China wants to bulldoze old neighborhoods to revive the economy

In Shenzhen, a metropolis born from China’s economic prosperity, Paibang Village is a reminder of the city’s humble past and the challenges ahead to revive the country’s real estate sector.

Paibang is what China calls an urban village, a labyrinth of low-slung apartment buildings and small storefronts, connected by a maze of alleys and narrow roads. There are hundreds in Shenzhen, a municipality of 18 million next to Hong Kong, and thousands of such villages across China.

With China mired in an unyielding real estate crisis, policymakers are looking to revitalize aging urban neighborhoods like Paibang to boost construction and stimulate the local economy.

But as Paibang’s faltering rehabilitation shows, this won’t be a quick or easy fix.

Seven years ago, Paibang was chosen by city officials for an “urban renewal,” and in 2019, China Evergrande, one of the country’s largest real estate companies, took control of the project. The company paid building owners for the right to demolish apartments and clear land for modern high-rise buildings. Before work could begin, Evergrande collapsed.

Evergrande then handed the project over to Shenzhen Metro, a state-owned company and top shareholder of China Vanke, another giant homebuilder. Now Vanke is confronted with his own money problems. Last week, Shenzhen Metro – and by extension the Shenzhen government – ​​tried to calm investors by promising to back Vanke.

All this time, construction in Paibang has been at a standstill. On a recent weekday, a glass-enclosed modern building that serves as the project’s headquarters and still features Evergrande signs was mostly empty.

China’s biggest homebuilders are in financial turmoil, facing a slowdown in sales and restrictions on borrowing after years of excesses. Last month, the average price of new-build homes fell the most in more than eight years. The real estate crisis is weighing on the economy. Local governments, which depend on rent income, are feeling the pressure.

The government has tried to lower interest rates and relax home buying requirements, but has not moved the needle. More drastic measures could weigh on local budgets, while debt is already a problem. Financial regulators are discussing ways to support developers but are reluctant to push real estate companies to return to the risky behavior that led to the crisis.

And that’s why Chinese leaders are looking to urban villages, community-owned enclaves within larger cities. All urban land in China is owned by the state. As part of the country’s urbanization, the government expanded the cities by absorbing adjacent agricultural lands from villagers.

But villages were allowed to retain collective ownership of the areas where their residents lived, creating areas of land where the reach of the state was limited. As Chinese cities modernized into sprawling high-rises and grid streets, urban villages grew into chaotic, densely populated neighborhoods little affected by the gentrification around them.

Starting around 2009, when urban sprawl began to run out of land, many local governments recognized the untapped potential of urban villages and redeveloped neighborhoods. But until this year it was mainly a local initiative.

The Politburo, the Chinese Communist Party’s executive policymaking body, said in April that it would “actively and steadily promote the transformation of urban villages” in the country’s 21 largest cities. In July, China’s cabinet, the State Council, called the policy an “important measure” to “increase domestic demand,” according to state news agency Xinhua.

“It really shows that China’s leaders feel this fear of finding new channels for urban growth,” said Zhang Yue, an associate professor of political science at the University of Illinois at Chicago.

During the last major real estate crisis, around 2015, Beijing spent hundreds of billions of dollars paying residents in cash to trade dilapidated shacks in smaller cities and towns.

Redeveloping urban villages is more complicated and can be just as expensive.

In an October report, Nomura Securities said the process was “challenging and expensive” and that the pace would be slow. According to an August report, Chinese stock broker CITIC Securities estimated that China could invest nearly $140 billion annually for a full decade.

Paibang, in the northwestern region of Shenzhen, is like many other urban villages. Rows of concrete apartment buildings are so close together that they are colloquially known as “handshake buildings” to describe the proximity of neighbors. The apartments are dilapidated: no elevators, bars on the windows and squat toilets.

At street level there is a lively shopping area with fruit and vegetable stalls, second-hand shops and simple eateries. Nearby industrial parks have printing houses, warehouses and factories. In Paibang and three neighboring villages, the vast majority of the 59,000 residents are migrants from elsewhere in China who have moved to Shenzhen for work.

These neighborhoods are often called the ‘starting point of a dream’. Chinese singer Chen Chusheng lived in an urban village in Shenzhen and performed in bars at night before he became famous. In a ballad he wrote about the experience: he sings: “The people there were very close, and the distance between the buildings was just a crack.”

Shenzhen was declared China’s first special economic zone in 1979, turning a fishing village of 300,000 into the center of China’s experiments with capitalism. Shenzhen became the birthplace of many of its most successful companies, including Huawei, BYD and Tencent.

But as Shenzhen grew, migrant workers, who were still essential to the local workforce, were priced out of the city’s newly developed neighborhoods.

In many villages, the land is owned by a collective and the buildings are owned by old villagers, many of whom have long since moved away.

Gao Jia has been running a second-hand furniture and electronics store in Paibang for eight years. Last year, his landlords asked him to leave after agreeing to transfer the building that housed his store to Evergrande. He was thrilled to get a reprieve after Evergrande’s problems stalled the redevelopment project and prevented his landlords from completing the sale of the building.

“Renovating old cities is of no use to us at all,” Mr Gao said. “We won’t be able to pay the rent and we won’t be able to do business anymore.”

Duan Biqiong, a stationery store owner, said: “If there are no migrant workers, this place is nothing but an empty city.”

In addition to pricing out some residents, urban village renewals are time-consuming. Local governments must negotiate agreements from land-owning cooperatives, as well as from individual building owners, before tearing down structures.

Officials in Guangzhou, China’s third-largest city, where 127 urban village renovations are underway this year, said the average completion time for a project had stretched from 5.5 years to more than seven years, according to Local media. The longer rehabilitation takes, the more it costs.

Jackle Zhuang, 44, owns a five-story apartment building in Paibang. When he first moved in with his family as a teenager, the neighborhood was barely developed. The nearest bus stop is a 30-minute walk away. Today, Paibang has its own subway stop.

But Mr. Zhuang no longer lives in the area. This year he moved with his wife and child to Chengdu, a city in northwest China, more than 1,000 miles away. In Paibang, he said, there were no parks nearby, and it was not safe for children because the buildings were so close to the road.

“There’s probably nothing else good besides the cheap rent,” Mr. Zhuang said. “It’s not an ideal living environment.”

While he is ready to move on, he is unsure if the deal he signed with Evergrande in 2020 to sell his building is still valid or if he will have to renegotiate with the new developer. He hopes to exchange his current apartments for units in a new building.

For now, all he can do is wait.

Li you research contributed.