中国的经济改革一直纠结于稳增长和去杠杆、调结构，那么当前宏观调控的方式是否具有可持续性？为何经济的杠杆率不断增加，而需要推动的结构调整却进展甚微？本文希望从当前中国政治经济结构的内在矛盾来对做出解释，并提出本轮要有效去杠杆和调结构所需满足的一系列政治条件。

“不刺激、去杠杆、调结构”的理念与现实

新一届政府的施政理念曾经被总结为“不刺激、去杠杆、调结构”，希望通过与“去杠杆”相配合的“调结构”的“活乱循环”。

但现实的情况，却是一旦经济开始出现了下行苗头，央行就会在各方的压力之下选择一次次放水，各部委也开始加速项目审批。多次“微刺激”累积成“中刺激”、“大刺激”，“去杠杆”反而变成了“加杠杆”，“调结构”所需的关键领域改革却难以实现有效的突破。

可以不夸张地说，从过去两年中国的宏观政策与改革实际进展来看，既有体制运行的逻辑要远远压过正确施政理念的逻辑，而原有利益格局的惯性更是远远强于政府去杠杆、调结构的力度。

甚至早在计划经济时期，中国“条块分割”体制中作为“块块”的地方政府就有不断“加杠杆”的冲动，而作为“条条”的各个中央部委，其天然职责就是作为中央政府代表相互配合来实现经济紧缩。无论是在1980年代，还是在1990年代，国务院相关部委的一个主要责任，就是在宏观紧缩期配合压产能和去杠杆。当然，与这个责任对应的是党中央对国务院在相当程度上的授权，才最终较为成功地完成了历次去杠杆的任务。

由于当前中国经济的杠杆率过高、房地产行业风险日益增大的情况下，如果用传统去杠杆的办法简单地去“收”，就很容易带来“死”的局面。如何在本轮去杠杆的过程中确保经济不出现硬着陆，已成为中国经济当前必须面对的重大挑战。

而当前体制下要实现去杠杆与调结构的目标，面临以下三方面的重大障碍：首先是产业垄断和资源控制方面的集权，尤其是央企的“尾大不掉”，已经成为当前宏观紧缩、产业结构转型与技术升级的重大障碍；其次是当前财政集权及其带来的支出刚性在未来财政收入下行的情况下很容易导致体制内、体制外不稳定；最后是经济管制上的中央集权，比如土地管理体制的集权，很容易在去杠杆过程中调控缺乏弹性，甚至带来经济的硬着陆，未来必须想办法通过渐进式的调整逐步走向更为分权与市场化的经济管理体制。

尤其需要强调的是，在本轮经济紧缩中，央企的尾大不掉和中央财政支出刚性潜在的巨大维稳风险，都是中国历次去杠杆中从来没有出现过的情况。因此，本轮去杠杆必须要采取针对性的策略，利用“双轨制”推动经济分权与更市场化的去杠杆。也只有如此，才能防止“一收就死”的系统性经济风险。

集权式去杠杆的负面效应

从中国宏观经济调控政策的历史经验看，去杠杆要在短期内真正奏效，必须在中央层面采取一系列的集权化措施，包括金融、财政和行政方面的集权。但这种去杠杆过程中的“中国特色”，也会带来多方面的负面效应。

首先，作为一个可置信的紧缩政策，“一刀切”式的压产能、砍泡沫虽有助于快速去杠杆，但也会带来非常高昂的经济代价，往往出现的结果是“孩子和洗澡水一起倒掉”，无效供给和有效供给都被压缩，调控的经济成本非常之大。

其次，中央的财政、行政集权本身可能与市场化改革之间出现巨大的矛盾。尽管各种集权的措施有助于在短期内紧缩宏观需求，但却不可避免地带来“活乱循环”的经济周期：往往是一收就死，之后只好再放，但再放又会再乱。

第三，集权化的紧缩政策也会与中央“调结构”这个政策目标本身产生尖锐矛盾。要实现有效的结构调整与产业技术升级，必须依靠市场的力量，而市场化又需要推动经济分权。只有市场化和经济分权才可以充分调动地方政府与企业的积极性，发挥后者的信息与激励优势去培育新增长点，并最终推动结构转型与技术创新。这样，集权化的紧缩政策就会不利于结构转型和产业升级。

一般而言，去杠杆的最关键措施是紧缩信贷政策，尤其是给那些不具备可持续性的企业和地方政府断奶。应该说，仅仅就信贷紧缩本身而言，并不一定就不利于向地方、企业与市场分权。但中国的情况却有所不同，主要表现在那些加了过高杠杆的实体，往往就是如国企、地方投融资平台这类存在严重预算软约束，不怕高息借贷、也没打算自己还钱的实体。因此，要有效去杠杆，中央政府就不得不采取一定的行政措施去压缩国企过剩产能，同时停掉地方政府大量的低回报基建项目。

在中国，如果不采取上述行政性措施，而只是推动紧缩的信贷政策，就会很快带来“钱荒”的问题。一旦“钱荒”出现，地方政府、国企、乃至银行本身就会倒逼央行继续提供更多的流动性。换句话说，由于“软预算约束”的存在，地方政府、国企能在金融市场上不惜代价去借钱，金融市场也因存在大量此类主体而出现严重的道德风险与逆向选择问题。在这种情况下，中央只靠信贷紧缩来推动去杠杆就必然难以成功。只要地方党、政领导、大型国企官员对信贷紧缩持反对态度，并在“钱荒”出现后逼迫央行放水，同时游说相关部委降低压产能的政策压力，那时各部委就很难顶得住压力。

中央的行政集权曾是去杠杆的支撑点

不妨回顾一下1990年代朱镕基总理主导的宏观紧缩政策。当时除央行大幅收缩银根之外，国家计委也必须硬性压缩各类基建项目，而负责各产业的其他部委则负责分头压缩相关产业的过剩产能，其中强势的国家经贸委也发挥了巨大作用。换句话说，只有在中央各部委集体行动的前提下，才能有效地实现去杠杆的目标。

显然，当前这一轮去杠杆也必须考虑各部委自身是否有激励去配合中央的行动。1990年代中后期的紧缩实际上伴随着中央财政、行政审批等多方面集权的措施，而这就给了国务院各部委相应的资源与政治权力，并成为各部委配合中央推动“紧缩”的强大激励。

需要指出，新中国历史上曾经出现过多次的宏观经济紧缩，而在不同历史阶段，中央集权的内涵也随时而变。例如，在1980年代的宏观紧缩中，中央虽然上收了投资审批权限，但并未大幅集中财税收入和国企管理权限。相比之下，1990年代紧缩期中央则推动了财政、金融、土地管理、国企管控等多方面集权。

更为不利的是，本轮去杠杆还面临着一些新出现的严峻挑战，首先，央企的“尾大不掉”让各个中央部委在压缩产能上力不从心；其次，中央财政的支出刚性增加了去杠杆的维稳风险；最后，中央集权与结构调整之间的矛盾比历史各个时期都更加突出。

央企“尾大不掉”是最近10多年新出现的问题

在中国现实政治与经济环境中，有效去杠杆必须给中央各部委足够的激励，尤其是赋予其相应的行政权力来推动他们形成集体行动。1990年代各行业主管部委压缩地方国企过剩产能的一个重要激励，就是为自己直接管理的央企来腾出市场空间。当然，那时候各个部委很难只是单方面压缩地方国企的产能。通常他们采用的策略是也要求央企产能有所压缩，但同时却利用自己掌握的资源去推动央企的设备改造与技术升级，从而降低产能压缩对央企的负面影响。1990年代推出的国企技改贴息政策就是此种类型的博弈。

但中央部委上述压产能的方式，势必与市场化、分权化的改革大方向背道而驰：一旦部委与央企集权导致经济活力不足后，经济又开始出现“一收就死”的情况，“一死再放”，陷入“活乱循环”的历史周期。

更为糟糕的，是1990年代紧缩期中央部委对央企的有意保护却带来了央企的经济实力与政治地位的不断上升，结果是“抓大放小”导致了央企的“尾大不掉”。而当央企的经济规模和政治地位不断提升后，各部委就基本丧失了对央企的有效管控权。

应该说，现在国资委等相关部委对央企的管控能力远远不能与1990年代的国家经贸委相比。结果是在目前这轮压缩过剩产能的行动中，央企本身就成为去杠杆的巨大障碍，各中央部委压缩地方产能的政治动力也不仅因进一步集权的空间不足而大幅下降，反而出现了地方与部委合谋扩产能的情况。

考察新中国的各个历史时期，宏观紧缩政策未必一定就带来国企管理的中央集权乃至央企的“尾大不掉”。虽然1958年大跃进后，中央进行宏观调控的同时也将大量的地方国企管辖权上收到中央部委手里，但在1980年代的紧缩期，中央并未大量上收国企。此外，虽然央企在1950-1960年代间在国有工业体系中占据了绝对优势，但当时央企的政治地位并不高，基本都归各部委直接管理。换句话说，光有经济地位， 央企也未必成为宏观紧缩的必然障碍。

实际上，央企的“尾大不掉”并变成宏观紧缩的障碍，主要还是最近10多年才开始出现的新现象，其根本原因，是此时央企已开始逐步摆脱了中央部委的管控。央企不仅在经济上，而且在政治地位上都有迅速提升，并成为本轮宏观紧缩一个前所未有的挑战。

财政集权带来的支出刚性与去杠杆也存在矛盾

在讨论财税改革时，我们提到1990年代分税制改革后中央加大了对地方的转移支付力度。在现行财政体制下，中央财政转移支付中完全授予地方政府自主支配权的资金（即所谓均衡性转移支付）占比仍然较低（大约20%）。转移支付主要是由地方没有自主权的部分构成，包括专项转移支付和指定用途的“一般性转移支付”（如增发工资补助）。

转移支付比重上升强化了地方政府的预算软约束，其中一个主要机制就是它削弱了部委控制地方支出膨胀的政治激励：为强化对地方对口部门的控制，各部委都会尽量争取扩大自己控制的专项支付。如此带来的结果，就是部委联合地方一起向财政部施压要求多给钱。与此同时，地方政府也可借机联合各部委去倒逼中央给地方财力补缺口。当中央部委与地方开始“共谋”后，就出现了转移支付资金规模越庞大，部委压缩地方投资规模的动力越弱的情况，加大了地方政府的预算软约束问题。

当然，上述转移支付模式未必就直接带来宏观经济过热。毕竟相对于政府的总体基建规模而言，这些由转移支付资金所支持的基建项目总量还不太大。但上述财政“共谋”机制还是会让地方和各个部委不断要求增加各类转移支付，而且一旦增加就难以砍掉，结果是中央财政的支出刚性不断上升，而这有进一步逼迫中央不得不继续去集中财力。当经济过热出现时，中央财政收入和支出都会快速增长，而各部委都有动力扩大刚性支出以固化本位利益。

于是，中央财政支出刚性本身成为了去杠杆的障碍：如果强行去杠杆带来了中央财政收入下滑，这种支出上刚性将会直接影响体制内、体制外的政治稳定。而中央为了保稳定必须再去加杠杆来刺激经济。

1950-60年代中国的财政体制也高度集权，但当时中央对地方基本没有转移支付，中央拿到的钱直接用于满足各个部委及其下属单位的支出。所以，即使当时中央财政高度集权，但其财政支出也主要是生产性的（国有单位基建投资大部分直接通过预算内支出），不会出现因转移支付下降带来地方财政困难后很容易引致的社会稳定问题。因此，计划经济时期经济紧缩伴随的支出压缩带来的社会风险要小得多。

在1970-80年代，财政体制一直都比较分权，但中央照样可以通过收缩信贷进行宏观调控。当时的宏观紧缩并不带来财政集权，正如1950-60年代的财政集权本身也并不阻碍经济紧缩政策的执行。而本轮去杠杆中央财政集权所导致的“吃饭刚性”及其所蕴含的维稳风险是过去从未遇到的挑战。

因此对转移支付体制的改革，就是希望由此降低中央财政的支出刚性，降低“吃饭财政”下压缩支出必然带来的“保稳定”压力，进而降低紧缩政策的政治阻力。

产业升级与财政集权之间的矛盾

最后，此轮若进一步通过财政集权来去杠杆，还会与产业结构调整、技术升级产生前所未有的尖锐矛盾。在计划经济时代乃至1980年代，产业结构调整与企业的技术升级都主要依靠政府投资去实现。在当时集权的财政体制下，中央可以直接投资去推动产业升级与技术进步。

而在1990年代，当中国出口导向型的制造业开始迅速增长后，制造业发展也基本上以吸收发达国家转移的夕阳产业为主，那时进行技术模仿的难度与成本并不太高。结合国内土地、环境、劳动力的低成本优势，那时中国的制造业就可以比较顺利地承接发达经济体的产业转移，并通过低汇率政策加大出口并迅速占领国际市场。

现在，当传统制造业产品的国际需求已基本饱和，而中国国内土地、劳动力、环境的低成本优势也逐渐消失后，财政集权与产业升级之间的矛盾就开始日益突出。如果中央加强进一步加强财政集权，就自然会去严控地方政府的减税与优惠政策，导致地方政府本来可以为有潜力产业提供的各种优惠政策无法落地，非常不利于地方政府根据本地条件去推动产业升级。例如，许多地方政府为了给本地产业升级提供高技能劳动力，纷纷出台了支持职业学校校企合作的免税政策，或者推动企业将本应缴纳的教育费附加直接捐资给职业院校，但一旦要推动这些政策，就会受到集权财政体制的约束。

解决的方式就是利用“营改增”将服务业的增值税全部留给地方，以便让这一轮去杠杆过程中给地方更高的财政自主性，激励他们去推动本地产业向技术、知识密集型的制造业、服务业升级。

除财政集权外，中央行政集权以及央企垄断都会阻碍技术进步与产业升级。尤其是当前中国需要更多原创性、集合性的技术创新时，这种阻碍的效应就更显著。1980-90年代中国的技术升级主要还是依靠进口技术设备并进行简单的模仿。但到了今天，产业升级与技术进步则不仅需要包括地方政府在内的各级政府进行适度的扶持和有效的知识产权保护，而且更需要市场的优胜劣汰机制去帮助挑选赢家，这显然与各部委进一步行政集权和央企垄断地位的上述存在巨大矛盾。

实现本轮去杠杆所需满足的政治条件

综上，在新中国历史上进行的各次宏观调控中，虽然是国企上收到中央以及财政集权化都不是必然发生的现象，但各种经济政策的管制权向中央集中还是不可或缺的。无论是否包括国有企业的上收、财权集中，还是只上收经济管制权，都会在宏观经济紧缩后迅速带来经济活力下降，“活乱循环”周而复始。

而本轮去杠杆的背景，是当前中国行政、财政已非常集权，而进一步集权不仅空间不大，而且会进一步破坏市场机制、阻碍产业升级。再加上央企的“尾大不掉”和财政支出刚性增强，本轮去杠杆的难度确实前所未有。

为了应对上述挑战，需要创造相应的政治条件实现各级政府与相关部门的激励相容。

第一，要创造相应的政治条件让国务院系统来承担去杠杆的职责，而同时也赋予其足够的权力实施去杠杆的任务；毕竟，在中央制定了去杠杆的目标后，具体政策的制定与执行还是需要实际掌握相应经济管理权力的国务院及相关各部委来完成。

要实现这一点，就不仅要更清晰地界定党中央与国务院之间的分工与职责，还必须通过赋予各部委一定的标准制定权和转移支付模式的改革，逐步斩断各部委与地方“共谋”扩大建设规模的渠道，强化部委压缩地方项目的激励，降低其“批项目”的冲动，扭转各部委一味争夺中央财力、强化财政支出刚性的局面。

第二，必须创造有利于打破央企垄断的政治与经济条件。一方面，在能源、原材料、重化工等周期性部门推动央企有效地去产能和降杠杆；另一方面，在产能仍因过度进入管制而不足、潜力没有充分发挥的高端服务业与制造业部门，打破行政性垄断，实现国企之间、国企与民企之间的有效竞争，从而拉动经济增长、增加高质量就业，并实现有效的产业升级与技术进步。

要实现这一点，除了中央必须有打破央企行政性垄断的决心外，还可以利用相应的对外开放措施，以双轨制思路给垄断性国企和教育、医疗等国有事业单位施加更大的改革压力。

第三，也是最关键的，此轮去杠杆应该全力避免过去那种因去杠杆而过度推动行政、财政集权、弱化市场机制、损害经济活力的情况，避免去杠杆中的硬着陆及其可能诱发的经济、社会风险。

而要实现第三点，关键还是创造性地在土地、财政等领域推动分权型的“双轨制”改革。考虑到既往去杠杆的经验与教训，考虑到此次去杠杆可能带来的房地产泡沫破裂及经济硬着陆，考虑到目前各部委与地方都缺乏去杠杆的激励，此轮去杠杆必须改变过去那种单纯依赖财政、行政集权来去杠杆的思路，通过有意识地引入“双轨制”，并创造条件让其中更市场导向的轨道不断强化并最后并轨，最终走出“活乱循环”的历史周期。

本文于1月29日发表在FT中文网

      

 

 

Douglas Elliott first pointed out that banks have dominated credit in China until recently. Key advantages are declining as multiple regulatory constraints have made the expansion of bank lending more difficult or expensive and depositors are moving to higher yielding products, posing critical challenges to banks. Meanwhile, competitive sectors and products are growing and banks both compete and cooperate with these alternative credit channels. It is difficult, Elliott argued, to assess how much shadow banking is “bank lending in disguise” and how much competes with banks.

According to Elliott, shadow banking has societal benefits, for it sidesteps excessive intervention by authorities and channels funds to entities that have difficulty obtaining traditional bank loans. Currently, authorities are also reluctant to reduce leverage growth in the economic system by strongly curtailing shadow banking activities. However, major risks can also be perceived. With regulations bypassed, necessary risk controls concerning loan to deposit ratios, capital requirements or troubled borrowers are absent. Borrowers are faced with more risks as well, for implicit guarantees are rife and divisions of responsibilities between parties are unclear in a shadow banking system.

Shadow banking risks appear manageable, Elliott put, for much of it is less risky than portrayed and the total volume is lower than often described. The central government should have more than enough fiscal capacity to cover a shadow banking crisis. But he also warned that shadow banking rescue would be messy, as crises could spin out of control when the perceived rules change quickly, implicit guarantees lose credibility and there is no clear lender of last resort.

In this case, Elliott asserted that financial sector reforms are crucial and should not be delayed. Major points he raised include: 

1. Reduction in quantitative controls should reduce micro-management by authorities, improve economic efficiency and reduce incentives for shadow banking; 
2. Introduction of explicit deposit insurance should help clarify what is guaranteed and what is not; 
3. Continuing efforts to increase safety margins and improve operational management at shadow banks are important; 
4. Clarifying what is allowed and what is not is necessary; and 
5. Reforms to grow bond markets should be advanced.

Commentator Shaun Roache stressed that the initial phase from which China developed 20 years ago should always be considered when assessing the current performance of its financial market. In most cases, the rise of shadow banking results from excessive regulations by authorities. Roache added that different from other countries, shadow banking in China undertake business finance, in particular.

Audience questions touched upon the wider economic reforms and anti-corruption campaign in China, and its implications for the financial sector reforms. 

Douglas Elliott speaks. Photo by: Hou Xioajun

Douglas Elliott speaks. Photo by: Hou Xioajun

Shaun Roache makes comments. Photo by: Hou Xiaojun

Tao Ran moderates the discussion. Photo by: Hou Xiaojun

      

 

 

On April 9, 2014, the Brookings-Tsinghua Center for Public Policy hosted a panel discussion on China’s new reform agenda. Three distinguished scholars, David Dollar, senior fellow, the Brookings Institution; Tao Ran, nonresident senior fellow, Brookings-Tsinghua Center; and Bai Chong-En, professor at the School of Economics and Management, Tsinghua University, have discussed the need and content of China’s reform agenda and its implications for China’s changing role in the world, especially with U.S.-China relations.

Director of the Brookings-Tsinghua Center Qi Ye moderated the talk.

Photos by Hou Jun 

      

 

 

After a peaceful power transition in the 18^th Party Congress, the new leadership in China is again under the limelight. The world is watching how it tackles the many challenges facing the nation: rising inequality, worsening pollution, rampant corruption, restless society, to name just a few. Most policy analysts therefore, believe that the top priority of the Xi-Li administration should be bold social and political reforms rather than economic growth. The Chinese growth has actually slowed down significantly since 2011 and some economists even warned of an imminent crash of the Chinese economy in the coming years. Without continued strong economic growth, the new regime may not have the necessary resources as well as the legitimacy to accomplish political and social reforms. What can be done to avert a potential crisis and rejuvenate the economy? There is no shortage of opinions and concrete proposals from economists and government-affiliated think tanks. The mainstream analysts have followed the liberal ideology and called for bolder market reforms. While sympathetic to the ultimate goal, we believe that placing faith solely on the courage of visionary leaders oversimplifies the political dynamics of economic reforms.

We believe reform strategy matters. Gradualism, in particular, can not only ensure the right sequencing is followed so reforms make good economic sense but also generate enough political support to overcome the resistance. Most reform proposals so far fall short in this regard. For example, some advocate reforming China’s financial system as a major breakthrough. Financial liberalization, while necessary, may in fact trigger a crisis in today’s Chinese economy if not accompanied by reforms in the real sectors. A lot of bank loans have been squandered by local governments and state-owned enterprises since the huge stimulus package was introduced after the 2008 world financial crisis. Once marketization pushes interest rates higher, the interest burdens may force them to default and banks will be saddled with piles of nonperforming loans. Market competition also reduces the profit margin for state banks, which leave them little room to absorb NPLs. In the aftermath of the 1997 Asian financial crisis, Chinese banks faced similar challenges and it was strong economic growth in the 2000s that enabled state banks to grow out of the NPL crisis. If this recent history offers any lesson, financial reforms should be introduced only with or even after changes are made in the real sectors.

To revive the real economy, some analysts call for reducing tax burdens shouldered by businesses. Like financial liberalization discussed earlier, while relieving tax burden is useful in principle, the timing is probably not right. The immediate threat to the Chinese economy is overinvestment and lack of sustained demand. Tax relief may put more yuans in businesses’ hands and give them more time to hang on in today’s tough environment, but it does not address the fundamental challenge of creating new growth engines. More importantly, those already highly indebted Chinese local governments are apparently not in a position to reduce tax. As a matter of fact, in 2012 the cash-strapped local governments are working very hard to collect more taxes from enterprises to make up the revenue shortfall due to growth slowdown and cooling land market. At the same time, the central government may need more fiscal revenues to prepare for the future slowdown. Therefore, the room for tax cuts is at most limited.

Breaking down state monopoly in industries, like oil, steel, electricity, and transportation, necessary in the long run, is probably not the solution to the current problem either, given there is already significant over-capacity in these sectors. Moreover, for reform in these sectors to go through, detailed plans to defuse fierce resistance from the vested interests are yet to be laid out and the lack of such plans has derailed similar attempts in the past.

In our view, a reform package that centers on land and urbanization provides the best chance of unleashing huge domestic demand and relieving the overcapacity problem in many industries. We focus on land in this week policy proposal because land has played an essential role in the making of China’s growth model in the past 15 years old and it is also responsible for current woes in the economy. Revenue centralization and expenditure decentralization since the 1994 tax-sharing reform left a big hole in local government budgets. In order to meet their spending obligations, local governments exploited their role as de facto owners of land and launched a massive drive for industrialization and urbanization. First, in order to attract mobile manufacturing businesses, especially foreign firms with huge export potential, to their jurisdictions, local governments raced against each other to offer the cheapest and most well-developed industrial parks. Requisitioning farmland became a national sport for local officials in both developed and poor regions. Second, to finance the costly infrastructure construction in industrial parks, local governments relied on urbanization to raise the necessary revenues. As de facto monopolists in local residential and commercial land markets, local officials limited land supplies through land banks and raised lease prices to land users. Finally, to leverage commercial and residential land, they must first improve urban infrastructure, such as highways, subway systems, railroads, airports, water and sewage networks, etc. Local governments set up lots of financing platforms, usually trust and investment companies for urban renewal, which used land as collateral to obtain policy loans from state banks or used future land revenues and government guarantee to issue bonds to the public.

This land-based developmental model contributed to the dramatic rise of the Chinese economy, but the negative consequences are also numerous and obvious. First of all, government subsidies in industrial parks have resulted in excessive investment in manufacturing capacity, making China highly dependent on export markets. China invested around 40% of GDP in the 2000s and the ratio reached about 50% in recent years, significantly higher than the world average of 20%!  Moreover, in their pursuit of mobile capital, local governments have inadvertently created an extremely pro-business regime. Farmers were under-compensated to lower land lease prices, labor rights were curbed to control wages, environmental laws were relaxed to save production costs, and housing prices were kept high to subsidize industrial land users. Economically, this regime weakened domestic demands and household consumption as a percentage of GDP declined from mid-40s in the 1990s to mid-30s in the 2000s. Social discontent also cast a dark cloud over political stability. Equally worrisome is the potential risk associated with the property market. Due to their distorted incentives, local governments have been propping up the housing and land markets. When the bubbles burst, not only will local governments be unable to continue their growth schemes, but the financial sector may also be dragged into a crisis because many bank loans are collateralized against the over-valued land.

Changing the course, however, is not easy. The old model has created its own vested interests and these actors, central and local, public and private, forged a strong growth coalition to perpetuate the existing path. In the aftermath of the 2008 financial crisis, the Chinese government’s response was prompt and massive. It pledged four trillion government spending in two years as well as increased bank credits by 9.6 trillion in 2009 and 7.95 trillion in 2010. The irony is that, instead of boosting consumption, the stimulus money reinforced the existing imbalance in the economy. Flooded with cash, local governments constructed more ambitious industrial parks and giant state-owned corporations splurged on business expansion. Both contributed to further buildups in manufacturing in China. On the other hand, local government’s urbanization scheme was kept buoyant by easy credits as well as speculative money. The centrally-controlled state-owned enterprises (SOEs) also heavily invested in the real estate sector, fueling a real estate bubble. In many third or fourth tier cities, housing prices more than doubled within one to two years. Land lease fees doubled from 1.59 trillion in 2009 to 3.15 trillion in 2011. These revenues combined with land-backed bank loans and bond sales enabled local governments to launch massive urban infrastructure projects, such as rail, subway, road, and airport, etc.

Despite the tremendous inertia, some reform in land can no longer be postponed. We propose a gradualist approach that aims to build a dual track system. Under the current land regulatory regime, land ownership is separated into urban and rural and only urban governments have the authority to take land from rural areas for urban development. This not only deprives rural residents of their development rights but also leads the Chinese economy down to a quite destructive path. Total liberalization, however, may result in a crash of the existing housing bubbles when large volume of rural construction land rushes to the market. To alleviate this concern by local governments and urban homeowners, China may need to first set up a rental property market track targeting mainly the 200 million rural migrants who already choose to live and work in cities. However, half of them live in dormitories provided by the employers and the other half resides in the illegally built housing in urban villages with poor infrastructure and no access to urban public services such as education for migrating children.  We propose a reform that always rural communities in suburban villages of migrant-receiving cities to take their non-farming land onto the urban housing market with one condition: for the first 10-15 years, they can build properties only used for rental purposes. After the transitional period, however, these houses will gain full rights and can be sold directly on the housing market.

This design has a number of advantages. Insulating rural construction land in the rental market initially provides a cushion for the existing housing market and prevents market panics and a crash of housing bubble. On the other hand, eventually merging the two tracks in the future sends a credible signal to the speculators that housing prices would not rise further; therefore, the central government can phase out its strict regulations on real estate markets installed since 2010 to curb the housing bubble. Both contribute to a healthy growth of the housing market. Moreover, granting rural community the development rights (even though restricted during the transition) opens the legal channel for them to apply for bank loans for development. This can unleash a housing construction boom in urban villages and suburban areas, which provides a lift for construction-related industries with significant overcapacity. Finally, unlike the current housing bubble, this kind of real estate development is more socially beneficial and economically sustainable. Rural residents, particular those living close to urban centers, benefit from this change directly. The growth in the rental property track also makes housing affordable for hundreds of millions of migrant workers, enabling them to settle in cities permanently. Urbanization holds the potential of turning the Chinese economy away from the investment-driven model.

One key to the success of this reform lies in the attitude of local governments. Their concern over revenues is perfectly legitimate and needs to be addressed in the reform package. Under the current system, local governments are burdened with too many spending responsibilities but do not have adequate revenues. After the reform, they will have limited power of land requisition and lose the sizable land lease fees and bank loans associated with that power. In the long run, property taxes should be levied so that local public finance can be supported by a stable source of income. Considering the strong resistance from the wealthy and the politically powerful in the trial cities, however, it is unrealistic to expect this new tax to take effect soon. In our view, the loss of revenue during the transitional period will be compensated by several sources.

First, the urban and suburban villages that are lured by the huge rents and join the proposed rental market track would be happy to contribute some of their land for free to the local governments in return for their newly gained land development rights for rental housing. For example, local governments would be authorized to take 50% of rural land from these communities and use 30% for infrastructure construction, such as roads, water and sewer, public schools, hospital, etc. Local governments can auction off the remaining 20% of land to raise capital for these constructions. The development rights for the remaining 50% of land would be granted to the original land owners, the villager. The latter would be better off since the remaining 50% of land would value more due to improved infrastructure and a higher development intensity authorized by the government. This technique, known as land readjustment, is an effective way for government to capture the land value appreciation in urbanization. Local governments would then be able to spare themselves from paying for infrastructure improvement from their own budgets. In addition, the proposed rental market also generates handsome rents and local governments can levy a tax on these rental incomes and use the revenue to cover the education expenditures for migrants’ children in urban public schools. Once the housing and schooling issues are settled, China would be able to accommodate hundreds of millions of migrants on a permanent basis. They would work, live and consume like urban residents, a further boost to domestic demand.

Moreover, for  those rural communities that have already developed their land “illegally” for urban usage,  a gradual process of legalization  can be started if certain infrastructure and building standards are met and due taxes are paid.  The land and house owners would be willing to pay to local governments to gain full legal status.

Finally, another untapped source for local governments is the under-utilized industrial land. According to various reports, the floor-area-ratio is only about 0.3-0.4 for industrial parks even in China’s developed areas. Through reorganization by negotiation, it is possible to double land development intensity and to convert some industrial land for residential and commercial construction. According to our estimates, at least one million mu industrial land should be available for such conversion each year. Assuming 750,000 yuan per mu for housing and commercial land (2008 price), local governments can collect 750 billion yuan per year for the next 10 years. Further assume that 2/3 of this converted land is used for housing, with a floor-area-ratio of 1.5, about 600 million m² houses would be built each year. With a moderate price of 5,000 yuan per m², local governments can raise 420 billion yuan in real estate related taxes.

Even with some moderate assumptions, one can show that local governments should be more than compensated for giving up the power of land requisition. They can also use these revenues to pay back the debts incurred through financial platforms and avert a financial bomb.

At the current stage of development, no reform in the Chinese economy is going to be easy. One certainly should not have any illusion about a quick fix. But the proposed dual track reform package offers some real hope of boosting domestic consumption and alleviating the overcapacity problem in many sectors. One particularly favorable factor for this reform is the new leadership’s emphasis on urbanization. Premier Li Keqiang has spent years on this issue and seems to have a genuine interest in making breakthroughs. This proposal may provide a realistic roadmap for such reforms.

      

 

 

In the first panel, speakers discussed the opportunities and challenges that China faces in its continued economic growth and social transformations. In the second panel, speakers explored the impact of China’s rapid growth on regional and global dynamics and outline challenges and opportunities for China’s foreign policy.

      

 

 

After continuous confrontation between villagers and local officials for almost four months, the land grab in the fishing village of Wukan, in Guandong province, China, has now led to the death of one of the elected village leaders in police custody, and further escalated into a violent “mass incident” with tens of thousands of farmers protesting against local officials.

The Wukan case is just one of many mass incidents China has experienced in recent years. In fact, the number keeps rising every year; journalists often cite a figure of 87,000 for 2005, estimates by the China Academy of Social Sciences give a figure of “over 90,000” mass incidents in 2006, and further unspecified increases in 2007 and 2008.

In China, a mass incident is defined as “any kind of planned or impromptu gathering that forms because of internal contradictions”, including mass public speeches, physical conflicts, airing of grievances, or other forms of group behaviour that may disrupt social stability. Among China’s mass incidents, more than 60% have been related to land disputes when local governments in China worked closely with manufacturers and real-estate developers to grab land from farmers at low prices.

In a drive to industrialise and urbanise, thousands of industrial parks and many thousands of real estate development projects have been, or are being, built at the costs of dispossessed farmers. The land requisition system deprives three to four million farmers of their land every year, and around 40-50 million are now dispossessed.

The Wukan case says a lot about the serious tension between state and society in the fast urbanising China. It is difficult to play the land requisition game fairly under the current system, since farmers are neither allowed to negotiate directly on the compensation package, nor are they allowed to develop their own land for non-agricultural purposes. They have to sell their land to local government first, which defines the price then leases the land to industrial and commercial/residential users for a profit. As land prices keep rising in China, it is not surprising that farmers with rising expectations are becoming increasingly unhappy. As a result, mass incidents, sometimes as violent as in Wukan, are inevitable.

Local authorities in China, in their pursuit of revenue via aggressive urbanisation and industrialisation, are also undermining the country’s grassroots democracy. It was usually local officials who would carry out difficult negotiations with village collectives, or who were in charge of coercing defiant farmers to accept government terms. Having village cadres who shared their interests would not only lower the selling price but also determine whether or not the transaction could take place at all. Therefore, township and county officials in localities that experienced greater land requisition had a stronger incentive to manipulate village democracies to make sure that more co-operative cadres were elected.

One township party secretary I interviewed in Fujian province said: “If election rules are followed strictly, [we] will lose control of the rural society. Village cadres will be afraid of villagers, not the township government. They can put off assignments from the township government and compromise the tasks during implementation. Therefore … local officials are willing to introduce rules that subvert the true meaning of village democracy. This is also the case in Wukan in which farmers are protesting not only against local governments, but also against villager cadres who worked with the authorities in abusive land requisition.

As China is urbanising fast, land requisition takes place in more Chinese villages, in particular those closest to the cities. Farmers with rising expectations on the one hand, and local officials with financial stakes in keeping the compensation low on the other, are bound to lead to increasingly violent mass incidents. Local governments in China needs to spend more not only on compensating farmers, but also on maintaining social stability. Wukan should be a signal for China to reform its land requisition system in order to keep local governments away from the financial gains of abusive land taking.

      

 

 

In the first installment of the Brookings-Tsinghua Center Policy Series, Nonresident Senior Fellow Tao Ran explores how China’s growth model since the mid-1990’s has led to a series of distortions in the country’s urban land use, housing price and migration patterns.

The report further argues for a coordinated reform package in China’s land, household registration and local public finance system to address the serious challenges China is facing in its urbanization process.

Read the report (in Chinese) »