China Wants to Bulldoze ‘Urban Villages’ to Revive the Economy

In Shenzhen, a metropolis born of China’s economic prosperity, Paibang Village is a reminder of the city’s modest past and the challenges ahead for reviving the country’s property sector.

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

Now with China mired in an unyielding property crisis, policymakers want to revamp aging urban neighborhoods like Paibang to kick-start construction and spur local economies.

But as the halting rehabilitation of Paibang shows, it will not be a quick or easy fix.

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

Evergrande then handed the project to Shenzhen Metro, a state-owned firm and top shareholder in China Vanke, another giant homebuilder. Now Vanke is facing its own cash concerns. Last week, Shenzhen Metro — and, by extension, the Shenzhen government — sought to calm investors by pledging to backstop Vanke.

All the while, construction in Paibang has been at a standstill. On a recent weekday, a glass-enclosed modern building that serves as the project headquarters, and still displays Evergrande signs, was largely empty.

China’s biggest homebuilders are in financial turmoil, suffering a sales slowdown and restrictions on borrowing after years of excess. Last month, the average price of new homes fell by the most in more than eight years. The real estate slump is weighing on the economy. Local governments, reliant on land lease revenue, are feeling the squeeze.

The government has tried cutting interest rates and loosening home-buying requirements but has not moved the needle. More drastic measures may weigh on local budgets when debt is already a problem. Financial regulators are discussing ways to support developers, but they are wary of inducing real estate firms to revert to the risky behavior that prompted the crisis.

And that’s why Chinese leaders are looking at 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 drive, the government expanded cities by absorbing bordering farmland held by villagers.

But villages were allowed to maintain collective ownership of the areas where their residents lived, creating pockets of land where the state’s reach had limits. As Chinese cities modernized into expanses of high-rises and gridded streets, the urban villages grew into chaotic, densely populated neighborhoods little touched by the gentrification surrounding them.

Starting around 2009, as urban expansion started to run out of land, many local governments recognized the untapped potential of urban villages, and redeveloped neighborhoods. But it was mostly a local initiative until this year.

The Politburo, the Chinese Communist Party’s executive policymaking body, said in April that it would “actively and steadily advance 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 “expand domestic demand,” according to Xinhua, the state news agency.

“It really shows that the Chinese leaders are feeling this anxiety to find new channels of urban growth,” said Zhang Yue, an associate professor of political science at the University of Illinois at Chicago.

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

Redeveloping urban villages is more complicated and could be just as costly.

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

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

A lively shopping district is on street level — fruit and vegetable stands, secondhand shops and simple eateries. In nearby industrial parks, there are printing shops, 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 jobs.

These neighborhoods are often called the “starting point of a dream.” The 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: “People there were very close, and the distance between the buildings was just a crack.”

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

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

In many villages, the land is held by a collective, and the buildings are owned by longtime villagers, many of whom moved out of the neighborhood a long time ago.

Gao Jia has run a secondhand furniture and electronics shop in Paibang for eight years. Last year, his landlords asked him to vacate after they agreed to hand over the building housing his store to Evergrande. He was delighted to win a reprieve after Evergrande’s problems brought the redevelopment project to a halt and prevented his landlords from completing the building’s sale.

“Renovating old towns does us no good at all,” Mr. Gao said. “We won’t be able to afford the rent, and we won’t be able to do business anymore.”

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

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

Officials in Guangzhou, China’s third-biggest city, with 127 urban village renovations 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 a 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 was a 30-minute walk away. Today, Paibang has its own subway stop.

But Mr. Zhuang doesn’t live in the neighborhood anymore. He moved with his wife and child this year to Chengdu, a city in northwestern China more than 1,000 miles away. In Paibang, he said, there were no parks nearby, and it wasn’t safe for children because the buildings were so close to the road.

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

While he is ready to move on, he is not sure if the deal he signed with Evergrande in 2020 to sell his building is still valid or whether he will need to negotiate again with the new developer. He is hoping to trade in his current apartments for units in a new building.

For now, all he can do is wait and see.

Li You contributed research.