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Pao Yue-kong Library, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong http://www.lib.polyu.edu.hk A STUDY OF FOREIGN DIRECT INVESTMENT IN CHINA’S REAL ESTATE MARKET FORM A PROPERTY RIGHT PERSPECTIVE: HONG KONG DEVELOPERS’ PRACTICE CHEN XINGGUANG PhD The Hong Kong Polytechnic University 2020 Final Submission for Examination Purposes 1 The Hong Kong Polytechnic University Department of Building and Real Estate A Study of Foreign Direct Investment in China’s Real Estate Market from Property Rights Perspectives: Hong Kong Developers’ Practice Chen Xingguang A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy July 2019 2 CERTIFICATE OF ORIGINALITY I hereby declare that this thesis is my own work and that, to the best of my knowledge and belief, it reproduces no material previously published or written, nor material that has been accepted for the award of any other degree or diploma, except where due acknowledgement has been made in the text. _____________________ (Signed) CHEN XINGGUANG 3 ABSTRACT Foreign direct investment (FDI) has played a key role in China’s economic transformation. The real estate industry has been the second largest sector in China to attract FDI since the economy was opened up in 1978. For FDI flows into China or other developing countries, the advanced institutional arrangements of foreign capital have a ‘demonstration effect’ on the host country. On the other hand, the host country actively improves and perfects its institutional system in order to attract and exert the role of foreign investment. This thesis reviews the literature and regulatory frameworks of FDI and its performance in the real estate sector in China. In China’s forty years of reform and opening, the goal of its transformation has been to establish, step by step, an economic system of private ownership and property rights under the framework of the public ownership economy. As those responsible for the lion’s share of the real-estate FDI flowing into China, Hong Kong–based real estate developers (‘HK developers’ hereinafter) have been the greatest contributors and have naturally played an important role in institutional change. The Property Right Law (PRL) is an important legal basis for the healthy operation of the real estate market, and has had a long-term impact on the industry. Since the implementation of the PRL in 2007, the number and size of projects (in terms of gross floor area) acquired by HK developers in China has been greatly reduced. This unusual practice captured the author’s interest and led to further discussions on three major problems encountered by HK developers in this thesis. These include: (1) investment strategy (2) getting land use rights (LURs) and (3) managing projects. Using practical case studies of different types of projects (ten projects by four HK developers in seven different cities), this thesis examines in detail the arrangements adopted by major HK developers in representative first-, second- and third-tier cities in 4 mainland China. The analysis divides the projects into five categories according to different physical and institutional settings. Informed by the author’s years of experience working and conducting research in the field and a regression analysis that takes on a large group of sample projects (including 354 urban development projects conducted by eleven main HK developers), the thesis presents observations, propositions and empirical findings that measure the impact of the PRL and clarify the importance of property rights for the practices of HK developers. The discussion and analysis produce several interesting findings. First, the high entry barrier and transaction costs led HK developers, in order to offset the impact of indirect costs, to focus mainly on high-end projects in prime locations and well- developed areas in first-tier cities. After the implementation of the PRL, HK developers became more cautious about acquiring LURs given their relatively weaker competitive position in relation to mainland developers. Because of the uncertainties of the policy and the immense internal and external challenges, HK developers tend to seek more joint-venture arrangements with mainland developers to lower the risk and deal with certain issues that require local networks. A second important finding is that the success of conducting real estate development projects in China relies greatly on good project management techniques. The main elements of these techniques are building design and engagement with and management of contractors and suppliers. An efficient contract management and procurement system includes adopting international contracts to minimise contracting costs and creating more direct contractual relationships by engaging more nominated subcontractors (NSC) and nominated suppliers (NS) arrangements. The difficulties lie in internalities and externalities encountered by HK developers. A careful selection of investment projects and contractual arrangements is 5 essential. And in order to further stand firm in the mainland market, HK developers endeavour to design good products, attract international tenants and brands as well as establish efficient procurement and contract administration systems. Although China is no longer short of capital or funds, it should recognise the importance of the introduction of FDI from the perspective of introducing advanced institutional arrangements, so as to promote the reform of China’s market economic system and ultimately promote the country’s further economic growth. This thesis presents the development of FDI over the past thirty years and discusses institutional change and the relationship between FDI and China’s transformation. Hopefully, it can serve as a useful inspiration for all parties. Keywords: FDI, real estate development, Property Right Law, Hong Kong developers, property investment, construction project management, contractual arrangement, externalities, internalities, changing rules 6 PUBLICATIONS During the research process, the author published two articles as co-author: Mike C. W. Wong,1 Steven X. G. Chen,2 Lennon H. T. Choy.3 (2019). Transforming China by Chinese enterprises through foreign direct investment: Experience of Hong Kong real estate developers. Man and the Economy, 6(1). 10.1515/me-2019-0005 Yong Lia,4 Xingguang Chen,5 Bo-sin Tang,6 Siu Wai Wong.7 (2018). From Project to Policy: Adaptive reuse and urban industrial land restructuring in Guangzhou City, China. Cities, 82, 68–76. 1 Sun Hung Kai Properties Ltd (SHKP), Wan Chai, Hong Kong. 2 I am co-author on behalf of PolyU and SHKP. 3 Lennon H. T. Choy is the corresponding author. Ronald Coase Centre for Property Right Research and the Department of Real Estate and Construction, The University of Hong Kong. 4 Department of Urban and Rural Planning, Guangzhou University, China. 5 I am co-author. 6 Department of Urban Planning and Design, The University of Hong Kong, Hong Kong. 7 S. W. Wong is the corresponding author. Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong. 7 ACKNOWLEDGMENTS I am grateful to my academic supervisors, Dr Lennon Choy of the University of Hong Kong (HKU), Dr Stanley Yeung of the Hong Kong Polytechnic University (HK PolyU) and industrial supervisor Mr. Mike Wong of Sun Hung Kai Properties Ltd. (SHKP). I am thankful to Robert Chan, Sam Lai, Antonio Ching (all from SHKP) and Thomas Choi (China Resources Land Ltd.) for the opinions they shared with me in various interview sessions. I also appreciate Sam Sun, Victor Zhang, Zoe Zhuo and Sophia Zhang (all from SHKP) for their input in the brainstorming sessions and comments on this thesis. I am also indebted to the participants in the Ronald Coase Workshop at the Tsinghua University, and to Lee Benham, Alexandra Banham, Xiaoning Long, Ning Wang for their particularly valuable comments. Special thanks are also given to my family for their continued support for my studies – especially to my parents, my wife and my children. All errors, however, belong to the author, and the usual disclaimers apply. 8 TABLE OF CONTENTS CERTIFICATE OF ORIGINALITY ................................................................................. 3 ABSTRACT ....................................................................................................................... 4 PUBLICATIONS ............................................................................................................... 7 ACKNOWLEDGMENTS