Time to get rid of land financial dependence? Read "Being Involved: Chinese Government and Economic Development"

Looking back at China's economy over the past ten years, it can be described as "two days of ice and fire".

Ten years ago, China's gross domestic product (GDP) had just surpassed Japan to become the world's second largest economy; at that time, the United States on the other side of the Pacific had not yet emerged from the shadow of the 2008 financial tsunami, while Europe on the west was mired in the European debt crisis. , among the world's major economies, only China stands out, and it has a high-speed growth close to double digits, leading the world economy to gradually recover.

It was also at that time that the "Chinese model" began to be talked about.

Today, ten years later, the Chinese economy is in a different situation.

Before the new crown epidemic, the economic growth rate was declining year by year, and the old model failed to stimulate economic growth. "Neither the growth of real productivity nor the speed of inflation can keep up with the growth of credit or debt, so macroscopically, it has caused high investment. Squeeze consumption, overcapacity in some industries and excess investment in real estate in some areas, accompanied by corruption and reduced administrative efficiency." After the outbreak, China's economy has become even more difficult: Internally, there is a Iron-fisted governance and reforms have had an unexpected impact on market confidence. Externally, trade conflicts and de-globalization have intensified. Russia’s invasion of Ukraine this year has made the international geopolitical situation even more turbulent.

Against this background, the Central Economic Work Conference at the end of last year pointed out that China's economy is facing the triple pressure of "supply shock, demand contraction, and weakened expectations".

Why such a huge change in just ten years?

In the past, what was the driving force behind China's rapid economic growth?

Why has this model failed to stimulate economic growth?

In terms of macroeconomic structure, why does China continue to underconsume?

What is the current reform logic of the government?

What challenges will the transformation face?

The model of local governments relying on investment to drive economic growth is unsustainable.

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Land finance is real estate finance

To try to explore these questions, "Being Insider: Chinese Government and Economic Development," published last August, might be a good primer.

This book tells the story of China's economic reforms over the past three decades from the current reality.

As the title suggests, government and policy are the protagonists of this book's analysis, because in China, "the government not only affects the distribution of the 'cake', but also participates in the production of the 'cake'", so it is impossible to talk about the economy without the government.

As a development economist, author Lan Xiaohuan does not view the Chinese economy and the relationship between the government and the market from the perspective of mainstream economics.

He has a little more "sympathetic understanding" and affirmation of China's early economic development.

In an interview with mainland media, he said: "The most important thing about this book is to look at the world from a different perspective. You will find that there is more than one way of doing things. The Chinese government is deeply involved in the economy. Although the Chinese government is very supportive of companies, there are some It’s a manifestation of corporatization, but it’s not essentially corporate, it’s deep engagement. It’s also a way to work—because it turns out that economic growth is not bad. If you go around the world, you’ll find it’s an economic miracle.”

So how is the government deeply involved in the economy to achieve this miracle?

The story begins with the reform of the tax-sharing system in 1994.

After the reform of the tax-sharing system, the central government took the bulk of the tax revenue, and the “three-seven” income distribution pattern between the central and local governments in the early stage of reform and opening up gradually changed to “five-five” or even “six-four”, and the local government’s budgetary revenue was severely affected. It has been greatly weakened, but the burden of economic development is still mainly borne by local governments, and things must be handled by local governments. ".

As the name suggests, land finance is the revenue generated by the local government's reliance on land transfer and development.

However, the government also needs to bear the corresponding expenditures for land sales, including compensation for land acquisition and demolition, and basic development expenditures such as "seven connections and one leveling" (electricity, access, heating, ventilation, water supply, drainage, communication, and land leveling), so as to turn the raw land into a mature land.

In this way, the government does not have much balance; for the local government, what it really wants is the industrial and commercial economic activities attracted after land development, because industry has a strong driving effect on economic transformation and upgrading, and can bring value-added tax and other Taxes and job creation.

It can be seen that land finance provides a foundation for local governments to promote industrialization.

After the income tax reform in 2001, the central government further centralized power and took away 60% of the corporate income tax.

Since then, the way local governments develop the economy has changed from the previous industrialization to "industrialization and urbanization": on the one hand, it continues to supply a large amount of industrial land at low prices to attract investment; on the other hand, it restricts the supply of commercial and residential land, from constant Earn land monopoly income from rising land prices.

The data cited in the book shows that although commercial and residential land accounts for only half of the land transferred, it contributes almost all of the land use rights transfer income.

In other words, the government subsidizes industrial land with commercial and residential land, so the author points out that the essence of land finance is real estate finance.

But the real power of land is not yet in "land finance".

With urbanization and commercial housing reform, the value of land has soared. The government not only supports the "land finance" with the income from the transfer of land use rights, but also capitalizes the future land income, borrows massive funds from banks and other channels, and uses "land finance". ”, which promoted rapid industrialization and urbanization.

As early as 2007, then-Premier Wen Jiabao pointed out that China's economy has huge problems, which are still unstable, unbalanced, uncoordinated and unsustainable structural problems.

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Unsustainable high growth

In Lan Xiaohuan's view, this largely explains China's "economic miracle".

He pointed out that the so-called economic development is nothing more than improving the efficiency of resource use and trying to "make the best use of people's talents and materials". China is a country with relatively poor natural resources. In the initial stage of the economy, the resources that can be used are mainly manpower and land.

"Many major reforms in the past few decades are mostly related to revitalizing these two resources and improving their use efficiency. Compared with manpower, land is easier to be capitalized, turning future profits into today's high land prices for local governments. According to this model, in the following ten years, the reform of state-owned banks ended, China joined the World Trade Organization (WTO), urbanization accelerated, earth-shaking changes took place in various places, infrastructure construction was in full swing, and the economy developed rapidly.

However, the costs and disadvantages of this development model are equally obvious.

The first is that in the process of urbanization, "emphasis on land and neglect of people", the insufficient supply of public services has pushed up housing prices and residents' debt burden, and widened the gap between regions and the rich and the poor.

Secondly, with the overheating of real estate and the relatively complete infrastructure and industrial system, the benefits of the government's extensive investment are getting lower and lower, and the pulling effect on the economy is getting weaker and weaker, and the debt burden and debt repayment risk are getting higher and higher; The third is the development strategy of "focusing on investment, production, and consumption." Although this has expanded foreign trade and made China rapidly become a manufacturing powerhouse, the disadvantage is that the economic structure is unbalanced.

This imbalance is reflected in two aspects: internally, resources are transferred to the corporate sector, and the proportion of residents’ income and consumption is low, which is not conducive to the long-term stable development of the economy; externally, the production capacity that cannot be absorbed at home is exported to foreign countries, which intensifies trade. conflict.

In fact, the Chinese leadership was aware of these problems as early as the early 2000s.

On March 16, 2007, when answering a reporter's question, then-Premier Wen Jiabao pointed out, "China's economy has huge problems, which are still unstable, unbalanced, uncoordinated, and unsustainable structural problems. The so-called instability , that is, the investment growth rate is too high, the credit is too much, the currency liquidity is too large, the foreign trade and the international balance of payments are unbalanced. The so-called uncoordinated means that the primary, secondary and tertiary industries are not coordinated, the investment and consumption are not coordinated, and the economic growth is too much. The land depends on investment and foreign trade exports. The so-called unsustainable means that we have not been able to solve the problems of energy saving and consumption reduction and ecological environment problems. These problems are urgent problems that need to be solved before us, and they require long-term efforts. question."

However, being aware of a problem is not the same as solving it.

Reform needs enough time and space to buffer the pain (of course, courage and courage) in the process. However, the subprime crisis in the United States in 2007 triggered a financial tsunami, and the global economy was in a mess after a bloody storm. Declining, the Chinese government quickly released a "4 trillion" economic stimulus plan, those urgent and huge problems were put aside, and China went back to the old path of relying on investment to drive growth, and because of the unprecedented scale of stimulus, these Potential problems have also been magnified, causing further imbalances in the internal and external economic structure.

Evergrande is a microcosm of China's over-reliance on debt and investment for economic growth.

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Local governments need to change their roles

After the 18th National Congress of the Communist Party of China in 2012, the central government gradually implemented "supply-side structural reforms"; in 2017, the report of the 19th National Congress of the Communist Party of China redefined the "main contradiction", from the original "people's growing material and cultural needs and backward society." The contradiction between production” has been transformed into “the contradiction between the people’s ever-growing needs for a better life and unbalanced and insufficient development.” In fact, it reaffirms that this development model is unsustainable, and it also shows that the central economic policy orientation has occurred. fundamental change.

In 2020, with the outbreak of the new crown epidemic and the increasingly complex international situation, the Politburo meeting of the Central Committee of the Communist Party of China proposed to build a "new development pattern of mutual promotion of domestic and international dual circulation", which is a transformation in development strategy.

So, will this time of reform be successful?

The answer is not necessarily.

As the author said, even if the reasons are clear, the consequences may not be dealt with. In recent years, the central government has implemented a series of major economic and financial reforms around "supply-side structural reforms", including strict control of housing price rises and "new asset management regulations". ”, restrictions on land financing, debt replacement, “anti-corruption”, mixed ownership reform of state-owned enterprises, etc., have indeed effectively curbed the growth of new debts, but the development model that is highly dependent on debt and investment has not completed the transformation. operation, but does not automatically translate into a more efficient mode.

The author pointed out that the key to this model in the past was the price of land, "House prices are linked to land prices, land prices are linked to finance, and finance is linked to infrastructure investment, so economic growth, local finance, banks, and real estate have formed a prosperous and prosperous relationship. It is a complex relationship in which one loses both.” Therefore, the key to reform is naturally “to transform the role of local governments in the economy, to curb their investment impulses, to reduce their productive expenditures, and to increase people’s livelihood expenditures.” Dependence on the development model of “finance” and “land finance” restricts its use of land to increase leverage, leverage credit resources, and reduce dependence on land prices.”

Another example is to increase residents' income and consumption.

The report of the 19th National Congress of the Communist Party of China clearly stated that it is necessary to "improve the quality of employment and people's income level...to promote a more reasonable and orderly income distribution...to expand the proportion of middle-income groups and increase the number of low-income groups. Income, adjust excessive income, ban illegal income ... perform the government's redistribution adjustment function, accelerate the equalization of basic public services, and narrow the income distribution gap."

However, as mentioned above, the low proportion of Chinese residents' income and consumption is closely related to the way local governments promote economic development. For example, local governments use commercial and residential land to subsidize industrial land, pushing up housing prices and land prices to maintain "land finance"; Interest rates and exchange rates also provide "hidden subsidies" for enterprises and exports based on the low savings returns of residents. In addition, in the process of urbanization, "focusing on land and neglecting people", insufficient expenditure on people's livelihood, and lag in the supply of public services such as education and medical care. In the end, the growth of residents' income is slow, and at the same time, they bear high housing prices and carry debts, which ultimately curbs consumption.

In recent years, the central government has started to carry out reforms in real estate, and regulatory policies have emerged one after another. In 2020, the "three red lines" policy was introduced to restrain real estate developers from over-borrowing. Many real estate companies that had aggressively expanded in the past immediately fell into the dilemma of a broken capital chain. The market has been suppressed in an all-round way, and the chain effect caused by it has not yet been controlled, which has greatly affected the economic growth of various places.

Coupled with the impact of the rebound of the new crown epidemic and strict epidemic prevention measures, the finances of some local governments have been extremely difficult, and the pace of reform has begun to shrink again.

The author makes a metaphor in the book, "It's like a person who eats haise and becomes a big fat man. If you want to regain your health, it is necessary to eat less, but a simple and rude diet may cause big problems, and you must be careful to deal with obesity caused by many complications," which seems to be a prophecy today.

This may also indicate that although the Chinese leadership is clearly aware of the problem, they underestimated the difficulty of reform. "Reform will always take some time." However, the cost of reform will not be reduced by delaying the reform. If it disappears, the later the reform, the more difficult it will be, and the higher the cost will be.

"Being Involved: Chinese Government and Economic Development"

Author: Lan Xiaohuan

Publisher: Shanghai People's

Publishing Date: August 2021

For details, please read the 324th issue of "Hong Kong 01" e-Weekly Newsletter (July 4, 2022) "