing. Due to the central government’s control, Jiaxing Chengtou has been nominally detached from the municipal government since 2012, but it maintains a financial role. It has been re-packaged with other LGFVs to access foreign bond markets. The paper reveals how LGFVs act as financial conduits to connect local governments with the financial market in China.

Pan, Fenghua, Fangzhu Zhang, and Fulong Wu. 2020. State-led financialization in China: The case of the government-guided investment fund. The China Quarterly (on-line first)

Abstract: China is witnessing a growing trend towards financialization by the state. Drawing on the concept of state-led financialization, this study is the first to explore how the government-guided investment fund (GGIF) has evolved and spread throughout the country. The promotion policies and practices of the central government have laid the key foundation for the development of GGIFs, while local governments have quickly adopted this new financial tool, resulting in its widespread take up. State-owned enterprises are heavily involved in the operation of GGIFs, indicating that this market-oriented tool has largely failed to attract capital from the private sector. This study shows that state-led financialization in China has strengthened rather than weakened the influence of the state in the economy, which is not the case in most Western economies. However, the limitations and risks of the GGIF are also related to the dominant role of the state in GGIF operations.

政府的金融化日益成为全球性趋势。基于“政府主导的金融化”这一概念，本研究首次考察了政府引导基金在中国产生并扩散到全国各地的过程。中央政府的一系列政策倡导以及率先成立若干基金，为政府引导基金的发展奠定了基础。地方政府迅速接受并采纳了这一新的金融化政策工具，从而带来其广泛传播。大量国有企业深度介入了政府引导基金的设立和运营，从这个角度看，意味着政府引导基金吸引社会资本的初衷并没有实现。该研究表明，与西方国家的情形不同的是，政府主导的金融化在中国进一步增强而非减弱了政府在经济活动中的影响力。然而，政府引导基金这一金融化政策工具的局限性和潜在风险也与政府和国有企业在政府引导基金中的绝对主导地位高度相关。

Jie Chen, Fulong Wu 2020. Housing and land financialization under the state ownership of land in China. Land Use Policy (on-line first)

Abstract: By studying the case of China’s state land ownership regime, this paper examines the financialization of housing and land and illustrates how these processes are intertwined and reinforce each other. This paper reached three conclusions: first, housing financialization and land financialization cannot be separated in China; housing financialization boosts the demand for housing assets and land financialization speeds up the supply to meet the demand. Second, housing financialization and land financialization jointly expand the production of properties and sustain capital accumulation. Third, the financialization of land and housing evolve over time. We conclude that the separate and related processes of housing and land financialization in China reflect the unique characteristics of the state ownership of land in China.

Conference keynotes (selected)

Fulong Wu (2020/21) The long shadow of the state: financializing the Chinese city, The Annual Meeting of American Associations of Geographers. April 2021 (Urban Geography Public Lecture – keynote) (rescheduled)

Abstract: Despite controversy over the meaning of financialization, there are two major dimensions to understanding whether the city is financialized. This paper explores whether the Chinese city (increasingly) uses financial instruments to carry out its urban development tasks and whether the utilization of financial instruments imposes a financial logic on urban governance. Financializing the Chinese city involves creating land collateral, converting development agencies into local government financial vehicles (LGFVs), extending shadow banking, diversifying financial conduits such as ‘fake equity, real debts’, securitizing local government debts, and financializing urban redevelopment to ‘deleverage’ the debt ratio of developers. Applying one financial instrument leads to another wave of financial operation, showing a financial logic in operation. However, financializing the Chinese city is engineered by the state through its credit expansion to cope with the global financial crisis and the ramifications of the entrepreneurial model of ‘export-oriented world factory’. It is a state-led financial turn. Key words: financialization, the state, state entrepreneurialism, the Chinese city.