At the upcoming Plenum, the CCP’s central committee will embark on a four-day gathering to focus on policy for the coming year. At the event, many analysts are expecting “local-government funding” to be one of the top three most likely areas of policy discussion, predicting that China will focus on reforming the issue over the next 12 months. In the public sector alone, the amount of leverage within the Chinese economy over the past few years has been skyrocketing. Standard Chartered Plc estimates that regional borrowing has expanded by approximately 24.4 trillion yuan ($4 trillion) since 2010. The rapid escalation in credit within the system clearly heightens systemic risk. Credit growth has contributed to the rapid appreciation of housing prices within China.
China’s current system for providing both welfare and municipal funding fosters real-estate related incentives. Public welfare is provided at a local level, yet, the central government does not provide sufficient funding to the provinces, leaving the regions with significant budget shortfalls and limited potential revenue generation sources. As a result, many municipalities will requisition land at a predetermined value and flip it for a profit. The re-sold land is bought by commercial developers, industrial firms, etc. for materially more than the government paid the initial landowner, arbitraging the system as home prices appreciate. Clearly, a precarious manner of funding, contingent upon rising home values. As Tom Miller explains it, “At the heart of the problem is China’s dysfunctional fiscal system…most local governments in China run a perennial budget deficit, because they are required to provide more services than they can afford…on average, one-quarter of local government revenue comes from land sales…” (91).
The result—often aggravated due to local-government corruption—is eminent domain. Many farmers are relocated from their property to housing complexes without land or proper compensation. Around 200,000 hectares of land are requisitioned in China from farmers every year, which some analysts believe catalyze approximately 60 percent of social unrest (83). Thus, the ability for municipalities to fund themselves through other means, besides arbitraging real-estate at the expense of the rural population, is going to be critical going forward. A levered public sector stimulating real-estate value appreciation is neither sustainable nor stable. Going forward, China should look to further property rights of its rural population and generate revenue for welfare benefits through real-estate taxes and the like.
“China’s Urban Billion: The Story Behind the Biggest Migration in Human History” by Tom Miller