In a recent article published in a multi-author volume on the financing of urban centres in developing countries1, Christine Wong examines the financing of Chinese cities.
One of the many strengths of this article is that it introduces readers to how Chinese cities are financed and the evolution of this process over the last thirty years. The author offers us a very pedagogical picture of China’s fiscal system and its main challenges.
Wong starts with a review of the recent history of urbanisation in China. For her, this rapid urbanisation of China is only a catching-up process; China is still not as urbanised as other middle-income countries.
She then looks at the administrative structure of local governments and its impact on local finance. She highlights three important facts to help understand China’s local finance. Firstly, local governments are in charge of most of the spending from infrastructures to basic services (education and health), but lack taxing powers. Secondly, there are huge discrepancies of revenues between localities. Thirdly, because economic growth was the main objective, the central government closed its eyes to local governments using backdoor practices to finance their budget.
In order to finance new infrastructures, local governments needed economic growth, and so real estate became a main pillar of local government finance. Land lease sales became a major fiscal resource for local governments, who profited from the transformation of rural land to urban land. However, Wong stresses the unsustainability of such a system, as land can only be sold once and it is a finite resource.
Wong also introduces the reader to the local investment corporations (LICs) and the way they have been used by local governments to finance their infrastructures. As local governments are not allowed to take out loans, they use these LICs to borrow money. However, because of poor supervision, Wong warns against potential debt issues in China.
The author makes a plea for the complete renovation and rationalization of China’s fiscal system. She argues that the economic and social transition undergone by China makes necessary the creation of a new fiscal system that would be more sustainable.
- Wong, C. (2013) Paying for urbanization: challenges for China’s municipal finance in the 21st century. In R. Bahl, J. Linn & D. Wetzel (Eds.). Metropolitan government finances in developing countries (pp.283-308). Cambridge, MA: Lincoln Institute for Land Policy. Retreived 20 January, 2013 from http://chinastudies.unimelb.edu.au/sites/www.chinastudies.unimelb.edu.au/files/1%5D%20metro%20paper_chapter_11.pdf [↩]