Download 2. The contribution of China`s finance to its economic growth

The Impact of Financial Relationship between Central
and Local Governments of China on the Economic
Growth since Reform and Opening-up
Zhongren ZHANG
Affiliation : The University of Shimane, Japan. Email : [email protected]
ABSTRACT.
Based on data analysis, the paper states that since 1978 the relationship between central and local governments,
which is characterized by moderate centralization, is one of the main institutional forms that maintained the
economic growth since reform and opening up. The relationship reflects the core features of the China model
Another key argument in the paper is that the redefining of relationship between central and local governments by
tax sharing reform since 1994 contributes to the stable economic growth. Surviving in the two external attack,
namely the Southeast Asian crisis and the financial crisis, the 16-year active fiscal policy from 1997 to 2014
(excluding 2007) has its negative effects, for it made the local governments become economic entities with growing
public investment, which is the institutional cause of the land finance problem. The policy leads to the bubble in the
economy, particularly associated with the increases of land and housing prices, as well as the cost of China’s
economy. Thus, the root cause of the slowdown of China’s economy is not the so called cyclical impact but the
institutional reasons, mainly the special structure of the relationship between central and local governments.
Keywords: macroeconomic structure, land finance, bubble economy, tax sharing system, income tax reform.
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1.
CHINA: A DISTINCTIVE MACROECONOMIC STRUCTURE
Under the general four-department macroeconomic structure, namely the government,
enterprises, households and overseas organizations, the economy is running in four markets, i.e.
product market, factor market, financial market and international market.
In the traditional economic model, the government is interrelated with two economic
variables: taxation (hereafter denoted as T) and government expenditure (G). Its function
includes collecting tax from households and enterprises, purchasing product and service from
enterprises and transferring payment to households. In particular, the factors of production such
as capital, labor and land that flow to enterprises are mainly originated from households.
However, China presents a different scenario.
In China, land is state owned and thus the government is the sole provider of land. For a
plethora of state-owned enterprises, capital is also provided by the government; besides a few
private and foreign banks, the commercial banks in China are mostly owned by the stated. That is
to say, being the main provider and consumer of capital, the government and state-owned
enterprises are the primary shareholders in China’s financial market. However, this paper focuses
mainly on fiscal issues, and only briefly touches financial ones when necessary. Due to the
involvement of state-owned enterprises, government plays a role not only in the factor and the
financial market, but also in the product and the international market.
China’s macroeconomic structure is accordingly distinctive in that the government is an
agent directly or indirectly involving in the four markets. To put it another way, China’s
government plays a dual role, i.e. the market supervisor and administrator and a shareholder,
which is akin to a referee-player on a football court. (as showed in Fig. 1)
Figure 1. The Special Structure of the Macro Economy in China
Factor Market
Land
Financial
Market
SOE
Household
Government
Private Enterprise
Sector
Commodity
Market
Source: Myself.
Note: SOE = State-Owned Enterprises.
It is therefore very common in China to fuel its economic growth with financial means.
China’s public finance expenditures cannot be viewed only as public budgeting. Since
1953, China’s public finance expenditures had actually been made up by two components:
budgetary funds and extra-budgetary ones, the latter was no longer existent after 2011. And as
indicated by statistics, the so-called Governmental Funds entered the market in 1997 to fill the
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shoes, only that they were not prominent due to the small size However, since 2007, the
Governmental Funds have experience such a remarkable increase that they amount to one
independent item in budget in 2010, apart from state-owned Capital Operating Budget and Social
Insurance Fund Budget. To present, China’s finance consists of four kinds of budgets. The Stateowned Capital Operating Budget has been put into use since 2007 and well-rounded statistics
were not available until 2012. The Social Insurance Fund Budget was initiated in 20101 which
bears little significance to this paper and is thus not a concern here.
Since the statistics of Expenditure of Extra-Budgetary Funds were first released to the
public in 1982, we will investigate China’s financial structure and its role in public expenditures
(1982-2013), budgetary expenditures (1982-2010), the expenditures of Governmental Funds
(2010-2013) and the expenditures of State-owned Capital Operating Budget expenditures ever
since 1982.
Figure 2. The Structure of General Finance Expenditure in China
Source: China Statistical Yearbook1992-2014. Finance Year Book of China1994-2013.
The ratio of China’s national financial expenditures to the GDP was less than 20% for 22
years from 1978 to 2008, in which it was lower than 15% for 8 years from 1992 to 1999. In
contrast, the ratio of the national financial expenditures in its broad sense to the GDP stays
above 20% except for the 8 years from 1993 to 2000 during which even the lowest in 1995 and
19972 were still above 15%. (See Fig. 2). The statistics show that revenues of the national
Governmental Funds from 1997 to 2004 stayed around 100 billion RMB, had undergone a mild
increase since 2005 and have shot to 1 trillion since 2007, which should be attributed to the sharp
rise in land transfer tax as a source of revenue3.
1
2
3
Opinions of the State Council on the Pilot Implementation of Social Insurance Fund Budget(No. 2 [2010] of the State Council).
The ratio of financial expenditures in the broad sense to the GDP would be slightly higher since some of the statistics are not open to the
public, such as the expenditures of State-owned Capital Operating Budge. Actually, local loans should also be included, but it is impossible for
us to obtain the related time series data.
Since only the data of land transfer tax is available only after 2009, we choose the statistics released by the Ministry of Land and Resources of
P. R. China for the period before 2009, and the ones processed by LI Sheng (2015) for the period from 2010 to 2011, those published in China
Land Resources Gazette from 2012-2013. Though it still remains unknown as to the correlation between the revenue from land transfer tax and
the Governmental Funds, it could be concluded that the former was included in the latter given that the revenues from Extra-budgetary funds
almost stayed put, which was not clearly proven until 2010.
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The role of the land tax in the revenues for the Governmental Funds is analogous to an
adaptor that allows the government to transform the currency it has issued into government
revenues through loans. Such a channel is inferable in the distinctive macroeconomic structures
as showed in Fig 1. This is nevertheless a risky channel connecting finance and fiscals. Once it is
open, the government revenues are under the risk of dramatic uncontrolled inflation, while as
long as the central government begins to lose its grip on land transfer tax to various local
governments, the floodgate is swung open.
The channel works as follows: the various commercial banks belonged to the government
offers loans to enterprises which are mainly state-owned ones, and enterprises, still mainly stateowned ones, purchase state-owned land on the loans, whereas, the revenues from the land
transfer are owned by the local governments. (See Fig. 3)
Figure 3. The Bridge Role of Land in China
Source: Myself in the past.
Note: The Purchase of Land =Transfer of Use Rights of State Land.
ZHANG, etc. (2014) observed, ever since this Channel starts to operate, China’s
economic growth model has begun to undergo a fundamental transformation that can only be
fulfilled under a special macroeconomic structure as mentioned above.
THE CONTRIBUTION OF CHINA’S FINANCE TO ITS ECONOMIC
GROWTH
2.
The contribution of China’s public finance expenditures to its economic growth cannot
be simply translated as financial input even though its amount is increasingly larger. The
contribution actually lies at the fact that China’s financial system, the dynamics between the
central and local governments in particular, creates the incentives for the local governments to
boost local economies, which has been the main theme of China’s economic growth ever since
1978.
In china, the driving force for its economic growth is actually the local governments.
According to Christine WONG (1992), China central government and its local
governments have implemented financial contracts in various forms since 1979, leading to a
wealth of autonomous revenues for the latter which therefore became independent of subsidies
from the former. Consequently, the various local governments are more eager to promote the
development of industries.
OI Jean C. etc have a more precise insight in this regard. OI (1992; 1999) pointed out that
under the fiscal responsibility system established in the mid-1980s, local governments on one
hand gained the access to revenues from the balance after the base quotas, and on the other hand
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pool the budgetary revenues generated from the profit of township enterprises, and therefore are
quite enthusiastic in supporting local entrepreneurial efforts. The quantitative research of LIN
Justin Yifu and LIU Zhiqiang (2000) also showed that financial contract system was significantly
conductive to local GDP growth.
Just as ZHOU Feizhou (2010) observed, the fiscal responsibility system adopted the base
quota mechanism. Base quota here includes budgetary revenues mainly from taxation, and the
mechanism is operated under a package of fixed gross sum for a few years, and does not regulate
the ratios of various taxes. Thus the more the local revenues outstrip the base quota, the more
balance local governments will get. Since the taxation system inherits the traditional one at the
foundation of the P. R. China, the main tax revenue is from enterprises whose hierarchical
relationships with the central and local governments are the basis for setting their tax quotas, and
the turnover tax is levied by the local government where the enterprise in question is registered.
Therefore, as long as local or locally-registered enterprises mushroom and thrive, the revenue will
go up along with the growth of the GDP.
All these studies shared a conclusion, that is, from 1979 to 1993, the fiscal relationship
between the central and local governments as embodied in the fiscal responsibility system has
greatly prompted the latter to enrich revenues through local entreprises, which serves as a key
powerhouse for China’s economic growth.
Since the tax-sharing reform in 1994, the relation between the central and local
governments has been subject to changes as well. The tax sharing system adopted by the reform
maintains the quotas for budgetary expenditures for the central and local governments but
differentiates, according to types of taxation, the governments at various levels as tax authorities
which take the organizational forms of the national and regional taxation offices. The tax-sharing
reform served as a watershed at which the taxation system and the fiscal system of local
governments were separated, and the taxation system is operated in a linear hierarchy, which
means a local taxation office directly reports to its next-in-line superior taxation office instead of
the local government. Therefore, it is unlikely that local governments and financial
administrations jointly put forward tax relief measures under the tax sharing system, which
eliminates the possibility of tax competition.
Thus being said however, this system is only halfway through since the financial and the
taxation systems at sub-provincial levels are not independent of each other. To put it another
way, there are no separate taxation administrations at provincial, municipal, county or village
levels.
To be more precise, the fiscal responsibility system under the tax sharing regime is in
essence a tax sharing mechanism between the central and local governments. The proportion of
shared taxation has exceeded 50% ever since the reform. That is to say, the 1994 tax-sharing
reform actually carries on those tax-sharing policies under the old taxation regime, the negative
effect of which on the new system will be discussed later.
Since the most valuable tax, value added tax, is a subject of tax sharing under the new
regime, however, the tax is administrated directly by local taxation offices, independent of any
local branch of the national taxation office under local governments, which almost disables all the
tax relief efforts in favor of the local enterprises initiated by the local governments. This of
course dampens the local entrepreneurial enthusiasm. To counteract such an unpleasant situation,
the local governments began to promote the transformation of town-ship enterprises into private
ones, and by the end of the 1990s, almost all town-ship enterprises have existed in name only.
Accordingly, the growth trajectory of local fiscal revenues has undergone a significant change.
Since the 1994 tax-sharing reform, the economic growth has dropped under 10% due to the
relatively placid economic enthusiasm of local governments.
We believe that the tax sharing regime failed to generate a stable fiscal system and a
growth-inducible dynamics from 1994 to 2001. In particular, during this period, the ratio of the
fiscal revenues of the central government not only failed to hit the initial objective of 57%, but
also kept going down to the point of struggling to maintain at 50% level. This prompted the
reform on the sharing of two types of income taxes in 2002.
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This reform again transformed the relations between the central and local governments,
only in such a fundamental way that even the policy makers did not expect it.
ZHANG Zhongren (2010) pointed out that when the two types of income taxes became
shared taxation, the ratio of which to the gross taxation went up to 62% in 2002. It is thus safe to
say that the tax distribution regime has shifted back to the old tax sharing regime.
According to this reform, the taxation levied from enterprises by the central and local
governments regardless of their administrative relationship with the authorities, which marks a
fundamental change in the relation between the local governments and the enterprises. The new
measure leaves a narrower margin of revenues from the enterprises for the local governments,
while increasing their reliance on sales tax which naturally has become one of the pillar of
revenue streams for the local finance.
In 2001, the ratio of enterprise income tax to local taxation reached 64.1%. Accordingly
the enterprise income taxation taken by the central government from the local governments due
to the tax reform was 77.45 billion RMB, 69.17 billion RMB, and 93.94 billion RMB from 20022004 respectively. The ratio of individual income tax to the gross local taxation was 71.9% in
2001. Accordingly the individual income taxation taken by the central government from the local
governments due to the tax reform was 26.6 billion RMB, 45.29 billion RMB, 55.49 billion RMB
from 2002-2004 respectively.
Therefore, in the first three years since the reform, the central government took away
104.05 billion RMB from the local governments, which took up 14.0%, 13.6%, and 14.9%
respectively of the annual revenues of the local governments. However, statistically, the extrabudgetary revenues had a slow increase up to 2010 as showed in Fig. 5, so as a redress, the
restriction on the revenues from land transfer by the local governments has been loosened
somehow.
As showed in Fig.4, the land transfer fees went up sharply over the years. In fact, they
rocked up to 129.59 billion RMB from 65.2 billion RMB in 2001, and continued to climb up to
542.13 billion RMB in 2003.
Based on the statistics from 2010 onward, the land transfer fees were counted as
governmental revenues whose ratio reached around 80% and hence it became a main source of
governmental revenues, while the expenditures of Governmental Funds were mainly for
infrastructure investment.
Figure 4. Structure and transition of General Revenue
Source: China Statistical Yearbook1992-2014. Finance Year Book of China1994-2013.LI(2015). Report on Chinese Land
Resource2014.
The land transfer fees are generated only where there are constructions going on,
especially big projects, so the local governments need to create an investment friendly
environment. The local economic development in turn will not only promote the sales of land by
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the local governments but also boost the prices, resulting in abundant revenues from land
transactions for the governments. This is the new mechanism for them to promote economic
growth. SUN and ZHOU (2013) pointed out that, the local government purchase the collective
land, put it into state-owned land; put the agricultural land into non-agricultural land. In this
process, The land value can be rise several times, or even more than 10 times. According to the
estimate, if the cost of land is 100%, the farmers can only get 5%-10%, village-level collective
organizations can only get 25%-30%, and 60% - 70% to become revenue of local governments
(county, township (town)). It is the main economic reasons of local government "land
management".
As the land market has grown into a certain scale, combined with ever-increasing land
prices, buying land on loans then will become a profitable speculation, which will let money flow
into the land market to create an economic bubble. There will appear an inflection point once
such an economy has grown to a certain stage and a slow economic growth which will be studied
in the next part of the paper.
THE REASONS FOR A SLOWDOWN ON THE GROWTH RATE OF
CHINA
3.
When a local government shifts its measure of increasing local revenues from
encouraging local entrepreneurial initiatives to land finance, the very nature of the government
finance has changed fundamentally since the former is dealing with the real economy, the
revenues gained from which are mainly budgetary and rise along with the economic growth,
while the latter is working on the fictitious economy, the revenues gained from which are mainly
extra-budgetary and it is out of consumption squeeze in the national income distributions.
The composition of consumption and accumulation in the national income is the
foremost essential in national economy. Unfortunately, there are no data on the national income
that have been collected since 1994 in China, so in some studies, the national income and
expenditures and the Gross Domestic Product by Expenditure Approach are both used. For
instance, YANG Shengming (2013) has used the Composition of Consumption and Capital
Formation approach. Since the statistic methods vary, there is a discrepancy, though not
remarkable, between the national income and the Gross Domestic Product by Expenditure
Approach.
The earliest Chinese research on the composition of consumption and accumulation in
the national income can be dated back to the 1950s. A study in the Research Center of General
Office of the CPC Central Committee4 in the March of 1980 suggested that the accumulation rate
was better to be maintained at around 25% based on 3 decades of economic experiences5,
whereas the most intolerable one according to this study was not up to 43.8%.
In Fig. 5, China a demonstrates the composition of consumption and accumulation in the
national income of China from 1955 to 1993; China b means the composition of consumption
and accumulation by the Gross Domestic Product by Expenditure Approach from 1993 to 2003;
there is an overlapping of China a and China b for a few years. The peak for overinvestment
appeared in 1993, with an increasing rate slightly faster than that of the GDP. Thus, under the tax
distribution regime, the rate of capital accumulation dropped sharply to around 35% in 2000.
However, since 2004, a significant change has taken place. The sum of the capital exceeded the
total national consumption, that is to say, the increase rate of capital formation outstripped the
growth rate of the GDP by an increasingly large margin, which ushered in China’s bubble
4
5
On 18th April, 1980, the Research Center of Secretariat of the CPC Central Committee was founded.
Please refer to“A Study On The Reasonable Accumulation Rate In View Of Past Experiences”, People’s Daily, Zhong Renfu, 15 th May, 1980.
This report was written according to Deng Xiaopin’s instruction. According to the record, Deng Xiaopin said at a meeting with other leaders
that Chen Yun had suggested a topic on where to draw a reasonable proportion between accumulation and consumption on the scale. The
Research Center of the Central Office had done a report titled A Study On The Reasonable Accumulation Rate In View Of Past Experiences,
which was good. According to the report, the accumulation should take up 25% of the national income. Our practice in the past had exceeded
the mark, with the highest at 43.8%. We had presumed that the higher the better, and the faster the development. However, we would set the
rate at 25% this time when mapping out the long term plans. Please refer to Chronicles of Chen Yun, p257, Party Documents Research Office
of the CPC Central Committee, Zhu Jiamu etc, Central Literature Press.
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economy. We can attribute the shift to the tax sharing reform of two types of income taxation in
2002, with a two-year time lapse. In addition, the effect of the SRAS outbreak in 2003 cannot be
neglected either.
Figure5. The Contrasting of Accumulation Rate in China and Japan
Source: China Statistical Yearbook1992-2014. Economic and Financial Data for Japan (http://www.stat.go.jp).
While according to Fig. 5, Japan’s accumulation rate seldom exceeded 35%, with no
exception even for the period of bubbly economy.
Normally, bubble economy can be regarded as local inflation. Since nothing is distributed
evenly. Take the air as an example, if it is perfectly even, there will be no wind and rain. So is
finance. When it accumulates locally in a great amount there will be the possibility of economy
bubbles. However, the notorious Kaffir Lilly Bubble in the 1980s was not an economic bubble
due to its small scale. Bubble economy generally happens when the capital value exceeds the limit
of tolerance of the real economy in real estate and stock markets nationwide. The inflation of
capital value is after all fictitious.
However, China’s bubble economy is not that simple. Although it has its fictitious
component, firstly it is a result of restricted private consumption and over-accumulation. This is
its essential feature and also the primary cause for its persistence up to the present and the
possible soft landing for China’s economy despite of the bubbles.
Under normal circumstances, the ratio of household consumption to the GDP usually
remains at 60% to 80%, however, that in China had experienced a long-term fall ever since it hit
50% in 1990 with new lows at 40% in 2005 and 34.5% in 2010, and has gone up slightly ever
since due to the rise of rent in private consumption. It is held that the size of consumption is
around 20% to 30% of GDP that had been used for capital accumulation. And that was huge.
There are short-term effects of restricting consumption on economic growth, however it
is not sustainable and has its limits. Otherwise, an economic crisis is looming large once the
bubbles burst. YANG Shengming (2013) also emphasized that neglecting and restricting
consumption will eventually lead to an economic crisis.
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MARX once observed that“The ultimate reason for all real crises always remains the
poverty and restricted consumption of the masses as opposed to the drive of capitalist
production to develop the productive forces as though only the absolute consuming power of
society constituted their limit.”[MARX: 1966, p.484] It is evident that consumption has a decisive
effect on the economic growth.
Although it is unlikely for China’s economy to experience a crisis, it is still subject to a
slowdown. Let us take a look at the cost for restricting consumption and over-accumulation
which first results in the fall of the investment multipliers. In Fig. 6, China’s investment
multipliers had fluctuated since 1980 but always remained low that seldom exceeded 2, but ever
since 2000 it had stayed at low levels, with 1.37 in 2005. Although it went up afterward, it peaked
only at 1.61 in 2013. The effect Coefficient of Investment in Fixed Assets dropped dramatically
from 77.9% in 1994 probably due to the tax sharing regime , and touched the bottom at 15.4% in
1999 which was followed by a light increase due to the land finance, however, the momentum did
not sustain and fell again to 12.8% in 2013. That is to say, every 100 RMB of investment in fixed
assets generated 77.9 RMB worth of GDP growth in 1994, but the same investment only resulted
in 12.8 RMB worth of GDP growth in 2013.
Figure6. Investment Effect and Investment Multiplier
Source: China Statistical Yearbook1992-2014.
Then why China’s economy has a falling efficiency and slowdown. To answer it, first of
all, we should understand the economic nature of the income from land transactions. The land
transaction income in the governmental revenues is actually the collection of land rent from 1950
to 1970 . At present, the land is overly priced. William Petty once said that land prices were
roughly equal to land rent for 21 years. Although this was not apparent to him that it was the
conclusion based on the interest rate being 4.76% (1/4.76%=21). Then when the land
transaction income is equal to the rent for 70 years, it means that the interest rate is extremely
low r = 1.4%, or there is a bubble in land prices. According to China’s actual statistics of interest
rates, land price bubbles is in fact three times higher than its actual worth.
According to Marx’s economic theory, land rent should be a part of the surplus value.
The land price bubble means that the land rent is high, and the proportion of interest and profit
in the surplus value will decrease, which will restrict the profit rate of the real economy. The
sharper the land prices go up, the bigger the blow it deals to the real economy. When real estate
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speculation becomes a means of profit, then some enterprises of the real economy will take part
in as well, and even they gain a fortune, the real economy still suffers a loss.
From the perspective of enterprise management, the land rent is part of the cost, so when
the land prices go up, the cost rises as well. From the perspective of individual consumers, no
matter as buys or sellers, the high real estate prices due to high land prices will be eventually
reflected in their salaries, so if the wages are not responsive in this regard, the daily consumption
will be oppressed and hence a sluggish market. If this scenario exacerbates, then the economic
crises as Marx said is around the corner.
When the land becomes expensive, as a result of the domino effect, the labor cost goes
up accordingly, which in turn raises the cost for economic development. Japan’s economy has
still been in the recession even 2 decades after its economic bubbles burst, which is a case in
point. We hope that China will learn from it. To some extent, the relation between the central
and local governments eventually gets reflected in that of the government and enterprises, and
that of labor and capital. It however remains a subject of further researches in particular on
whether it is justifiable for the governments, as the land owner, to charge land usage fees as a
source of extra-budgetary revenues or if so how much is reasonable.
On the other hand, the bubble economy arising from the land finance, if being around
for a while, may result in a disproportionate industrial structure, which holds especially true for
the upper stream industries such as iron, concrete, plate glass etc. The prolonged industrial chains
for them will lead to excess capacity for the I sector. Just as Marx put it,“To accumulate it is
necessary to convert a portion of the surplus-product into capital. But we cannot, except by a
miracle, convert into capital anything but such articles as can be employed in the labour process
(i.e., means of production), and such further articles as are suitable for the sustenance of the
labourer (i.e., means of subsistence).”[MARX: 1965, pp.580-581] Therefore, to address China’s
economic bubbles, it is not sufficient to only start improving the relation between the
governments and enterprises through reforms of the distribution system, in light of the relation
between the central and local governments. It further calls for a solution to the imbalance of the
two sectors in view of the real economy.
4.
A BRIEF CONCLUSION
Based on the data analysis, it shows that since 1978, though the different effect in
different stage, the central-local governments relationship is one of the main institutional forms
for the determinants of economic growth. In the first phase (1978-1993), it is reflected in the
fiscal responsibility system of central-local fiscal relations, which prompted the local government
through the establishment of township enterprises to increase fiscal revenue, and effectively
promoted the economic growth. In the second Phase (1994-2001), from the beginning of tax
reform, it established a moderate centralization in form of central-local government relationship,
cutting off the path of local government enterprises to increase budgetary revenues; with the
progress of the township enterprise, the economic growth rate began to decline. In order to cope
with the negative effects of the Southeast Asian currency crisis, in 1997 the government began to
implement the positive fiscal policy, expanding the public investment, and making the local
governments pick up the enthusiasm of meddling in the economy, but we can not take that this is
a mechanism caused by the tax reform. Since the proportion of central governments and that of
local governments are not stable under the tax system, in order to retain the status of the degree
of centralization, in 2002, the central government implemented the two kinds of income tax
reform, which evolved into the tax sharing system, the central and local tax were bundled
together and the central government got around 14% of the tax from the local governments. In
the third phase (2002 - present), in order to compensate the local budget losses, the central
government loosed restrictions on local governments to sell land in extra budgetary, to provide
the local government with new resources, and formed a new mechanism of "land finance" to
promote economic growth.
Phase 2 is clearly a transitional period: Economic Growth in Phase 1 and Phase 3 are
essentially different. Economic growth in the first stage is driven by the local government to
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promote the real economy, township and village enterprises generally are small, their products
mostly belong to the category Ⅱ, and during the Cultural Revolution, the imbalance of the
relationship between the two major departments have been adjusted: the third phase of economic
growth has a lot of fictitious components, land finance through the special macro economic
structure in China opened a channel from the financial sector to fiscal sector, so the local
governments could endless gain revenue through land sales, but its side effects are also clear:
increasing land revenue expands investment and also increases the cost of economic operation,
so the investment benefit will be less and less, and the economic slowdown is inevitable. But due
to the increasing expansion of the public investment in fixed asset investment, especially the
category Ⅰ overextended, the structural imbalance between two departments is growing, leading
to overcapacity in some sectors. By 2007 Land Finance impetus to economic growth has almost
reached its peak, in 2008 US financial crisis brought about by the impact of China's economic
slowdown, which came just ahead of time.
In short, since 1978, the root cause of slowdown in China's economic growth is the
distinctive macroeconomic structure and the central-local fiscal relationship, but not the so-called
cyclical impact or external shocks.
It is emphasized that 2002 is an important turning point. after this year, the reliance on
the booming export economy is no longer a good choice, and the corporate cost increases, which
makes the financial sector that doesn't create value the most profitable sector in the whole
economy (according to the data in the third quarter of 2013, In China, among 2,467 listed
companies, the net profit of 53 financial institutions share as high as 58.3% of the total net
profit), in short, the fictitious economy began to squeeze the real economy.
If China wants to solve the above problem, we must first change the government-led
economic growth. We may consider converting the unstable land transaction revenue to the
stable land tax included in the central budget management, in order to establish a stable centrallocal fiscal relationship on one hand, as well as reduce the fiscal risk of unsustainable land
finance. Secondly, we must abolish the dual identity of local government, especially local
government can take the role of a land owner in the market. Thus China's economic
development will possibly embark on a normal track.
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