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 end

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