‘Financial pressure on local governments is only likely to build’

President Xi Jinping has ambitious plans to reform the economy. Ending the land grab among local governments should be top of his list.

For years, escalating land sales have been a valuable source of revenue for cash­strapped local governments. Each time Wenzhou , Fuzhou or other cities agree to a licence for a new high­rise apartment block, the local government earns a hefty chunk of cash for the land that is sold to the developer.

Land sales now account for an average of 40 per cent of local government revenue, up from 10 per cent just a decade ago. In some cities, the sale of land is the main source of income. That free income is beginning to decline as governments run out of land and the property bubble runs out of steam.

There is a reason for the giant land grab: local governments are desperate for new sources of revenue to pay for local social services and to keep the engines of the economy churning at high levels.

Local governments are responsible for everything from retirement income to health care for their citizens. Since fiscal reforms in 1994, local governments’ share of the tax revenue has decreased to 40 to 50 per cent but they have been responsible for 70 to 80 per cent of expenditure. Outside fees – mainly from the sale of land – account for the difference.

Take Zen township in Zhejiang, studied by Lynette Ong of the University of Toronto. During one recent fiscal year, the town gave most of its 319 million yuan (HK$400 million) in revenue back to Beijing, keeping just 15 million yuan. To pay for the lion’s share of its 88 million yuan budget, which included urban and rural development, education and health care, the town earned 71 million yuan selling land.

Another big incentive for local officials to sell land is to create glamorous projects to aid their

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1/14/14 A China crash in the making?

chances of promotion. According to Victor Shih from Northwestern University and researchers at Peking University, drawing in revenue from outside the province boosts an official’s chances of being promoted more than increasing gross domestic product. And what better way to show off leadership qualities than a new stadium or the proverbial “bridge to nowhere”?

Now, though, many of the best pieces of land in the city centres have been sold. According to a study by the National University of Singapore, by 2007, the average tract of land sold was 50 per cent farther from the city centre than it had been just four years earlier. That trend has accelerated.

This year, according to local developers, Guangzhou is trying to double revenue from land sales to 48 billion yuan. Guangzhou is now offering three new central business districts, but they are located in less valuable areas on the outskirts of the city centre. Xi’an is asking developers to prepay tax on land the developers haven’t even bid on. “The government is mortgaging against future land sales,” the chief executive officer of one Xi’an developer told me in March. Also – and a bigger concern for China’s economy – there are hints that the escalation of property values and thus land prices is easing. Home prices on the mainland rose for the 12th straight month in May, but the pace of growth continued to fall.

More ominously, the revenue gap is increasingly being filled by China’s growing shadow banking system

The average price of new residential properties in 100 cities rose
just 0.81 per cent from April, to 10,180 yuan per square metre. That compared to a 1 per cent gain in April and March’s 1.06 per cent rise.

No one can say for certain whether China is suffering from a property bubble or when it may collapse. But land is not an endless resource. That revenue must come to an end.

What can replace it? Beijing has been testing local property taxes. Apart from bringing much needed income, these taxes would impose a cost of ownership on property, crimping the use of flats as a cheap “bank account”. Owners are baulking but these taxes would be a rational source of income for local governments.

More ominously, the revenue gap is increasingly being filled by China’s growing shadow banking system, in which companies and individuals feed their excess savings into everything from residential buildings to white elephant projects, many backed by local governments through side companies called local government financing vehicles. While it’s nice to see Chinese capital escape the claws of the state sector, the lack of regulation is a real concern.

The past decade’s big land boom has been bad news for rural homeowners forcibly evicted from their ancestral villages. At a recent conference at Sun Yat­sen University, activists called for greater protection of the rights of homeowners.

“The effects of urban development, demolition and eviction on tens of millions of Chinese citizens have been profound,” notes Eva Pils, a lawyer and expert on land rights at Chinese University of Hong Kong.

Until there is a new revenue system in place, the financial pressure on local governments is only

likely to build. That means more dangerous financial games by local governments and more

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residents evicted from their homes.

Andrew Collier is the former president of the Bank of China International’s US office. He is currently an independent analyst based in Hong Kong

The Diplomat

The country is experiencing a tug of war between military dominance and a more open democracy.

By Andrew Collier

December 23, 2013

Myanmar is facing a stark choice – open the doors to the rule of law or slide into Chinese­style state capitalism run by the military.

So far it looks like the country could go either way. The
military is guaranteed 25 percent of the seats in parliament,
giving it a strong position to dominate the country’s political system. The military also has a growing presence in theeconomymainlythroughlocallandgrabsandacozyrelationshipwithglobalcorporations. Formerheadof state Than Shwe was replaced in 2011 by the first civilian president in nearly 50 years, Thein Sein. Though the nominal civilian government is still backed by the military, Than Shwe has seen the power of his supporters diminished.

“We are a hybrid democracy with many factions. We have all the ingredients for an unsuccessful transition,” says a Myanmar official with an international peace group based in Yangon.

Amidst the shifting political sands, there is a surprising secret weapon in Myanmar’s arsenal: a cultural affinity for grassroots democracy. After spending a week in Myanmar in December with the Mansfield Foundation preparing for a rule of law conference at Hong Kong University next year, I was astonished at the gut level instinct for freedom of expression and assembly. It’s all over the country.

For example, there is a group actively training local lawyers in 14 districts across the country how to fight illegal activities to press the local governments to return illegally acquired land. “Many of these cases have been won,” a representative said.

There’s also the Myanmar Business Executives, with a membership that includes many female business leaders. It trains small businesses and has even set up a micro finance operation. Making capital available to small businesses that operate outside the formal banking system expands economic rights and is a sign of declining state control.

The government began relaxing limits on media censorship in 2011 but last year officially unblocked most banned content, including the websites of foreign media outlets that criticized the government. As a result, the English press – and to a lesser degree the Burmese press – routinely runs stories about ethnic rights and political opposition. Reporters are still thrown in jail, along with protestors under Myanmar’s Article 18 against freedom of assembly, but they tend to be treated better than in the past – although the jury is still out on their future.

Earlier this year, a nationwide protest backed diverse groups was able to force the government to cancel a dam project funded by China Power International. Although the lead campaigner was later thrown in jail, the dam “united many different groups because the river runs through the country,” observes one human rights worker.

An independent environmental group called Ecodev is teaching villagers in 42 of 330 townships – soon to expand to 72 – how to push the local authorities to follow environmental laws already on the books. Yangon has already declared 189 buildings as heritage sites.

It’s not just the actual work, though. It’s the sense that, unlike some countries where the state presence is felt everywhere, human rights workers aren’t always looking over their shoulders when they discuss plans for political activism.

There are two major flaws in the picture that explains why many rights activists say they are only “cautiously” optimistic: the continued strength of the military, and strife surrounding ethnic groups. There’s a lot of nervousness about how much power the military intends to control after the elections in 2015 – and how much they control now. Apart from the guaranteed 25 percent of parliamentary seats, the military is widely accused of taking advantage of a booming economy to grab land. I was standing outside an outdoor restaurant in Yangon waiting for a taxi and across the street spotted two new eight­story residential buildings – whose windows were completely dark. “One is owned by a drug dealer who was arrested and the other by the military,” the restaurant’s doorman said.

The military has been a big supporter of the Chinese­backed pipeline that will run from the Bay of Bengal into China’s Yunnan Province – despite widespread concerns about pollution, corruption, and land acquisition. “We are looking at the gas pipeline but I don’t want to cause a diplomatic incident,” says one environmental rights worker.

The second issue is the knotty problem of ethnic rights. There are 134 ethnic groups assigned to eight official races, although scholars such as Yale University’s James Scott argues that most of them are not ethnically separate but have chosen to leave or have been forced out of the Burmese State. They are losing access to land that is increasingly valuable as Myanmar’s GDP growth tops 6.5 percent.

The biggest loser in this battle thus far has been the Rohingya, a Muslim group that the government does not believe are citizens. Even many citizens accuse the Rohingya of being expatriated Bangladeshis and not really part of Myanmar.

There is a forceful opposition in the form of Aung Sang Suu Kyi, the charismatic former éminence grise who is now actively pursuing office. Yet after twenty years of isolation, and with no active political experience, Suu Kyi needs to organize a strong team and build a political party capable of governing.

Despite these myriad problems one can’t help but feel a forceful current of passionate opposition bubbling to the surface, arguably a legacy of British rule. This year, Yangon University launched a human rights program. A Christian group comprising ethnic minorities even held a large religious meeting in Yangon earlier in December with the tacit approval of the government. “We are watching and waiting,” says a Christian representative of the Lisu minority who is helping to organize the meeting.

Andrew Collier is a Senior Fellow with the Mansfield Foundation.