CommentInsight & Opinion

How to fund China's urbanisation

Winston Mok proposes a funding plan for the national project of turning 500 million Chinese into bona fide urban residents, which can work only if the central government takes the lead

PUBLISHED : Monday, 13 May, 2013, 12:00am
UPDATED : Monday, 13 May, 2013, 1:52am

After extensive consultation, co-ordinated by the National Development and Reform Commission, the long-term plan for China's urbanisation is being finalised. Behind all the complex issues is one fundamental question: how will it be paid for?

Based on estimates by the State Council's Development Research Centre and other sources, 100,000 yuan (HK$125,000) to convert one rural resident to an urban dweller may be a reasonable starting point. So, converting 500 million people (which would see 70 per cent of China urbanised) by 2030 would cost about 50 trillion yuan, or US$8 trillion, the equivalent of China's gross domestic product last year. A comparison may be German reunification, which cost some US$2 trillion for a much smaller base of 16 million people. At four times the cost, China's urbanisation would be 30 times the size of German unification on a human scale.

In this context, suddenly abolishing household registration is unfeasible. Even if hospitals and schools could be built overnight, there is no way to pay for them. Instead, a gradual approach is more realistic. While financially challenging, it should be possible to implement such social integration over two decades. Anything faster is beyond China's financial capacity but anything slower may compound social discontent.

With about 15 million rural people coming to cities every year, the annual costs for their integration would amount to 1.5 trillion yuan, higher than China's projected 2013 budget deficit of 1.2 trillion yuan (about 2 per cent of GDP). Moreover, of the nearly 500 million rural people to become urban citizens, more than 200 million are semi-urban residents who already live in cities. This accumulated urbanisation deficit of 20 trillion yuan would take time to digest. To amortise this manageably over two decades would add 1 trillion yuan per year.

Even at this measured pace, the annual costs would total 2.5 trillion yuan. While daunting, the issue must be addressed now before it compounds.

Urbanisation is a national project. However, the central government has provided limited financial support for it, leaving the job mostly to local governments, who as things stand can hardly service outstanding debts, estimated at 10-20 trillion yuan (20-40 per cent of GDP). Pending reforms in municipal finances, they cannot afford such a burden.

Therefore, Beijing has to take the lead. A centrally co-ordinated funding programme could look to:

  • Increase fiscal income. In addition to taxing the rich and profitable corporations, a range of taxes may be considered, such as rates, capital gains, goods and services, and inheritance. To become urban citizens, migrants may be required to pay an additional social service tax for a time.
     
  • Monetise state assets. The government could raise capital by further privatisation of profitable state-owned enterprises. Stakes could be injected into mutual funds, to be allocated in small lots to a wide base of citizens. This would provide good outlets to digest excessive liquidity and share prosperity with the people - making state firms genuinely publicly owned.
     
  • Enforce employers' contributions. By law, employers are required to contribute to social security funds for workers. In practice, it is not well enforced. A national provident fund authority could be set up to strictly enforce employers' contributions. This central authority may also better co-ordinate the imbalanced social security funds across regions.
     
  • Redirect rural land value. Rural land has been expropriated by local government at low cost to fund the upgrades and expansion of cities. As property rights for rural land are clarified, the value may be redirected from local governments to rural people. For example, after local and central government taxes, the full market value of rural land can accrue to farmers, subject to a cap per head, with the rest going to a national urbanisation fund.
     
  • Increase the budget deficit. Even if other measures are effectively implemented, there may still be a funding gap. China might need to increase its budget deficit to about 5 per cent of GDP for a time. Such a deficit would moderate over time as GDP grows. Such a deficit may be partly financed by municipal bonds.

With funding from these initiatives, Beijing could drive urbanisation through subsidies or direct management of certain programmes such as public housing. Importantly, the social programmes must be well managed to avoid the dissipation of funds in transfer leakages or local inefficiencies.

Urbanisation is about one thing: rural people becoming urban citizens. Beyond all the gleaming urban landmarks, this change will affect the lives of hundreds of millions of people and their future generations. China is now rich enough to address the problems of rootless migrants and to provide an orderly transition for the newcomers.

China's growth will be driven by domestic consumers, importantly for services. As urban citizens, the hitherto rural people will become full consumers. Thus, investments in social services will have a strong multiplier effect on the economy.

Properly structured, China can fund urbanisation with urbanisation. Migrant workers will pay their fair share of the costs of becoming urban citizens through taxes, social security contributions and consumption, let alone the labour surplus.

Winston Mok is a private investor, a former private equity investor and McKinsey consultant. An MIT alum, he studied under three Nobel laureates in economics

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