From ghost cities to land fever, researcher probes the complex economy of China

As the winner of the 2018 Lincoln Institute China Program International Fellowship, Junfu Zhang, an urban economist at Clark University, is analyzing Chinese government policies that shape the country’s rapid economic growth.

Despite its economic successes, China recognizes a stark contrast between its inner, remote western provinces and bustling eastern, coastal cities. To build up the western regions, China has approved $550 billion in infrastructure projects since 2012: highways, airports, railways, water diversion facilities, and hydroelectric power stations. But many of the development projects don’t attract investors, businesses, or residents, and sit idle as “ghost cities.”

Meanwhile, huge, dense, coastal cities like Shanghai face exorbitant housing prices and large migrations of workers from rural areas who cannot find affordable places to live. Speculators drive up the prices even more.

Undergirding these uneven patterns of growth is a state-controlled quota system for converting rural land to urban development. The central government distributes quotas to provinces, which then allocate them among cities according to unspecified criteria, allowing local governments to acquire land from farmers and lease it to developers and industrial enterprises.

“You have a big country, the second-largest economy in the world, and you have a very large urban system, with hundreds of very large cities. Which city is growing fast? Which city is growing slowly? It’s partly controlled by this land quota system,” says Zhang, professor of economics. “There are a lot of observers, including leading economists in China, saying this land quota system is inefficient. The idea is very simple: Certain cities need a lot of land; other cities don’t need as much. We’re trying to argue that there are better ways to allocate this crucial factor of production.”

During his fellowship year, Zhang is continuing work on a paper, “Land Conversion and Misallocation Across Cities in China,” with his colleagues, Shihe Fu of Xiamen University in China and Xiaocong Xu, a doctoral student in economics at Clark. They developed a computer program to extract 1.5 million land-lease announcements posted to a Chinese government website from 2007 to 2016.

Their data analysis sheds light on how much land has been converted for urban use, and how much revenue has been generated from leasing out the land, and compares the land revenue with the localities’ tax revenue.

“We’re painting a big picture in terms of what is going on with land conversion,” Zhang says. “We offer a lot of evidence that China is not making the best use of its land resources to generate the most economic gains.”

The quota system encourages cities in western provinces to develop land, even though the payback is small. Meanwhile, booming and bustling cities like Shanghai are constrained by the quota system, which doesn’t grant mega-cities enough land to develop.

“Part of the reason housing prices are so high in Shanghai is that you don’t give them enough quota; you don’t allow them to build more,” Zhang says. “The reason you have ghost cities in some regions in China is because houses were built, but nobody is living there. We argue that there must be a better way to manage urban development.”

One proposal from the researchers: Cities should be allowed to trade quotas with each other; a western city could sell a quota to Shanghai, for instance.

“If you worry about equality, then share the quota,” Zhang says. “Western cities will gain a lot by selling the quota; the quota will be used by the place where it’s most valuable.”

In researching China’s economic policies and practices, Zhang offers the perspective of both an insider and outsider. A native of Northeast China, he has lived in the United States for more than two decades. He has a B.A. in international economics from Renmin University of China in Beijing, an M.A. from Clark, and an M.A. and Ph.D. from Johns Hopkins, and has served as a research fellow for the Brookings Institution and the Public Policy Institute of California.

In 2006, he returned to Clark as a faculty member. Recently, he was voted president-elect of the Chinese Economists Society, an academic organization that promotes economic research on China.

“My research on China also examines rural-urban migration, studying the people, where they go, and how their behavior reveals a preference,” Zhang explains. “Are they willing to give up income and bear higher costs to live in larger cities? I look at the human side of urbanization too.”

Zhang is widely published in peer-reviewed journals, including the Journal of Urban Economics, Journal of Regional Science, Urban Studies, and more.

His paper, titled “Measuring the Stringency of Land Use Regulation: The Case of China’s Building Height Limits,” published last year in MIT’s prestigious Review of Economics and Statistics, drew much attention. Zhang and his colleagues presented a framework – new to the field of economics – to measure the stringency of building height restrictions. Their research could help cities across the world figure out the economic impact of height restrictions, he says, and also could be applied to studies of other land-use and environmental regulations.

Zhang’s earlier research draws upon game theory, a mathematical approach to understanding human behavior in competitive situations, which he has applied to his examination of China’s “development zone fever.” Over the past three decades, China saw several episodes of surges in local jurisdictions seizing land, building out infrastructure, and establishing development zones to court domestic and foreign investors.

Zhang’s 2011 paper, “Interjurisdictional Competition for FDI [Foreign Direct Investment]: The Case of China’s ‘Development Zone Fever,’ “ published in Regional Science and Urban Economics, proposes a mathematical model to analyze the effectiveness of China’s development-zone policies.

“Journalists and policymakers do not see investors going to some of these development zones and they naturally consider it a waste of resources. In applying game theory, I find it’s not necessarily the case,” he explains.

When coastal cities like Suzhou, near Shanghai, successfully attract investors to their development zones – and towns in inner, rural provinces do not – that does not necessarily hurt the country overall, according to Zhang.

“The goal is to allow the investors to go to the best place that benefits the country most,” he says. “And the process of this interjurisdictional competition will allow the investors to find out which city is best.”

Zhang’s fellowship from the Cambridge, Mass.-based Lincoln Institute of Land Policy runs through February 2019. A nonprofit private operating foundation whose origins date to 1946, the Lincoln Institute researches and recommends creative approaches to land as a solution to economic, social, and environmental challenges.