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  • Jul 28, 2014
  • Updated: 4:32am
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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whymak
To readers SpeakFreely & Megafun:
I feel compelled to correct your misperceptions about the role of agriculture in China and modern advanced economies.
Agriculture’s share of the French economy is only about 2% and employs about 3% of the nation’s workforce. The GDP share of agriculture in the US, UK and Japan economies is only about 1%. In the US, only 1.8% work in farms, in Japan, 3.8%. The US exports 1/3 of the production it doesn’t consume.
A few things jump out from this picture. The French has highest value-added products, the US most efficient with Japan the laggard, its manufacturing prowess notwithstanding.
China is still poor and backward. About 38% of her population is in agriculture, which makes up 10% of her GDP. This tells us two things. Many Chinese are still living at subsistence on the farms and not very productive.
Japan farm workers shrank from 17% in 1970 to 3.8% in 2011, and China from 49.1% in 2003 to 38%. Korea industrialization shows the same pattern, from 50% to about 10% today.
High ratio of farm workers is an indication of a developing economy.
With modification, I can tell a similar story about manufacturing. But I don't have the space to go into it here.
Facts here tell the story that China is on course to join the rank of rich nations. Another reason for hate-China folks to get all riled up.
I don’t know Mr. Mok. But I am not surprised his opinion on macroeconomic strategy is beyond the comprehension of average SCMP readers.
megafun
What rubbish Mok writes. this urbanisation had started with migrant workers, whom obtain medical, education for children and other services in the grey / black markets. Doesn't Mok knows that in migrant settlemsnts there are millions of doctors, whose "Certs" are not monitored; and teachers in black-schools with no qualifications. Come on Mok, get real.
Anyway, in my opinion, urbanisation is not sustainable, unless China creates sustainable urban communities, which can produce its own food, recycle all its water and generate all its power from clean renewable energy. Does that look like what has happened? So, Mok, You're wrong.
whymak
How do you produce enough food in urban communites?
Byebye
"Urbanisation is about one thing: rural people becoming urban citizens" ~~~~ who will grow food for the vast population of China?
whymak
Very good thumbnail sketch. All are sensible suggestions.
Raising funds for urbanization by privatizing SOEs decreases future taxpayers burden and lowers banking system risks. It will also benefit from diminished need to budget reserve or to maintain life support for chronically unprofitable and zombie firms.
Converting land into capital stock to support newly urbanized workers after they leave the farms is a wash in central government budget, but it leaves a hole in the provincial and local government revenues in the short term. More revenue sharing by Beijing may become necessary. However, tax revenues from urban workers now with higher income will contribute to the urbanization development budget. It's also time to allow provinces with quality management to raise funds through the bond market.
Fear not, incurring a higher national debt within limits is okay if the growth rate could be maintained between 7.25% and 7.5% over the next decade. There may be other unforeseeable factors as we delve into a new era of fully convertible yuan. Given the past good track record of PBOC in capital control, I am optimistic that our central bankers will navigate skillfully through a floating currency float regime. When push comes to shove, there is always a backup by stepping back into a dirty float - currency intervention - or beggar-thy-neighbor devaluation tactics like what the US and Japan have been doing on and off, especially lately.
SpeakFreely
I'm sorry as I don't see the urgent need to urbanized 500m or almost 40% of the population. Who is going to feed China if 500m farmers converted to urban. The world is no longer able to take on more goods manufactured in China, so just urbanized will not solve the GDP per capita issue. Rather if you look at the farming produce and quality of food in china is still very poor comparing to the West. Not just the chemical used but the yield and quality of produce still way behind. Why the government is not helping the farmers to improve the quality and yield of the farmers that will improve their GDP per capital substantially and help all Chinese to have quality food from local? If you look at California and France for example, agriculture is a big part of its economy plus people are enjoying the great food too....farming is critical to a society. China made the fortune by being world manufacturer but polluted seriously and in fact probably cost them more they earned so far to clean up the mess. Not is they move to huge urbanization they will pollute even more. There will be short term gain in GDP growth due to urbanization but long term is it good? I rather see them iMovie the yield of the farmers to the level of city people by improving quality and yield. And I think this is achievable, California is a good example with huge water navigation projects.
 
 
 
 
 

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