China’s local government land scams
China’s local governments are financing the growth of their regions and cities by an enormous scam — a rip-off of the local peasants, whose land they purchase and then flip to developers. The resulting profits can account for over half a regional government’s budget, according to the WSJ, and the values are sustained by the influx of tens of millions of rural people into the cities:
ZHENGZHOU, China — The new musical fountain in this drab provincial capital in central China demonstrates why authorities in Beijing are having so much trouble controlling the world’s fourth-largest economy. Jets of water dance to the patriotic anthem “Love My China,” while laser beams shoot into the sky. Soon, the fountain will be overshadowed by a hotel styled after a classical Chinese pagoda, which, at 918 feet, will be nearly three-quarters as tall as the Empire State Building. A waterfront arts complex, almost completed at a cost of $100 million, looks like a clutch of enormous duck eggs…Mayor Zhao Jiancai says his vision is to transform backward Zhengzhou into the “Chicago of the East”…by more than tripling the city’s size. Total investment in the area around the business district could hit $35 billion….
Over the years, Shanghai’s urban plans have become ever more fanciful. It now is building a series of satellite cities — each themed after a European country — to relieve pressure on the city center. Anting, which aspires to be a car-making hub, is re-creating the pastel-colored apartment blocks and Bauhaus offices found in the German city of Weimar. It has even splurged on a Formula 1 race track. Nearby, the emerging college city of Songjiang turned to a British engineering consultancy to construct an English-style community called Thames Town. There, residents can choose to live in Victorian terraced houses, drink in pubs and marry in a church whose spire rises over cobblestone lanes….
There are good reasons why China’s cities need to expand. Each year, they have to accommodate at least 10 million peasants flooding in from the countryside. Increasingly, cities also have been forced to fund their own health, education and social-welfare programs….
Compounding the problem is the way local governments are forced to fund their investments. China’s central government doesn’t allow them to raise local taxes or issue debt. Instead, they are cashing in their most valuable asset — land. The sale of land now accounts for 40% to 60% of all local government revenue, according to Ms. Wang of the Chinese Academy of Social Sciences. This dynamic adds momentum to the geographical expansion of cities. To acquire more land that they can sell, cities simply redraw their boundaries to engulf the surrounding farms. The compensation they pay to farmers for the land is far less than its value to developers. When the city flips the land, the revenue isn’t part of regular budgets that can be audited by Beijing.
The degree to which this is sustainable is anybody’s guess. Currently, China depends on exports for 70% of its growth. A downturn or stagnation in export growth could have a cascading effect on values, since those millions providing excess demand as they go to live in the cities might become hard-pressed to find work. Of course, if China could keep this up long enough, there eventually might come a point where the nation’s internal demand could support this cycle of growth. However, depending on land sales for half of government revenues does not strike us as a stable or sustainable strategy.