Wednesday, 27 January 2016 12:10

How China's economic woes might impact on local government

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When I was last in China, just over a year ago, there were still plenty of cranes on the urban skylines, and I was whisked along on the high speed trains connecting vast new stations. China has taken 500 million people out of poverty since 1978. It is the outstanding development story of the past 40 years. However, the rate of growth has dipped to below 7% a year, with commentators speculating that the rate for 2016 is likely to be lower again. There are still almost 100 million living below the nationally defined poverty line. Despite the massive transition that has moved people from the land into cities, which are now home to 750 million, the level of urbanisation is still only 55%. However, the World Bank (see previous link) is saying that significant policy changes are needed if China's development is to be sustainable.

Urbanisation and the massive investment in urban infrastructure is both a cause and a consequence of China's growth engine. If that machine is now starting to splutter, what are the likely consequences for land development? More specifically, one of the concerns of economists is that China has built up too much debt, though local authorities are still being urged to implement infrastructure schemes to boost growth.

Land and debt - the making (and breaking?) of a boom

Land development has been the key source of municipal finance during China's boom. As Zhi Liu fof the Lincoln Institute for Land Policy explains, about a third of local government revenue comes from dealing in land for development. Only the state has the power to convert land from (low value) rural to (high value) urban use. Therefore local councils on the edge of cities are able to acquire land by compulsory purchase. They then service the sites and sell them on to developers, capturing the increase in value that in more "pure" market economies goes into the pockets of land owners such as farmers, house building companies or investment companies.

Furthermore, the local authorities have been able to use their land assets as collateral to raise commercial loans, usually setting up Urban Development Investment Corporations to circumvent legislation (now being amended) that prevented local governments from borrowing. The result, as Zhi Liu observes, is that "The size of outstanding local debts has grown rapidly over the last few years, reaching at least one-third of the GDP now."

As with any boom, the situation is sustainable as long as demand is strong, prices are continuing to rise, and the upward trend is reflected in future valuation of the assets.  However, as the collapse of the sub-prime housing market in the USA showed in 2007, if debts are called in, assets have to be sold and prices fall, the cards can come tumbling down quickly and with widespread repercussions.

Professor Zhi observes that the slowing down of China's growth means that in many places the supply of land for conversion to urban uses is now running ahead of demand. He says " Some cities have borrowed much more than they can repay, leaving them heavily indebted." If experience in the West is anything to go by, we might be about to see a serious disruption to the mechanisms that have produced a dramatic phase of urbanisation.  If that happens the effects are likely to extend to other parts of today's global economy.





Read 768 times Last modified on Wednesday, 27 January 2016 17:25

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