April 13, 2007
Nailing nail houses
The SCMP reports on the latest craze in China:
Developers wanting to turn a Shenzhen site into the city's tallest building are being blocked by an obstinate Hong Kong man whose building has become the mainland's latest "nail house" holdout. Choi Chu-cheung's six-floor villa in the booming central business district stands isolated in the middle of a huge construction site and the 57-year-old says it will stay until he gets more compensation. Mr Choi and his wife, Zhang Lianhao, are standing firm despite an order by the Shenzhen land resources and housing management bureau last month ordering his family to move out by yesterday.This article nicely encapsulates many of the issues involved here. Firstly this kind of thing panders to a general perception that in China it's the mean property developers and greedy governments railroading poor, harmless people fighting for their property rights. In many cases that's probably true. In this case, it doesn't seem to be. 389 others all thought the developer's compensation was enough. In a classic case of economics, the "price" for holding out gets higher the fewer people that accept the compensation package. Basically this "nail house" becomes able to blackmail or extort money from the developer, especially if it's a large project and everyone else has already taken the package. There are some remedies to this, for example by making the compensation package contingent on 100% acceptance (which brings peer pressure to bear). But in this case the solo holdout is now able to extract an out-sized settlement for their obstinancy. Some might say congratulations to them for holding out and screwing more money out of the developer. But where does this leave the other 389 landholders who accepted the first, lower offer?
The next issue the article highlights is the murky world of Chinese property title. It is usually very difficult to decide who has clear title, and this is going to be an ongoing problem. However in this case the government spokesman on one hand says it's state land, but in the next breath practically concedes it is not the state's land.
Many capitalist countries have a concept of eminent domain, where the state has the power to force property owners to sell without their consent, albeit in return for just compensation. This is used when the interests of the many override the interests of the few individual property owners. Of course much hinges on the concept of "just compensation", but in this case 389 property owners clearly felt it was good enough. And while it makes for dramatic photos, the city of Shenzhen will be much better off with its new office tower brining in tax revenues, businesses, workers and the like than keeping some rundown villa. If these existing properties have heritage value (e.g. like the hutongs of Beijing) then the government can and should set up ways to protect those heritage buildings...something that even theoretically advanced Hong Kong struggles with.
So let's call this nail house what it really is: blackmail.
For more on the previous nail house incident, please read Tenement Palm's excellent summary of the story behind the story and follow that up with an absolute must-read where Dave considers Howard French's IHT piece on the nail house where he discusses the faults with Western media's coverage of China and common misperceptions the media fuels. As usual, there's far more to the story than you might first think.posted by Simon on 04.13.07 at 11:18 AM in the China economy category.
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Just what Shenzhen needs, a new office tower.
"blackmail and extort" Seems to me more like he is taking advantage of his position.
If the other 389 get less than he does, tough luck.
If there are no rules against what he is doing, then its OK.
Hotels and airlines put their fares up in high season. Is that fair on the customer?posted by: Joel on 04.14.07 at 11:32 PM [permalink]
There's a key difference here between this nail house and hotels putting up fairs during high season: for hotels, it's all laid on the table in a take-it-or-leave deal...and if you decline, someone else will likely take your place. In the housing case, the developer already owns all 389 other lots, and those 389 people have already agreed to the compensation level.
To give you an analogy, in share market takeovers there is usually a compulsary aquisition trigger. If more than 90% of shares are tendered to the offer, the aquirer can compulsarily aquire the rest, because otherwise a lone hold-out can hold the aquirer to ransom. This is exactly the same thing.posted by: Simon on 04.16.07 at 09:14 AM [permalink]
So the system in place is "poorly designed" and the hold outs are taking advantage of the "poorly designed" system. ("poorly designed" that is if you want to make it easier for forced buyouts, which seems pretty anti-free market to me)
And if you play the game poorly enough that you get caught in a PR Spin trap (like photos of nail houses), then don't you deserve to get taken to the cleaners?posted by: Tom - Daai Tou Laam on 04.16.07 at 02:12 PM [permalink]
"But where does this leave the other 389 landholders who accepted the first, lower offer?"
In the exact same place they are right now, which is the exact same place they'll be if the holdout gets a higher offer, accepts the current offer, or is forcibly evicted by the government. How is it relevant?
"Many capitalist countries have a concept of eminent domain, where the state has the power to force property owners to sell without their consent, albeit in return for just compensation."
My definition of "just compensation" is one that doesn't require the long arm of the law to force me to comply.
From the eminent domain article you linked: "The property is taken either for government use or by delegation to third parties who will devote it to 'public uses.' The most common uses of property taken by eminent domain are public utilities, highways, and railroads." That is a vastly different concept than your stated purposes of opening restaurants and office buildings.
And yes, capitalist countries have eminent domain, but when used for abuses there is huge public outcry. In the U.S., the Kelo vs. New London decision upheld broad eminent domain use, but to public backlash, and the creation of legislation to prevent its excessive use.
The 389 others are relevant because they were all in the same situation as this hold-out, and accepted the compensation on offer. You can think of it like this: 389 people voted that this offer was fair, and one didn't. However unlike a democracy, this one has an effective veto over the whole project.
As for your second point, Kelo is a perfect demonstration that eminent domain is often used for a broadly defined "public use", for example by taking run-down buildings and allowing new office towers to be built on them because they will lead to greater tax revenues and better use of the space. Sure there was a huge outcry over Kelo, but the US Spremem Court decided that eminent domain is a broad power, unless circumscribed by legislation. After all the Supreme Court is the "check and balance" of excessiveness in the US system and they saw this example was a legitimate use of the power.
So my point remains: this hold-out is basiaclly extorting and blackmailing. No-one has disagreed with that point yet.
It seems you've now become the arch-capitalist! These hold-outs play the PR game well, and in free-wheeling China they are proving better and more able at extracting money developers. "Forced buyouts" are not anti-free market, as the example in share aquisitions I gave above makes clear. They are a way of preventing a tiny minority from having a veto.posted by: Simon on 04.16.07 at 06:01 PM [permalink]
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