Justifying Chinese Local Government's Land Finance Regime
Transcript of Justifying Chinese Local Government's Land Finance Regime
CHINESE TALK SERIESMIT RELA ESTATE ENTREPRENURSHIP LAB
LAND FINANCE: PAST• PRESENT •FUTUREJUSTIFYING CHINESE LOCAL GOVERNMENT’S LAND FINANCE REGIME
YANJING, ZHAO XIAMEN UNIVERSITY2016-04-13 Boston. USA.
THE FUTUREWHAT WILL THE LAND FINANCE BE?
THE PAST WHAT CAUSED THE LAND FINANCE?
THE PRESENTWHAT IS THE PROBLEMS?
THE PASTHow does land finance fuel Chinese urbanization?
A business model can be simplified with the equation
R-C=S•R: revenue •C: cost •R:surplusConstraint
S≥0
When time factor takes into account
(R0+Ri)-(C0+Ci)=(S0+Si)
R0 is present revenue, such as the rent,
Ri is future revenue, such as the price of property
C0 is present cost, such as fixed cost
Ci is the future cost, such overhead cost or, variable cost
S0 is the present surplus, such as savings
Si is future surplus, such as interests.
• The time-mismatch of revenue and cost.
• (R0+Ri) —(C0+Ci)=(S0+Si)
How to find enough C0?
The problem of urbanization
Future present
THE SOLUTION IS FINANCE
• The mismatch of R and C• R0=0, Ri=100
• C0=1000, Ci=0
• ∑ Ri=R1+R2…R10
C0
FINANCE WITHOUT TAXES• The initial conditions of reform
1. No taxes (Planning Economy System)2. State-owned urban land3. Collective-owned rural land
• Learn from Hong Kong– The similar land system
Land commercialization• In 1987, the first land was sold in Shenzhen • In 1988, the People's Congress passed the
amendment of Land Act– "Land use right may be transferred by law".
• in 1990, the state council issued – the interim regulations of the people's republic of
china concerning the assignment and transfer of the right to the use of the state-owned land in the urban areas.
The value of land in China
• What a local government sells is its public services– future revenue of owners (the rent) – the revenue of government (property tax)
• The other countries– Developer sells the future rent– Governments levy the taxes.
price of land:debt but not revenue
• Since the public services have not been supplied yet– The income of selling land is a debt but not revenue. – Land finance is not a replacement of tax– The buyer of land is a stockholder, not merely a consumer– Local government is a joint venture– The property buyer is not a creditor but shareholder
Why did China chose the way of land finance?Initial ownership of land
• China :state-owned– Lower cost of land requisition– Monopolies the primary land
market– Less leakage of externality of
public goods
• Others : private-owned– Higher cost to obtain land– Compete with other
developers– More free-rides ……
land finance : a disposable income?
• the criticism: unsustainable– It has solved the problem to raise fixed cost c0 but still
needs to raise the revenue to cover the regular budget. Local governments, therefore, have to keep selling land so to cover the increasing regular expenditures.
• The real model: sustainable– First step: raise money from land finance and build the
infrastructures– Second step: attract firm to gain the sustainable taxes
Xiamen: most revenue from industrial and commercial
Figure 1: The revenue composition of Xiamen municipal government
87%
65%74%
81% 79% 82% 79%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2001 2002 2003 2004 2005 2006
Agriculture taxes
Fund budget revenue
Administrative fee
State-owned assets management
Industrial and commercial tax
Xiamen: the balance of budget
The Revenue and Expenditure of Xiamen Municipal Government
-200
-150
-100
-50
-
50
100
150
200
2000 2001 2002 2003 2004 2005 2006
100 million
Revenue of budget
Revenue of land
Expenditures
Balance
Surplus
Figure 3: the structure of land uses by areas
78.8% 78.8% 81.6%68.3%
4.1% 3.3%6.0%
6.1%
17.1% 17.6% 12.5%25.6%
0%
20%
40%
60%
80%
100%
2003 2004 2005 2006
Residences
Infrastructures
Industries and storages
Figure 4: the land prices/cost of different land-uses
198
5,331
443180
-
1,000
2,000
3,000
4,000
5,000
6,000
Industry Residence and commerceCost of land Compensation of Land requisition
Yuan
/ M2
Explain the behaviors of local government
• More competitions– Lot of local governments look
for few firms– better infrastructures– Lower cost including lands
• Less democracy– Tax payers are firms but not
citizens– Low cost of moving allows
firms could vote with feet
Loose money Loose foot
THE PRESENTCan land finance be sustainable?
Unsustainable 1: demands
• When most profitable public goods have been completed, the demand for land finance would decline too. – Since 2008, many Chinese cities has suffered from loss of population.
The first sign is the decrease of students in school.– In Dalian, one of best cities in Northeast China, students in the stage of
compulsory education dropped 16% from 522,000 in 2008 to 438,000 in 2014.
– Even the capital cities of many provinces, such as Taiyuan of Shanxi province, Ha’erbin of Heilongjiang province, Lanzhou of Gansu province, Kunming of Yunnan province, the number of student has also decreased from 14.8%, 14%, 13.6% and 9.8% separately during the same period of time.
• Except few cities, such as Beijing, shanghai, Shenzhen, Guangzhou...... Most Chinese cities would slow down their magnificent growth of last two decades rapidly in next ten years
• According to the newest announcement of finance ministry the revenue from land selling has fallen from 4.12 trillion RMB of 2014 to 3.4 trillion RMB of 2015, a decrease of 21.6%.
Land exhausted
Unsustainable 2:Transaction cost:• The higher compensation • The longer period of time
• The total revenue from land-selling was 4.29 trillion RMB throughout country. But the cost was up to 4.12 trillion RMB. Among them, the cost of Land acquisition and relocation was 3.395trillion RMB. The net revenue was merely 0.89879 trillion , take 20.9% of total land revenue in 2014.
Contrast to 1989• The cost in total revenue of land was less than 20%.
And the cost now is more than 80%. • The surplus has narrowed down from 80% to 20%.
Revenue
Cost
Profit
The consequence 1: efficiency of local governments
• The revenue from land is disposable which allows local governments make decisions without the democratic process.
• Since it is illegal for local governments to arise money on debt market, the diminishing of land finance will weaken the ability of competition of local governments.
Chinese local governments would degenerate into less competitive mediocre urban stewards.
The consequence 2
• land finance plays important role in creating the credit of RMB– It is more secret but more important than other reasons. – The collapse of land finance may cause unexpected
consequence on the whole economy.
THE DUAL ECONOMYIf not land finance, what is the next?
Dual economy
• An economy could be divided into two sectors, the one is nature economy and another is commercial economy.
• But way?
W. Arthur Lewis
The cause of dual economy
• The nature economy: trade with money
• Commercial economy: trade without money
The Goods Equivalent• Goods Money or Equivalent
– come from surplus of the economy during most period of history—the wealth accumulated before
– According to the equation
(R0+Ri ) -(C0+Ci)=(S0+Si)
1.The surplus S0 is always smaller than R0
2.the supply of Goods Equivalent is always shorter than the demand of trade
3.Economy based Goods equivalent must be a dual economy.
Equivalent Goods=20 commercial sector
Exchange of goodsNature sector
10
101010
101010
10
In a dual economy, the increase of equivalent does not cause the increase of prices of commodities, but the number/quantity of commodities.
M
Rise and fall• Supposing the scale of market is M, the quantity of commodity is Q, the
variety of commodity is V, the ɑ and β represents the distribution of equivalents between quantity and variety:
M=QɑV β
• ɑ+β=1, constant– which means the supply of equivalent is constant, there is a trade-off between Q
and V —the increase of Q would cause the decrease of V and otherwise and vice versa.
• ɑ+β > 1 , growth– which means the increase of equivalent, the market, both quantity and variety
would enlarge. • ɑ+β < 1, decline
– which means the decrease of equivalent supply, the market would diminish.
The economic progress and urbanization
Progress
Commercialization %
Commercial economyNature economy Dual economy
Boundary of sectors
Nature economy
Commercial economy
Constraint of money
• Decreasing the demand– Institution inventions– Tribe, state, family, firm,
commune……– Slavery, Planning
economy……
– Labor division without money
• Increasing the supply– Money inventions– Goods, salt, Silver, Gold,
check, banknote……– Goods standard, Gold
standard……
– Labor division with money
Way 1 of Increase the supply
Commercial sector
Nature sector
Suzerain/Export countries
Colony/Import countries
The principal is to turn other economies into its nature economy sector.
The best player of Goods Equivalent
The pound pegged with Gold was the first international currency
Way 2 of Increase the supply
By contrast to pound of the gold standard, the Dollar was based on the national debt, the future revenue
The credit equivalent: from Hamilton to Breton Forest System
S0 Ri
• (R0+Ri) -
(C0+Ci)=(S0+Si),
Different symptoms: inflation
• Goods equivalent– Over-supply cause the
inflation (CPI)
• Credit equivalent– Over-supply causes the
increase of asset
Different symptoms: trade surplus• Goods equivalent
– The trade surplus could add the equivalent supply
• Credit equivalent– The trade surplus is not
related to money supply– The money export help debt
issuing and the add the equivalent supply
BILLION DOLLARS
OTHER COUNTIES
JAPAN
CHINA
THE WORLD
YEAR
Figure 8: the trade deficits of the US since the collapse of Breton Forest System
THE FUTUREIf not land finance, what is the next?
Ancient China :Labor division in the acquaintance society and the semi
- acquaintance society
After 1949……
Urban: Planning Economy
– State-owned firms– Less trade– Over-accumulation
Rural: People’s Commune
– Collective communes– Small market– Depress consumption
After 1979, Big Price Push……• The market-oriented
reform– the first obstacle was
that the less money could not match the higher level labor division in industrial sector.
• The big push of price– Inflation and social
unrest in 1989
From 1990
• Urban land required compensated use– Demand for more money– Land used as Goods equivalent by local governments
1994, pegged to dollar……
• Exchange rate reform– Since 1994, the yuan
has been pegged to the dollar, the credit money
– The reform make trade surplus become an important source of universal equivalent when China entered the WTO in 2001
The trade surplus has made more universal equivalent
1998, the housing reform……• Housing supply reform
– Old house sold with discount price– New house have to buy on market.– The demand for money has caused the deflation of next 5
years in rowChina US
CPI changes of US and China 1990-2010
Land finance: the steps toward credit money
M0 M2 FOREIGN EXCHANGE
100billion
Year
Currency issuing 1992-Nov.2010
Land finance as the source of credit
The credit of dollar is based on federal debt
The credit of RMB is based on local government’s debt
Their credits are all revenue of future.
US CHINA
Two possible futures• Future 1: depression
– If the land finance bankrupt, it would cause the similar catastrophe of the Great Depression.
• future 2: follow the way of US– Unsustainable land finance is just like the state
debts of US after Independent War.– The central government replaces the debts with
national debt and issuing RMB as Hamilton did……
The observation of Angus Madison:
• After 1820, world development became much more dynamic. By 2003, income per head had risen nearly ten-fold, population six-fold. Per capita income rose 1.2 per cent a year: 24 times as fast as in 1000-8120. Population grew about 1 per cent a year: six times as fast as in 1000-1820. Life expectation increased to 76 years in the west and 63 in the rest of the world. (Contours of the World Economy, 1-2030 AD: Essays in Macro-Economic History)
J. Bradford DeLong• in about 2.5 million years from Paleolithic period to 2000, the global
economy took 99.4% of the period of time to make GDP per capita grown up to 90 dollars (1990 international dollars) and took another 0.59% of period of time in 1750 raised the GDP per capita to 180 international dollars. From 1750 to 2000, global economy has increased 37 times to 6600 international dollars. What pushed the world into such a magnificent growth?
Figure 6: Average GDP per capita 1 million BEC until now (in 1991 international dollars) Source: Bradford DeLong (1998) – Estimates of World GDP, One Million B.C. – Present