Xiongan: the making of a great non-megacity

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In a surprise move that caught most of the country off guard, the Party’s Central Committee, jointly with the State Council, issued a Resolution in the late afternoon of April 1, when people were wrapping up a week’s work ahead of the Tomb Sweeping Festival. The decision, announced through Xinhua, the official news agency, unveils the planned Xiongan New Area, which encompasses three existing counties in Beijing’s adjacent Hebei province. Development of the New Area will be phased: in the short term, a 100 square kilometer start-up area will be built, which will expand to 200 square kilometers in the mid-term and 2000 square kilometers (roughly the size of Tokyo) in the long run.

Though impressive, size was not the decisive factor in the awe that permeated the Chinese Internet. When introducing the resolution, Xinhua made it clear that this was not just another new special zone among an array of similar projects. “Xiongan is a New Area that follows the path of Shenzhen and Shanghai’s Pudong New District. It is an initiative for the next millennium, a major event of national significance.” By elevating Xiongan to the level of Shenzhen and Pudong, Xinhua fanned anticipation to historic proportions. In 1980, the opening of Shenzhen, at that time just a small village bordering Hong Kong, was the decisive moment of China’s Reform and Opening after the country broke away from the grip of Maoist ideology. In 1990, the decision to develop Pudong as China’s new window facing the world symbolized one of Deng Xiaoping’s last major efforts to give momentum to the reform that suffered major setbacks in the late 1980s. Joining the ranks of Shenzhen and Pudong meant that Xiongan would bypass its “older brother” in North China, the Binhai New Area in Tianjin, set up in 2005, as the heir apparent of the Reform. Xinhua’s application of a “millennial” dimension only increased the astonished curiosity surrounding the announcement.

Ever since the kick-off of Reform and Opening under Deng, Chinese society has come to cherish the “invisible hand” of the free market. The memory of shortages still lingers in the minds of those born before the 1980s, when the supply of basic goods such as food had to be rationed. The economic reform has unleashed the creativity and can-do spirit of the Chinese people. It has also reshaped their perception of the state’s role in the economy. Government interventions have since then become a kind of necessary evil to be tolerated, not embraced. Until very recently, catch-phrases such as “Guojin Mintui” (the advance of the state and the retreat of the civilian) represent the nation’s uneasiness with the state’s corrosive touch on the economy. Progress towards an open economy friendly to the participation of a vigorous private sector is seen as the ultimate barometer of the reform’s success.

The reaction to the Xiongan New Area reveals a shifting national psyche. The pageant-like online discussion shows that for a considerable segment of Chinese society, the visible hand is no longer frowned upon. Rather, it is seen as a magic wand that can turn a backwater town into a booming center of innovation and productivity.

 

At least no more tomb sweeping for now. For those with a heightened sense for money-making opportunities, the Resolution let out the assuring fragrance of Renminbi. In no time, the Chinese media were filled with stories about jammed streets and fully booked hotels in Xiongan. Almost overnight, once obscure towns that nobody had ever heard of were transformed into bustling centers of real estate transactions. Urban legends abounded of nouveaux riches from Beijing and Shanxi buying up entire residential compounds with piles of cash.

The scene marked the first public test of confidence in the newborn area. And it was excessively bullish. The cash-wielding house buyers saw the announcement as a clear signal of imminent pouring-in of investment, people and possibly preferential policies from the government, all pointing to a rising real estate market. Bet long on Xiongan, their guts told them. Quite literally, this mood was reflected in the stock market. Stock prices of cement and steel companies from Hebei province soared following the news, to the extent that a few of them had to publicly downplay expectations.

The reaction seemed not what the designers of Xiongan had wanted. Measures were swiftly put in place to quench the fever of apartment hoarding and deter speculators flocking to the place. A freeze on any real-estate trade in the region was announced, which quickly escalated into the arrest and lock up of rogue traders, and resulted in bizarre scenes on the streets of Xiongan, with police officers chasing after real estate agents.

Xiongan’s planners are faced with a tricky task of managing not just expectation but also imagination. And there is visible frustration over the public’s small-minded, reductionist reading of the New Area as a repeat of the real-estate-driven routine of city construction. Wild speculation is “debasing” to the leadership’s vision for the New Area, a People’s Daily article declares. The grand plan, it argues, is an ambitious strategy to explore a new way to overcome “megacity disease”, to achieve a more balanced regional development and to nurture innovative engines of growth. In other words, the speculators are guided by a misplaced enthusiasm, which, according to the article, is a kind of short-sighted “petty wisdom”. They fail to appreciate the designers’ real intention.

The article introduces a few novel terms to the lexicon of urban development. Besides “megacity disease”, it also highlights the primary role of Xiongan as the receiving base for “non-capital functions” to be moved out of Beijing. In case this is not clear, it specifies that such functions include anything that’s inconsistent with Beijing’s self-image as China’s capital, i.e. the political, cultural, international exchange and technological innovation center of the country. Corporate headquarters and financial institutions therefore do not belong to the capital and should be relocated.

The framing provides a powerful conceptual framework to understand Xiongan: it stands against everything that’s wrong with Beijing, the largest megacity in North China today. In addition to its notorious pollution, congested traffic and overheated real estate market (megacity disease), commentators also blame Beijing for its unconstructive role in the region: instead of acting like a sun that radiates warmth to its neighboring towns and cities, it acts like a black hole that sucks resources from them. The relatively healthy symbiotic relationship among Yangtze River delta cities, wherein Shanghai and Shenzhen shine like stars, do not exist around Beijing.

The implied dissatisfaction with the capital’s current situation found resonance in the popular reaction to the announcement. Many people, upon hearing the news, paid homage in their social networks to Liang Sicheng, the defiant architecture scholar who, in the 1950s, insisted that the old imperial Beijing be kept intact, while a new city should be built in its vicinity to accommodate the new capital’s expanding industries, commerce and governmental entities. His vision of Beijing was diametrically opposite to that of Mao, who famously told colleagues that he would like to see chimneys all over the city from the towers of Tiannanmen. His Soviet advisors, at that time, were busy planning a public square in the city center in the fashion of the Red Square. No wonder Liang’s advice was not heeded. Worse, he was fiercely persecuted in later political movements for those very views.

If setting up Xiongan is to some extent a correction to Mao’s extreme vision of the capital as the symbol of China’s industrial might, it is by no means a return to Jane Jacobs’ organically grown city. The effort is as deliberate as the meticulously ranked dancers at the opening ceremony of the Beijing Olympics. And attitudes toward the arbitrariness divide the country into bears and bulls.

 

The pessimistic sentiment is best represented by a Weibo post that inspired thousands of reposts: “Is the government able to make some place prosperous simply by wishing it? What you guys have in mind is not Gov, it’s God.” The author uses the examples of China’s Northeastern rust belt provinces to illustrate the point that the heavy involvement of the state does not necessarily bring desired economic results. Those provinces have enjoyed decades of central government largesse in the form of state-owned industries and the associated public resources. Yet the region’s deepening economic woes since the 1990s, especially in comparison to the vibrant economies of coastal provinces dominated by private businesses, accentuates the limitations of state planning.

A more serious critique is offered by Chen Gong, a senior researcher at the Anbound think tank. He bluntly calls Xiongan New Area “overrated”, and predicts that it won’t imitate the success of Shenzhen. “Both Shenzhen and Pudong saw great influx of investment and talent because China was in the process of integrating into the global economy. There was huge momentum at the time of their opening. All the government needed to do was to lift the restrictions and set free those market forces. ” Xiongan will be different. “Forever gone is the era when government draws a circle, enacts a few policies, and capital automatically flows in to prop up thriving industries.”

The economic new normal means a lack of untapped reservoirs of capital and resources that will replenish a pool as soon as the gate of the dam is open. The arbitrary allocation of “non-capital functions” to the New Area is therefore seen as a zero-sum game. “Enterprises moving out of Beijing will bring down the city’s economic output, reduce its tax revenue, cut consumption and sap part of its service sector,” Chen predicts, “it can become a major depletion of Beijing’s economy and its impact is likely underestimated.”

Drawing on the experience of the Silicon Valley, another commentator is more explicit with his disdain for state-driven efforts in building so-called technopolises. The success of the Silicon Valley, the argument goes, is in stark contrast to the relative obscurity of Massachusetts’s Route 128 today, whose lackluster performance is attributed to its reliance on government contracts, big conglomerates and a top-down approach to innovation.uch deep-rooted skepticism probably won’t disperse until a more definitive assessment of Xiongan’s economic performance can be made.

But this time the pessimists are confronted with an articulated optimism that rivals, if not trumps, the doubt. An FT Chinese piece by long time urban development observer Li Yan is representative of such confidence: “North China hasn’t had such strong and clear anticipation of growth for a long time. The psychological need for such anticipation overrides any rational calculation of real interests.” In other words, simply manufacturing that anticipation is already a brilliant move by the government. Li directs people to look beyond the relocation of “non-capital functions” and pay attention to the other stated objective of Xiongan to become “a showcase of innovative development”. This means the New Area will likely concentrate high-end, rising industries (as opposed to low-end manufacturing), powered by the inflow of new migrants. It will kick-off a “chemical reaction” that reactivates other economic elements in the North China eco-system. Unlike Shenzhen in the 1980s, this time Xiongan will enjoy the backing of a central government with “unprecedented finance prowess and administrative resources.” And it will become the “ultimate test” of a developmental model that puts government mobilization and direction of resources at the center.

The optimism online also comes from agreement with the general strategic direction of redistributing resources between Beijing and Hebei, and confidence in China’s bureaucratic apparatus in delivering such schemes with top level blessing. As Weibo user Li Ziyang, someone known for his bullish views about China, puts it, “China has an army of officials and bureaucrats who know the country well, are proactive in their job and can execute competently. It is one of the secrets of China’s economic miracle.” Both Li Yan and Li Ziyang suggest that the New Area can be China’s chance to articulate and crystallize its homegrown approach to economic success, wherein the state, with its efficient bureaucratic apparatus, are central to its recipe.

For those optimists, details of the Xiongan plan are not as important as its strategic boldness. Or, as Li Yan puts it, people are simply enthralled by the grandeur of setting up a new city from scratch (大手笔). The society’s appetite for boldness is also reflected in the relative marginalized voices that question the procedural integrity of the decision. The fact that a decision of millennial proportion did not go through any public consultation or approval by the National People’s Congress, and was kept under an iron lid up to the moment of its announcement, seems not to have bothered the general public. And people take the drastic crackdown on real estate trade in stride. After all, neither Shenzhen nor Pudong is the product of democratic deliberation.

 

Against the backdrop of public anticipation and confusion, the Party’s official outlets continue to dole out information about how the plan came into being. Through this tiny window, people have a glimpse of how the idea evolved out of the perpetual frustration over the imbalanced and uncoordinated development of the Beijing-Tianjin-Hebei region and how, in as early as Feb 2015, the proposal for a “new city” had already emerged. The concept was further hashed out in a series of follow-up meetings led by President Xi himself, from the March 2016 notion of a “second wing” of Beijing to the May 2016 official designation of the New Area. The vision for the city also became progressively clearer. A Xinhua piece puts Xiongan’s long term population projection at 2.5 million, which is only a fraction of Beijing’s current population of over 20 million, further confirming the point that it’s not going to be “mega”. It also names Japan’s Tsukuba and Israel’s Haifa as role models for the new city. Both are centers of science and technology brainpower for their respective countries, while Tsukuba is also very much a “planned city”. The designers of Xiongan seem determined to act differently from what China’s playbook for economic growth would prescribe. Their determination and the dizzying swiftness of its materialization leaves the country in a state of thrills and disbelief.

Frenzonomics

frenzonomics
(Picture by: 安小庆)

Over the years, people have come up with various barometers for the Chinese economy, which, due to the opaqueness of official statistics, proves to be a tough nut to crack. The price of pork, the output of coal, the number of windows that light up at urban neighborhoods at night have all been used to take the pulse of the massively complex country. One of the more famous examples of such makeshift indictors is the now legendary “Keqiang Index”, named after Premier Li Keqiang, who, while serving as the governor of Liaoning province during the early 2000s, used railway cargo volume, electricity consumption and the amount of bank loans as surrogates of the official GDP figures which he, as a Communist Party provincial chief, deemed unreliable.

Jokes are to official statements what the Keqiang Index is to GDP numbers. Nowadays, The best online jokes are about the overheated housing market that since late 2015 have preoccupied the nation. “Today’s HR gauges a candidate’s hireablility by asking if he or she owns real estate. A person without an apartment is often pessimistic and cynical about the society. Those having to pay mortgage tend to be loyal, not itching for job change.” Another version has a more real-life feel to it: “Engineers who own more than one apartments in Beijing are unmanageable in the office, always ready to fire their boss, sell an apartment and go travel the world with the money; engineers who own one apartment are completely demotivated, as they are basically set. The raise they earn through harder work would be rendered pointless by the rising house price. Those without an apartment are anxious to go into the finance sector or do an MBA and won’t spend a single minute on perfecting their engineering skills. The housing market is shaking the Republic’s foundation!”

Ever since the 2009 post-financial-crisis government stimulus of 4 trillion RMB, which kick-started a massive housing market boom, anxiety about skyrocketing housing prices has filled the pages of the country’s newspapers and cadres’ speeches. Premier Wen Jiabao’s numerous promises to keep housing price “reasonable” during his last few years in office still resounds. But the jokes today capture something new in that anxiety. The rallying market is reshaping people’s psyche as much as their pockets.

One of the most cited expressions of concern in the Chinese media today is Longview Economics CEO Chris Watling’s comparison of the current housing price hike to the Dutch “Tulip Fever” that happened almost 400 years ago. The London-based consultancy lists Shenzhen, the Chinese city that borders Hong Kong, as the world’s second most expensive housing market, next only to San Jose in California. According to the firm, Shenzhen’s housing price has risen a whopping 76 percent in a single year, surpassing longtime real estate strongholds, its sister city Hong Kong, and even inner London.

It is debatable if China’s housing boom today is as economically shaky as the Tulip Fever or even the housing boom in the United States before the financial crisis, fueled by subprime mortgage. As recent as in Jun this year, bullish advocates for the Chinese property market, such as star developer Ren Zhiqiang, a Weibo celebrity, were still arguing that the rise in housing prices is driven by the unabated pace of urbanization and population inflow into cities. The large amount of down payments, backed by actual saving of the Chinese consumers, not credit, makes the boom qualitatively different from the subprime mortgage driven US housing market before the crisis.

But concerns with the sustainability of the current boom is only part of what people have been fretting about. Yes, the prospect of a spectacular crash in the fashion of the stock market last year is scary. However, to many people, the alternative, a market that continues to rally in the foreseeable future, looks as troubling if not more fearsome. The engineer joke is an embodiment of such concern: an ever booming housing market is going to eat into the very foundation of a robust, creativity-based economy that China is so eager to become.

A much more articulated version of this fear appeared on the Financial Times Chinese website on Aug 29. The author enumerates a few dire consequences of an ever enlarging housing bubble, including financial risks and depleted capitals for the “material economy” such as manufacturing. More piercingly, he observes that with the housing price spike, the “landlord mentality” that historically haunts China has been rekindled among the Chinese nouveau riche. “Many rich investors have accumulated a large amount of real estate in their hands to collect rent or simply the additional value generated from more rise in price. One the other side, more urban proletarians, those workers who can never afford housing, are created in the process.” For a regime that, more than 60 years ago, gained support by wiping out the landowning class through collectivization, the current situation seems ironic.

To illustrate their increasing uneasiness about where real estate is leading the country, commentators need to borrow an entire vocabulary from a place where the dominance of property developers have agonized a society, Hong Kong. An article that warns about the mainland cities slipping toward “Hong Kong-ization” characterizes the autonomous metropolis as having three distinctive features: sky high property price and living costs, huge income inequality, and increasing conflicts between the natives and newcomers. The author attributes the problems to the Hong Kong government’s laissez-faire approach to real estate profiteering, whose unbridled growth squeezes the space for small and medium businesses (through expensive rent) and exacerbates social inequality (property owners vs. those who can never afford).

Nothing highlights the mainland’s resemblance to the Hong Kong case better than the 6-square-meter apartment in Shenzhen that causes a stir in the public conscious. On Sept 24, news had it that a developer was selling a set of ultra-mini flats in Shenzhen with a jaw-dropping per-square-meter price of 150,000 RMB (roughly 22,000 USD). As a reference, monthly average salary in Shenzhen is about 5000 RMB (746 USD). The mean salary is lower. Reporters visiting the place as potential buyers were shocked to find a packed scene: people were rushing there to get hold of the deal. A woman reportedly wept after her apartment slipped away to another buyer just because of a minute of hesitation.

Commentators were quick to refer to those mini-apartments as “pigeon cages“, a term once used to describe the horrible hellholes immigrant laborers and poor residents inhabit in Hong Kong. (To be fair to the developer, those Shenzhen apartments are actually much more spacious than their registered 6 square meters.) They become the symbol of the property frenzy, 880,000 RMB for literally a jail cell in the middle of a city.

There are people who see it differently. Again, Hong Kong provides the inspiration. They call such small apartments “Get-on-the-bus-property“, meaning that the relatively low total cost (because of the tiny space) allows cash strapped consumers to embark on the “bus” of property ownership. The housing boom makes it perfectly clear to many that property has become the watershed of one’s fortune. Ownership means a quick accumulation of personal asset, a defense against inflation and access to cheap credit. Without it, you are doomed with the dwindling value of cash in the bank or under your bed. To buy or not to buy, it’s not a question. That’s why when Hong Kong developer Cheung Kong Property released a 16 square meter mini-condo for RMB 1.32 million back in 2014, the Hong Kong media dubbed it “mercy to the poor“. Mainland observers bring up this anecdote with sarcasm and resignation.

The exacerbation of already severe income inequality through this recent episode of housing price spike, which spread to second and third tier cities, is the most disturbing aspect of this property market rally. As one commentator puts it, “without denying their hard-working, the property owning upper middle class should attribute most of the build-up of their fortune to property price increase. Today’s housing boom is not primarily hurting the anxious middle class, but the desperate lower classes that won’t share a penny of this market. Observers who do not acknowledge this sad fact, or even watch with amused indifference, should go into the hall of shame.”

Not just the cold-blooded spectators are to be shamed. The above-mentioned Financial Times commentary also points the finger directly at central ministries and local governments, which, as the author claims, willingly hijack a top leadership policy of clearing housing inventory and turn it into a call for re-stimulus. The result is rapidly increasing leverage of households and the simple shift of debt from the balance sheets of property developers to those of individuals. Local governments benefit tremendously from land sales and taxation on transactions while families bearing the financial risks. They are becoming “super landlords”.

As the country’s top propaganda organ, the People’s Daily weighed in on Sep 26 with an opinion piece, reflecting the graveness of the current situation. Titled “Losing the hard-working spirit, we will still be homeless with all the properties”, the article devotes much of its content to an uneasiness about the ascent of a opportunist, speculation mentality, in the same vein as the engineer joke, but with a notable twist at the end: it calls on individuals to cling to their faith in self-improvement and to not get lost in the housing pageant. The commentary was met with disbelief and ridicule. In no time, another joke starts to spread on the Internet. It applies a light touch to the original title of the People’s Daily article: “Losing all the properties, we will still be homeless with all the hard-working.”