China Economy

Debts weigh down new vision for urban push

Mainlanders, mindful of local government excesses, have reason to be wary when the leadership talks up urbanisation as a key strategy

PUBLISHED : Thursday, 06 June, 2013, 12:00am
UPDATED : Thursday, 06 June, 2013, 4:15am

"Better city, better life" - the slogan used by the Shanghai-hosted World Expo 2010 sparked great controversy on the mainland at the time. Critics said life was far from better in the city after a massive wave of urbanisation had worsened pollution, caused rising bad debts, and lowered the quality of life.

Similar concerns surround the undertaking by Premier Li Keqiang to make urbanisation a national strategy in the hope of creating fresh growth dynamics for the country. Years of fast investment in new roads and bridges have caused debt to pile up at local governments.

Li announced his urbanisation vision last autumn, but he has yet to produce a clear roadmap for getting there. A plan is still being deliberated among government bodies and researchers, and it is understood to have been amended repeatedly in order to balance opinions from all sides and reduce any possible harmful impacts it may have on the economy.

Mindful of past criticisms, Li has stressed that the new urbanisation strategy should not repeat the old model of unrestricted expansion, which damaged the environment and increased financial risks.

Funding, and the way local officials evaluate expansion projects, is at the core of the current debate.

China is being urged to revamp the local fiscal system, broaden channels for local governments to boost revenues, and cut their reliance on land sales to get financing.

Yang Weimin, Vice-Minister of the Office of Central Leading Group for Finance and Economic Affairs, has flagged a revamp of fiscal systems to boost local government revenues and reduce their reliance on land sales.

"We have realised that the land fiscal system isn't a healthy, sustainable, financing method for urbanisation. We should build a long-term and sustainable financing mechanism," he told a forum recently.

Yang said the government should accelerate the creation of a local taxation system to support public services, make local government debt more transparent, overhaul resource prices, and introduce private funds into education, health care, and low-cost housing industries. Also, the government should allow a market-based system to facilitate land transfers for migrant workers.

About half to two-thirds of construction funds in many cities were raised from land sales, National Development and Reform Commission Planning Department head Xu Lin and other researchers said in a report issued this month, and about 40 per cent of government debt at the end of 2010 needed to be repaid by land sales revenues.

The report, published on the website of the China Finance 40 Forum, added that in the past decade about 2.42 million hectares of good-quality rural land was allocated for urbanisation, which hurt the nation's grain sufficiency.

The International Monetary Fund suggested that local governments' poor governance in raising funds in an often less-well supervised financial system may be one of the biggest risks facing China. "Augmented" general government debt, including loans to local government financing vehicles, had risen to nearly half of China's gross domestic product, the IMF estimated.

Citigroup analysts said China's overall debt level was not threatening. But corporate leverage was a cause for concern. It estimated that the debt of non-financial corporations, including debt issued by the former ministry of railways and local government financing vehicles, reached 151 per cent of GDP last year, the highest among the 10 major advanced economies.

Despite the risks from high debt, local government officials continue to offer incentives to boost investment mainly because their performance is assessed on local GDP growth rates. Such an evaluation system, say critics, should be changed.

National University of Singapore professor Deng Yongheng, who reviewed the system operating in 283 small and medium-sized cities on the mainland, found that party secretaries and mayors in the country would have a higher than 8 per cent probability of securing promotion if local GDP growth accelerated by 0.3 per cent under their watch.

"The biggest side-effect caused by such urbanisation moves is that local governments tend to use more resources through short-sighted activities," said Mao Zhenhua, of China Chengxin Credit Management. "Chasing greater investment often causes structural imbalances and increased corruption."

Popular proposals to broaden local governments' financing channels include implementing a property tax and allowing them to issue municipal bonds.

Mao said the law that banned local governments from issuing debt on their own needed to be changed. Allowing municipal bond issuance would greatly improve transparency of local governments' financial status, he said.

To accompany this proposed change, Mao said local governments should have separate balance sheets, using their asset size to set the limits for how much they could borrow. But he had not heard of any concrete discussions at government agencies about amending the law soon.