China Urbanizing

Impacts and Transitions

Weiping Wu,Qin Gao

• Publisher: University of Pennsylvania Press
• Year: 2022
• ISBN:
  9781512823028
• Topic: Politics & International Relations
• Subtopic: City Planning & Urban Development
• Index: Politics & International Relations

China turned majority urban only in the recent decade, a dramatic leap given that less than 20 percent of its population lived in cities before 1980. This book situates China's urbanization in the interconnected forces of historical legacies, contemporary state interventions, and human and ecological conditions. It captures the complexity of the phenomenon of urbanization in its historical and regional variations, and explores its impact on the country's socioeconomic welfare, environment and resources, urban form and lifestyle, and population and health. It is also a book about China, in which the contributors provide new perspectives to understand the transitions underway and the gravity of the progress, particularly in the context of demographic shifts and climate change.The chapters in China Urbanizing, written by American and Chinese scholars, achieve three interconnected aims. The first is to explore how the process of urbanization has shaped and been influenced by the social, economic, and physical interactions that take place in and beyond cities, and the state interventions intended to regulate such interactions. The second is to examine the shifts and evolutions emerging in urban China, such as the economic slowdown, population aging and low fertility rates, and how cities interact with the environment and planet given China's rising role in the global discourse on climate change. The third is to explore new sources of information for conducting research on urban China, such as satellite and street-level imagery data and online listings, to account for the complexity and heterogeneity that characterize contemporary Chinese urbanization. Contributors: Juan Chen, Dean Curran, Deborah Davis, Peilei Fan, Qin Gao, Pierre F. Landry, Shi Li, Shiqi Ma, Justin Remais, Alan Smart, Shin Bin Tan, Jeremy Wallace, Sarah Williams, Binbin Wu, Weiping Wu, Guibin Xiong, Wenfei Xu.

CHAPTER 1 Paying for Urbanization: Land Finance and Impacts

Weiping Wu

Introduction

Under China’s market transition, the process of urbanization has produced spectacular results, at least when judging from the physicality of transformation. This includes great strides in delivering basic infrastructure in ways that are more effective than most other developing countries with similar income levels, and building national networks of high-speed rail and roadway connecting cities that are the envy of even places in the industrialized world. Such progress has modernized the ways and conditions in which manufacturers produce goods, commerce and services provide for consumers, and people live and travel in and across locales. As a central theme of this volume, the impact of urbanization is ubiquitous. This chapter addresses the economic and physical dimensions primarily through an analysis of how urban infrastructure is structured around land finance and how this mechanism shapes cityscapes.

On an aggregate level, China has made significant progress in meeting the rising demand for infrastructure. Urban infrastructure financing in China is fundamentally different from that of most other countries (W. Wu 2018). In industrialized countries, borrowing is widely used as a key method because of the capital-intensive nature of urban infrastructure, especially in terms of up-front costs. Most such borrowing is directly from a functioning capital market and relies on a system of municipal bond rating (in contrast to the dominance of bank lending in China). After borrowing, local taxes are the most important source, constituting on average a 40 percent share (Bird 2004; Chan 1998). Other sources of funding include grants, subsidies, and user charges. Although the situation in developing countries varies substantially, local property taxes dominate the revenue structure, and loan financing tends to be a small source.

Overall in China, bank loans are the major source of funding for infrastructure projects (as opposed to capital markets). Five major state-owned commercial banks dominate the credit market for large infrastructure projects: Agricultural Bank, Industrial and Commercial Bank, Bank of Communications, Construction Bank, and Bank of China. Additionally, a policy bank established in 1994, China Development Bank, provides long-term financing for key projects supported by the state (Walsh, Park, and Yu 2011). Borrowing from these banks occurs largely through local government financing vehicles (LGFVs) or urban development investment corporations, often backed by future land lease revenue (Wong 2013). The latter process has morphed into full-fledged land financialization—using land as collateral to secure bank loans—particularly since 2008, when fiscal stimuli by the central government required local matching funds. In 2014, about 75 percent of land mortgages were furnished by the major banks previously noted (F. Wu 2019). Other key sources of finance include taxes and fee revenue (though not in the form of property taxes commonly levied in the West), especially land lease/transfer fees (W. Wu 2010). During the period from 2007 to 2014, for instance, receipts from land lease/transfer accounted for an average of 52 percent of revenue for prefectural-level cities (Fu, Xu, and Zhang 2019).

Of concern to scholars is the use of land leasing as a primary means of finance for urban infrastructure. This has led to what has been referred to in the literature as a “land-infrastructure-leverage trap” (Tsui 2011), in which local governments—relying on a finite quantity of land as collateral for bank loans—become reliant on an unsustainable system for funding capital-intensive infrastructure projects that may not lead to a level of economic development necessary to pay off the debt. In light of this, there has been much consternation within and outside China with regard to the level of debt LGFVs have taken on. Other factors contributing to the accumulation of local debt include increased local expenditure on services (but reduced revenue) as a result of the 1994 tax reform, stimulus spending and loosened credit policies to ease the 2008 global financial crisis, and a complacent state-controlled banking system willing to accommodate the wishes of local governments (Lin 2009; Tsui 2011; F. Wu 2019).

Rather critically, land-infrastructure-leverage or land finance has spatial implications. The conversion and subsequent leasing of rural land as a method for urban expansion has produced sprawling built environments, coined as “urban sprawl” in the literature. For instance, between 1990 and 2003, the built area in Shanghai more than doubled and in Beijing almost tripled (Wu, Xu, and Yeh 2007). Recently, urban land expansion has significantly outpaced the growth of the urban population in the majority of Chinese cities. Compared to the rest of East Asia, where only 22 out of about 270 cities experienced such a growth pattern between 2000 and 2010, China had 316 cities (out of 600) whose land growth outpaced population growth (World Bank 2015).

This chapter will first discuss a confluence of factors underlying the “land-infrastructure-leverage” strategy of infrastructure and urban development. I will outline how LGFVs leverage land leases and other profitable businesses to mobilize investment in urban construction and infrastructure, drawing from profiles of such entities in Beijing and Shanghai. Given the rapid pace of urbanization, local governments have resorted to land finance to meet an increasing range of responsibilities, while having much less in terms of dedicated budgetary allocation under current central-local fiscal relations. I will then address the impact of land finance on the spatial forms of cities, as manifested in fragmented expansion and vacant development (or the so-called ghost cities).

Understanding Local Government Financing Vehicles in China’s Fiscal Context

China’s fiscal system remains in transition, and much like macroeconomic reforms, decentralization has been gradual and incremental, responding to immediate problems often with short-term fixes. Under state socialism (1949–79), the central government had direct control over local governments in three main areas: allocation of materials and resources, production planning for key industries, and budgetary control of revenue and expenditure. A number of measures significantly altered central-local fiscal relations in the 1980s. Most notably, the central government declared that each of the four provincial entities would be viewed as a “separate kitchen” for fiscal purposes, which meant that, among other things, many municipalities could retain more of the revenue raised in their jurisdictions and were given more discretion in how they spent that revenue (Wong 1997; Wu and Gaubatz 2020). Following the 1994 tax reform, local government expenditure exploded as a percentage of total government spending. Yet local revenue has not kept pace. To wit, local governments had 80 percent of total government expenditure but only 48 percent of revenue in 2009, and this ratio has remained more or less steady since (for instance, it was 85 and 52 percent, respectively, in 2012). The overall effect of the reforms can thus be considered a decentralization of investment responsibilities and a recentralization of tax collection (Lin and Yi 2011; Wei 2014). An additional problem for local governments is that they are not allowed to establish taxes or issue bonds—save the ten local government entities permitted to issue bonds under a pilot program initiated in 2014 that was subsequently expanded to include all provincial governments in 2015—and hence rely on transfers of tax revenue from the central government.

One response to this dilemma of local public finance has been the creation by local governments, often at the municipal or county level, of extra-budget or off-budget corporations, known as LGFVs, which have four main functions. LGFVs are (1) financing platforms, raising funds for infrastructure projects; (2) public sector investors, managing and operating local government assets; (3) land development agents; and (4) project sponsors or owners (World Bank 2010; Figure 1.1). Thousands of LGFVs have existed throughout China, with wide variation in number per province and municipality. Most are under the direct control of municipal governments, while others may report to the municipal department of construction, a local asset management department, or the local development and reform commission. Compared with public infrastructure development companies in other countries, China’s LGFVs do not have a scope of work that is codified into law, nor do they have transparent governance systems or a direct linkage between revenue and expenditure (World Bank 2010).

While procuring funds from capital markets (for example, through the sale of stocks or bonds) is generally not allowed for local governments, it is for LGFVs, since they are formally corporate entities (Tao 2015; Ueda and Gomi 2013). The principal backing asset for LGFVs is municipal land, the main asset owned by local governments (Tao 2015; Wong 2013). These LGFVs have engaged in heavy borrowing through project bonds, bank loans, and loans from shadow banks such as trust, securitization, insurance, and leasing companies. The debt of LGFVs is effectively guaranteed by local governments, despite such guarantees not being legally sanctioned (Lu and Sun 2013). It has been estimated that up to 76 percent of LGFV loans may be at risk of repayment problems because the infrastructure projects they are created to support do not generate sufficient cash flow (Garcia-Herrero and Santabarbara 2013). This situation was exacerbated by the global financial crisis of 2008, after which China’s central government encouraged heavy borrowing by local governments as matching funds for national stimulus measures (Goodstadt 2012; F. Wu 2019). Even central government officials have warned about LGFV default risk (Weinland 2019).

Figure 1.1. Land finance and LGFVs at center of urban infrastructure development. Source: Based on Lu and Sun 2013.

Despite their ubiquity throughout China, limited data has been accumulated about LGFVs. Estimates about the number of LGFVs, as well as their debt and percentage of local government revenue, differ wildly even among central government agencies (Wong 2013). Based on data from the National Audit Office, LGFV debt accounted for 39 percent of total local government debt in 2013. The number of LGFVs was reported by the People’s Bank of China as about ten thousand in 2010 (Cai et al. 2021). In order to provide a sense of the scope and function of LGFVs, I profile their experience in Beijing and Shanghai. These cities are unique in their size and the central government’s direct control over them, yet the functions and mechanisms of their LGFVs are quite typical. There are two basic organizational models. The first, in the direction of Shanghai Chengtou, refers to an all-encompassing LGFV that is in charge of infrastructure financing and development in multiple sectors. This LGFV may have a number of subsidiaries or become a stakeholder in other relevant ventures. The second, as exemplified by Beijing and Chongqing, refers to LGFVs with sector-specific responsibilities and respective financial teams. Chongqing’s initial eight LGFVs, all established in 2002 and under the oversight of the municipal government, are organized along sector and functional responsibilities, with separate financial accounts and management teams (World Bank 2010).

Shanghai

Shanghai was the first city to establish an LGFV, creating the General Corporation of Shanghai Municipal Property in 1992 with a mission to invest in urban infrastructure. The corporation was assigned a variety of fiscal resources from the municipal budget, including budgetary allocation for urban construction, the urban maintenance and construction tax revenue, and fees on public facilities (Wong 2013). It was a major developer of transport, water and sewage, and environmental infrastructure, in addition to being a real estate developer. Another of its mandates was to initiate new financing approaches, including bond issuance, concession management, bank borrowing, and capital market financing. By 2004, it had already mobilized US$16.8 billion of direct infrastructure investment (Gao 2007). Renamed as Shanghai Municipal Investment (Group) Corporation in 2014, it owns three specialized corporate groups, two listed companies, and multiple other subsidiaries.

Since its founding in 1992, as the dominating LGFV, Shanghai Chengtou has seen its financing mechanisms shift and expand. In the beginning, it relied on loans from such multilateral development banks as the World Bank and the Asian Development Bank, in addition to fiscal allocation from the Shanghai municipal government. Limited government investments were used to attract both international and domestic lending, including multiple public-private partnerships. The funds were then implemented for a wide variety of...