Eurasian Geography and Economics
ISSN: 1538-7216 (Print) 1938-2863 (Online) Journal homepage: https://www.tandfonline.com/loi/rege20
China's Infrastructure Investment Boom and Local
Debt Crisis
Kai Yuen Tsui
To cite this article: Kai Yuen Tsui (2011) China's Infrastructure Investment Boom and Local Debt
Crisis, Eurasian Geography and Economics, 52:5, 686-711, DOI: 10.2747/1539-7216.52.5.686
To link to this article: https://doi.org/10.2747/1539-7216.52.5.686
Published online: 15 May 2013.
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China’s Infrastructure Investment Boom
and Local Debt Crisis
Kai Yuen Tsui1
Abstract: A noted Hong Kong–based economist addresses the emerging financing problems
prompted by debt-laden local governments in China in the aftermath of the global financial
crisis. More specifically, using the most recent data available, he traces the root of China’s local
debt overhang to a protracted debt-financed infrastructure investment boom in which several
key institutions (the cadre evaluation system, the land management regime, and the banking
sector) have created an environment that draws local governments into a land-infrastructureleverage trap. The author argues that the resulting high levels of debt may ultimately impede
the country’s efforts to mitigate structural imbalances in its economy. Journal of Economic
Literature, Classification Numbers: H600, H700, P200, P300. 3 figures, 9 tables, 121 references. Key words: Chinese political economy, land management system, infrastructure boom,
leveraging, structural imbalances, local financing platforms.
INTRODUCTION
F
requent visitors to major Chinese cities cannot fail to notice their ever-changing skylines
and the dramatic transformation of their once-decrepit urban infrastructure. Futuristic
airports, high-speed rail links, multi-lane boulevards, and state-of-the-art expressways are but
the most ostentatious manifestations of an urban infrastructure construction boom that gathered momentum in the 1980s, accelerated during the following decade, and shows no signs
of slowing in the new millennium. Following in the footsteps of such mega-metropolises as
Shanghai and Beijing, less developed cities and towns have been quick to jump onto the bandwagon. From Chongqing to Changsha to Hefei, official newspapers and websites are filled
with publicity extolling leapfrog-like transmutations in urban infrastructure. The relentless
pace at which this process has been advancing is astonishing, all the more so when compared
to the infrastructure problems plaguing many developing countries.
China’s state-directed, investment-driven paradigm of development, with infrastructure
investment as an integral component, is reminiscent of the “big-push” model in development
economics, whereby the state plays a coordinating role in mobilizing resources for industrialization in the early stage of economic development when the market fails to accomplish
this objective (see, e.g., Krugman, 1992). China’s swift and effective decision-making has
led to rapid improvements in public infrastructure critical to economic growth, so that influential agencies such as the World Bank are known to offer China as a role model that other
developing countries are urged to emulate (e.g., Dollar et al., 2003; Dollar, 2008). Proponents
1
Professor, Department of Economics, Chinese University of Hong Kong, 9F-010F Esther Lee Building, Chung
Chi Campus, Shatin, Hong Kong (email: b040785@mailserv.cuhk.edu.hk). I wish to thank the editor and referees
for their valuable comments.
686
Eurasian Geography and Economics, 2011, 52, No. 5, pp. 686–711. http://dx.doi.org/10.2747/1539-7216.52.5.686
Copyright © 2011 by Bellwether Publishing, Ltd. All rights reserved.
KAI YUEN TSUI
687
of the China miracle seldom miss an opportunity to emphasize the benefits of the country’s
infrastructure revolution (e.g., Stiglitz, 2010, p. 395).
But the rapid pace of infrastructure development has also engendered risks.2 The views
of skeptics have lately gained increasing traction thanks to a report by China’s National Audit
Office (NAO, 2011) warning of the risks inherent in a 10 trillion-plus yuan local debt burden. Receiving particular scrutiny are financing vehicles created by local governments. Major
Western media outlets have quick to draw analogies with the debt burdens of advanced countries (e.g., China Tallies, 2011; Extent of Local, 2011; How Manageable, 2011, to name but
a few). One of the recent commentators, Victor Shih, told the Financial Times (Extent of
Local, 2011) that China’s total public debt-to-GDP ratio might stand at an alarming 150 percent, higher than that of the U.S. government, and even exceeding the level of Greece.3 The
collision of one of China’s new high-speed trains in Wenzhou in July 2011 has further called
into question not only the rush to expand the network of high-speed trains, but also the ability of the Ministry of Railways (MOR) to service its immense debts.4 Rather suddenly, the
“infrastructure express,” viewed by many as propelling China to the threshold of a new era of
prosperity, began to pose a growing threat to the nation’s financial health.
There is thus much concern over whether the pace of China’s infrastructure development is sustainable. To address this question, economists often attempt to measure returns on
infrastructure investment. Interesting and valuable work has been done, although quantitative
measures of investment efficiency are not without their problems.5 Opting for a different
approach, this paper instead seeks to reveal how the infrastructure boom has been shaped by
the incentives embedded in China’s institutional landscape.
It should be emphasized that the current local debt overhang is not a one-time anomaly
triggered by the global financial crisis, but rather the apex of a long series of infrastructure
investment booms driven by surges in local debt financing. The infrastructure building boom
is but one facet of a complex local political economy in which the criteria for evaluating the
performance of local government officials (the so-called “cadre evaluation system”) links
their upward career trajectories to how well they promote industrialization and urbanization
during short terms in office. With mandates from above often unfunded and local officials
2
E.g., see MOF, Fiscal Science Research Institute Research Group (2007) as well as Shen (2009a) on the
e xcesses of China’s expressway building boom and Zhao (2006, 2011) on the great leap forward in high-speed rail
construction.
3
Shih already had voiced concern about the high level of local government debt in an early 2010 interview published in the Wall Street Journal (Shih, 2010); see Walter and Howie (2011), among others, for a different estimate
of the local debt burden.
4
For critiques of the high-speed-train projects, see, e.g., Chan (2011) and Zhao (2011). According to figures
released by the MOR (2011), its total liability exceeded two trillion yuan in mid-2011 and the asset-to-liability ratio
was 58 percent.
5
For example, the incremental capital-output ratio (ICOR) is often used to assess China’s investment efficiency,
a recent example being the work of Ulrich (2010), who found no increase in China’s ICOR. However, it remains
unclear whether ICOR is really a meaningful measure of investment efficiency (for a critique of ICOR’s theoretical
foundation, see Easterly, 1999). Trying to estimate the return to capital using a different approach, Bai et al. (2006)
had to overcome a whole host of data problems. In any event, the aforementioned studies do not specifically target
infrastructure investment. Among the ones that specifically measure productivity of infrastructure by first estimating
a macro production function (e.g., Fleischer and Chen, 1997; Démurger, 2001; Shen 2009a, 2009b; Fleischer et al.,
2010), the results can differ depending on the period examined in the studies. The difficulty of measuring returns on
infrastructure investment is well known and was the subject of much debate in the U.S. in the early 1990s. Appealing as the cited quantitative approaches may seem, theoretical and practical hurdles abound, as aptly demonstrated
by Gramlich (1994). Methodological and theoretical issues aside, another major obstacle in the case of China is the
quality of official statistics. For example, studies attempting to estimate the return on capital invariably must come up
with capital stock data (e.g., Bai et al, 2006), although in China as elsewhere, this is no easy matter (Holz, 2006).
688
EURASIAN GEOGRAPHY AND ECONOMICS
under pressure to outperform their peers, accessing infrastructure financing becomes their
main objective. City governments have mapped out a “land-infrastructure-leverage” strategy of urban development, skillfully navigating China’s institutional terrain to their advantage and tapping the windfall from land development (e.g., see Lin, 2010). Improvements in
infrastructure are then used to attract outside investments (including FDI; e.g., He, 2010).
The strategy is driven by debt leveraging. Further facilitating such a development path is
the still largely state controlled banking sector. Although the formula for growth outlined
above appears to have generated spectacular results for some cities,6 the risks of debt-financed
urbanization have recently become evident in mounting local debts that are undermining the
financial system.7
The local debt accumulation problem has implications both for China’s domestic economic policy as well as the applicability of its growth model to other developing countries.
On the domestic front, this paper’s arguments are relevant to the debate on China’s structural
imbalances, which are driven in part by high rates of investment.8 Although China’s leadership has pledged to move toward a more consumption driven economy in the 12th Five-Year
Plan (2011–2015), the country’s institutional landscape would seem to lock the nation into
an investment-driven mode for some time to come. On the international front, the China
model has increasingly been viewed as presenting a challenge (and viable alternative) to
the incumbent Washington Consensus, which emphasizes the combination of markets and
good governance as key to successful development.9 Indeed, a recent report of the African
Development Bank (2011) has explored the question of whether infrastructure or governance
is more important. However, given China’s idiosyncratic institutional landscape, shaped by
a top-down political regime, unique land management system, and largely state controlled
banking sector, China’s development paradigm may not be easily transplanted to other developing nations.
THE POLITICAL ECONOMY OF TOP-DOWN URBANIZATION
AND THE URBAN INFRASTRUCTURE EXPRESS
The land-infrastructure-leverage strategy of local urban development has its roots in the
local political economy. China’s political landscape has galvanized local officials in recent
years to display extraordinary zeal in infrastructure construction. Figure 1 depicts the secular
trend in urban infrastructure investment using a long time series from the Ministry of Housing
and Urban-Rural Construction (MHURD).10 Although narrower in scope than the definition
for infrastructure investment used by, for example, the World Bank (1994), the MHURD time
series is the only source of data that is sufficiently long to capture the trend in infrastructure
investment during the reform era.11 Emerging from a period of stalled urbanization during
6
On the differential capacity of China’s cities to sustain an infrastructure financing–based growth model, see Wu
(2010).
7
Loans to special borrowing units of local governments weigh on the balance sheets of many Chinese banks,
which are under pressure from the China Banking Regulatory Commission to raise capital in order to meet rising
international standards of capital adequacy (e.g., Bradsher, 2011; Huang, 2011).
8
On China’s low rate of domestic consumption driving global imbalances, see, for example, Lardy (2006), Prasad
(2009), and Kroeber (2011).
9
E.g., see Rodrik (2006) for an excellent review.
10
In this paper, the term “urban” is used loosely. On the intricacies incumbent upon definitions of “urban,” see
Chan (2007).
11
The scope of the Ministry’s definition is limited by its mandate and jurisdiction. More information is presented
in the caption of Figure 1.
KAI YUEN TSUI
689
Fig. 1. Share of urban infrastructure investment within total fixed asset investment. Sources:
Compiled by author from data in MHURD (annual; various issues), NBS-a (annual; various issues)
and NBS-c (2011). MHURD data measure the share of urban infrastructure investment (i.e., chengshi
shizheng gongyong sheshi guding zichan touzi, as defined by MHURD) to total fixed asset investment
(quanshehui guding zichan touzi). The narrow definition is based on Regulations on the Management of
Urban Area Delineated by the Yellow Line (Chengshi huangxiang guanli banfa); see also MOC (2005).
NBS-4 data measure fixed asset investment in four economic sectors for cities and towns (chengzhen),
namely: (1) Electricity, Fuel Gas, and Water Production and Supply; (2) Transport, Storage, and Postal
Services; (3) Information Transmission, Computer Services, and Software Industry; and (4) Water
Conservation, Environment, and Public Facility Management. The definition for “urban” is different
from that of MHURD. The 2010 figure is based on monthly data released by the NBS. Total fixed asset
investment (quanshihu guding zichan touzi) used to derive the shares was obtained from MHURD
(2010).
the Maoist era, the share of investment designated for urban infrastructure moved gradually
upward, accelerating at the turn of the millennium and reaching a peak of 8 percent in 2003.
Switching to a broader definition than that of MHURD, but with a much shorter time series,
the corresponding shares in Figure 1 (NBS-4) turn out to be much higher, hovering around
25 percent for the period 2004–2009. From the peak in 2003, measures to cool the economy
slowed the pace of infrastructure investment between 2004 and 2008, before the rate again
accelerated in 2009 due to the stimulus measures undertaken to counter the global financial
crisis.12 China’s 25 percent level of infrastructure investment reported for urban areas alone
(the NBS-4 indicator is calculated only for cities and towns) is already higher than the 20 percent (both urban and rural locations) average for low- and middle-income countries reported
by the World Bank (1994). Consequently, if China’s share was low during the pre-reform era,
it has now reached levels higher than the norm for other developing countries.13
Achievements in certain areas are truly astounding. With 60,300 km of expressways constructed by 2008, China now ranks second after the U.S. in terms of the length of its system
Infrastructure investment in 2009 increased by more than 40 percent (see Fig. 3).
As pointed out by one of the paper’s referees, the share of China’s infrastructure investment is not high if one
considers the level of other developing countries to be low because of their neglect of infrastructure investment. The
Chinese figures in the text are cited to counter claims made by certain Chinese officials that the Chinese share falls
below the norm (e.g., Chengshi, 2010).
12
13
690
EURASIAN GEOGRAPHY AND ECONOMICS
Fig. 2. Real growth rates in urban infrastructure investment, 1979–2009. Source: Compiled by
author from MHURD (annual; various issues); see also Figure 1.
(MOTC, 2008). Much of this construction is quite recent. In 2007 alone, 8,600 kilometers of
expressways was constructed, exceeding the length of Japan’s total network (7,400 km) built
over many years. Henan, a poor province in central China, constructed 5,000 km of expressways in just 15 years—half the time Japan needed to build roughly the same mileage.14
To highlight the repeated surges in urban infrastructure investment spending, Figure 2
presents the real growth rates of infrastructure investment using the MHURD series. A series of
investment surges is clearly evident, with the ensuing overheating and inflation subsequently
reined in by macroeconomic control measures. In the new millennium, the first investment
surge occurred around 2003, when urban investment growth jumped by 40 percent, coinciding
with the start of 10th Five-Year Plan (2001–2005) and the 16th Party Congress, which ushered in the Hu-Wen administration. Subsequent years witnessed central government attempts
to curb investment and inflation to prevent the economy from spinning out of control. Yet by
2009, urban infrastructure investment surged again, increasing by nearly 50 percent.
What features of the local political landscape drive such surges in infrastructure spending? Cities in China’s administrative hierarchy are not so much spontaneous urban agglomerations as state-designated jurisdictions embedded in China’s complex, top-down political
hierarchy (Dai, 2000). Key city officials serve at the behest of superiors one level up, and their
careers are predicated on fulfilling a range of top-down mandates. Targets are passed downward, become increasingly concrete, and are decomposed meticulously among subordinate
governments.15 As bastions promoting modernization and industrialization, city governments
driven by the career concerns of local officials compete with each other to attract industrial
investments by offering such incentives as cheap land and good infrastructure.
14
The Japanese figures are from the Japan Statistics Bureau (http://www.stat.go.jp), whereas China’s national
figures are from MOTC (2008) and NBS-b (2010).
15
For example, the city of Chongqing hands down each year a list of urbanization-related targets (e.g., increases
in city and township population, rate of urbanization, built-up area) on the basis of which bureaucrats in subordinate
jurisdictions are evaluated (see CCPC, 2003, 2006). After receiving the mandates from above, Qianjiang, a district
(qu) under Chongqing passes these on to its subordinate townships (zhen) and villages (cun).
KAI YUEN TSUI
691
The pressure on local cadres to perform is all the more palpable due to their short terms
in office (often five years). Changing the guard often ushers in new rounds of grandiose
investment plans and races to fulfill those targets, as officials work to polish their resumes
just in time for the next round of jockeying for coveted positions in the bureaucracy.16 Such an
incentive system fosters a myopic cost-benefit calculus: long-term losses may be steeply discounted, while short-term gains are grossly exaggerated. Bank-financed infrastructure loans
are well suited to accommodate the incentives above, boosting short-term economic growth,
but with debt burdens befalling future administrations.17
Given the existing political landscape and incentive system, the only additional ingredients needed to trigger an infrastructure investment boom in the new millennium were new
top-down policies and often unfunded mandates. The policy break came in the 10th Five Year
Plan’s (2001–2005) clarion call for a great leap forward in urbanization and infrastructure
development. A package of measures was introduced: jurisdictional changes facilitated city
expansion, local governments were encouraged to put land up for auction and tender, reform
of the household registration system was mooted, and new ideas for infrastructure financing
were floated (see NDRC, 2001). As the sole supplier of primary land, local governments were
swift to exploit these new opportunities, abetted by the stimulus measures launched in the
wake of the Asian financial crisis. The result was the massive build-up in investments in the
early 2000s shown in Figures 1 and 2. The land-infrastructure-leverage framework for urban
development in China has worked so well because of a number of idiosyncratic features
of China’s institutional landscape, including the dualistic land management system, centrallocal fiscal arrangements, and a half-reformed banking sector. The first two are scrutinized in
the next section, followed by a discussion of the banks.
LAND AS WINDFALL, LURE, AND LEVERAGE
Key to an understanding of the land-infrastructure-leverage strategy is knowledge of the
means by which city governments fully exploit their land endowments. To urban bureaucrats,
land is at the same time windfall, lure, and leverage.
With the State Council (2001) and MOLR-a (2002) encouraging land auctions and tenders nationwide, land premiums quickly have become a major source of revenue (e.g., Lin,
2010). From Table 1, it can be seen that the total value of contracted gross land premiums
16
One anecdote is illustrative. In 2006, a time of leadership change at the city level, a new party secretary came
into office in Hefei, the capital of Anhui Province, and immediately launched dajianshe (“big construction”)— a
mega-campaign of infrastructure investment involving demolition on a massive scale, to be funded inter alia by bank
loans. Based on statistics released by the MHURD (annual; various years), Hefei’s urban infrastructure investment
financing increased by 160 percent in 2006 (from 2.4 to 6.4 billion yuan), before climbing another 47 percent (to
9.4 billion yuan) in 2007. In 2006, domestic loans to finance infrastructure investment in Hefei increased by almost
six times.
17
I thank one referee for pointing out the possibility that embedding China’s state-directed development strategy
within the cadre evaluation system may in fact be a credible strategy for a rapid improvement in infrastructure,
given that the market is not always a panacea. It is far from my intention in this paper to argue that a market-driven
approach trumps the current state-directed strategy. The latter obviously has the advantage of swift policy implementation to address market failures, as the logic of the “big-push” theory in development economics has long shown
(e.g., see Krugman, 1992). There are, however, problems of government failure as well, especially in an environment
of insufficient transparency and accountability. Indeed, the land-infrastructure-leverage strategy has been the subject
of much discussion in China lately, not least because of such widely reported problems as land grabs, corruption,
vanity projects, and local debt burdens. Rather than arguing for a market-only approach, what many commentators
(including the author) have in mind are political reforms to enhance transparency and accountability through, for
example, greater public participation.
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EURASIAN GEOGRAPHY AND ECONOMICS
from land transfers (tudi churang) skyrocketed after 2002, reaching 1.6 trillion yuan in 2009.18
As shares of local revenues, Table 1 reports two sets of estimates for subprovincial and subnational governments under columns A2 and A3, respectively. Our preference and thus focus
is on the subprovincial series under column A2 because land premiums are by and large at the
disposal of subprovincial governments. In recent years, the share of land premiums in local
aggregate fiscal revenue (A2) has hovered around 20 percent.19 Thus the estimated shares in
recent years exceed those of such major sources of revenue as the value-added tax, business
tax, and income taxes. Land premiums are a very volatile source of revenue, however. With
land often used as collateral to secure bank loans, as discussed below, China runs the risk that
a downturn in the real estate market and drastic reductions in land premiums could trigger a
local debt crisis.
Thanks to China’s dualistic land management system (e.g., Lin and Ho, 2005; Lin, 2010;
Zhou, 2004), the distribution of the windfall to be derived from land conversion and development has been skewed in favor of local governments. The Land Management Law (tudi
guanli fa) entrusts village collectives rather than peasant households with the ownership of
rural land. Collective land can only be sold as state land after it has been requisitioned. Compensation for the requisitioned farmland, however, is not linked to market values.20 Existing
regulations also can work against the interests of urban property owners vis-à-vis local governments, because land may be appropriated under the aegis of the “public interest.”21 While
peasants and urban property owners may not reap the land bonanza in full, local governments
can sell the land requisitioned (at below market prices) through public auctions and tender
offerings (at market prices). As sole suppliers of primary state land, local governments thus
can effectively regulate the land supply to reap monopoly rents. It is not uncommon for local
governments to transfer land to their state-controlled urban infrastructure construction companies, which can then use the revenues from land sales to fund infrastructure projects (more
below).
This “land windfall” has become the lifeblood of local public finance, thanks also to
central-local fiscal arrangements detailing how to divide the fiscal pie. There has been protracted wrangling between the central and local governments over the sharing and use of land
premiums dating back to the 1980s (Ai, 2001). The central government ultimately agreed to
hand over land premiums to local governments in a grand bargain that gave rise to the 1994
tax-sharing agreement (e.g., see Wang, 2010). Local governments then gained full control
over and a much freer rein in using their land windfalls, which were impervious to budgetary
18
Readers should be aware of three caveats concerning these figures released by the Ministry of Land and
esources. First, definitional changes apparently were introduced in 2003, so the spike in land premiums may be
R
exaggerated. Second, the amount is specific only to land transfers (tudi churang) through negotiated sales, as well
as auctions and tender bids. Revenues may also be derived, inter alia, from administrative allocations (huobo) as
well as supplementary land premiums (bujiao de tudi jiakuan), often from changes in land uses. Third, the actual
amount remitted to fiscal coffers may be different from the contracted total—e.g., the amount for 2009 reported by
the Ministry of Finance (1,482.3 billion yuan) as opposed to the 1,591 billion figure given by the Ministry of Land
and Resources. The Ministry of Finance attributes such discrepancies to land premiums paid in installments (see note
“a” below Table 1). There are also numerous reports of developers failing to pay land premiums and other irregularities (e.g., see NAO, 2008, 2010a, 2010b).
19
This figure is smaller than the 60 percent estimate often cited by the Chinese media because I use a more comprehensive measure of fiscal revenue as the denominator.
20
Compensation for cultivated land (gengdi), for example, is set at 6–10 times the three-year average value of
output.
21
The requisitioning of state-owned urban land is governed by the Regulations Governing the Demolition of
Urban Residential Buildings and Resettlement. Local governments have much discretion in interpreting what constitutes the “public interest” (e.g., Gonggong, 2010).
KAI YUEN TSUI
693
Table 1. Gross Land Premiums and Shares in Aggregate Fiscal Measures, 1999–2010
A. Contracted gross land premium
Year
100 mill. yuan
A1a
Share of local aggregate fiscal
revenue, in percent
Subprovincial
Subnational
A2b
A3b
500
5.73
3.83
2000
514
5.76
2001
1,296
9.70
2002
2,417
2003
2004
1999
B. Revenue in local funds
account
100 mill. yuan
B1c
B1/A1,
in percent
B2c
0.06
0.01
3.84
86.62
16.84
6.66
132.08
10.19
14.49
10.43
243.63
10.08
5,421
24.88
18.60
452.19
8.34
6,412
24.74
18.48
730.09
11.39
2005
5,884
19.86
14.81
1,022.51
17.38
2006
8,078
21.64
16.51
1,601.36
19.82
2007
12,217
25.82
19.33
5,890.11
48.21
2008
10,260
14.67
10,376.87
101.14
2009
15,910
18.97
14,823.33
93.17
2010
27,000
29,415.48
91.79
a
Figures on gross land premiums (tudi churang jiakuan) released by the Ministry of Land and Resources are only based on
contracted amounts. The figures include revenues from negotiated sales (xieyu churang), as well as auctions and tenders (i.e.,
zhaobiao, paimei, and guapai). The amount remitted to fiscal coffers may actually be less.
b
To ascertain the importance of the total gross land premium as a share of local fiscal income, two broad measures of aggregate
local fiscal revenue are used. A2 only includes revenues accruing to subprovincial governments, whereas A3 includes revenues
accruing to provincial governments and lower units. Each of the aggregate measures is defined as: Aggregate measure = R1 + R2
– R3 + R4 – R5 + R6 + R7, where R1 = local general budgetary incomes (difang yiban yusuan shouru), R2 = intergovernmental
transfers from above, R3 = upward remittances (sum of all remittances), R4 = revenues remitted to the funds account (yusuannei
zhengfuxing jijin shouru), R5 = incomes from compensatory use of land use rights (guoyou tudi shiyongquan youchang shiyong
shouru) remitted into the funds account, R6 = contracted gross land premiums (tudi churang jiakuan), and R7 = extrabudgetary
income (yusuanwai zijin shouru). Before 2007, only land premiums net of requisition (R5) and site development costs were
remitted to the funds account. To arrive at the broad measure of fiscal revenues and avoid double-counting, I first subtracted R5
and then added to the measure the gross value of land premiums (R6) under A1 in the table. R6 is just the contracted value of
land premiums, which may overestimate actual amounts remitted to local fiscal coffers. I did not have data for extrabudgetary
revenue before 2005 to derive shares for subprovincial jurisdictions. For the period 2005–2007 when the data exist, the shares of
subprovincial to subnational extrabudgetary revenue are 67%, 67%, and 73% respectively. I then multiplied the average of these
percentages by the subnational extrabudgetary revenue to arrive at estimated shares for subprovincial jurisdictions before 2005.
Finally, it should be noted that the aggregate measure does not include social security contributions.
c
Corresponding to R5 above, the figures under column B1 are shares of land premiums actually remitted to the local funds
account. Before 2007, only land premiums net of such costs as land requisition expenses were remitted to the funds account.
But since 2007, gross land premiums have to be remitted to the funds account, resulting in a sharp increase in the figures after
2006. Even after this change, the figures since 2007 are not the same as those under A1 reported by the Ministry of Land and
Resources; the reasons are detailed in footnote 18. Since 2004, a part of the remitted land premiums has been set aside to establish
an agricultural land development fund (nongye tudi kaifa jijin). From 2006 onwards, a proportion of remitted land premiums
has been injected into a land income fund (tudi shouyi jijin). For the sake of consistency, the figures under B1 include premiums
injected into the two funds. The figures in column B2 suggest that large portions of the gross land premiums were not remitted
to the funds account before 2007.
Sources: Author’s calculations based on MOLR-b, various years; MOLR-c, 2009; MOF, 1999–2007; MOF, 1999–2009; MOF,
2009; MOF, 2010b; MOF, 2011a
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EURASIAN GEOGRAPHY AND ECONOMICS
Table 2. Disposition of Land Sales Revenues, 2009–2010a
Expenditure category
2009
2010
Bill. yuan
Pct.
Bill. yuan
Pct.
1232.71
100.00
2662.21
100.00
A. Compensations for requisitioned land
518.06
42.03
1020.70
38.34
B. Land development
142.97
11.60
247.96
9.31
Total expenditures
C. Urban infrastructure construction
334.10
27.10
762.10
28.63
A+B+C
995.13
80.73
2030.75
76.28
Sources: Compiled by author from MOF, 2010a; MOF, 2011b,
a
Total expenditure refers to spending of revenues derived from land premiums. Since 2007, gross
land premiums are supposed to be remitted to the budgetary funds account under “income from
transfers of land-use rights of state-owned land” (guoyou tudi shiyongquan churangjin), the definition of which may be found in MOF/MOLR/PBOC, 2007.
oversight and public scrutiny, leading to outcries of malpractice and corruption. Up to 2007,
local governments only had to remit net land sales revenues into the budgetary funds account
(yusuan jijin zhanghu) after deducting expenditures supposedly defraying the costs of land
requisition and site preparation.22 As shown under Column B2 in Table 1, the share remitted
to the funds account was less than 20 percent prior to 2007. Only after protracted centrallocal government bargaining were the gross receipts from land sales finally remitted in their
entirety to the within-budget funds (see State Council, 2006 and MOF and MOLR, 2006). As
shown in Table 2, around 80 percent of the land windfall was spent on compensation for land
requisition, land development, and urban infrastructure construction.
Land, however, serves as more than simply a “cash cow.” It is also a key factor in interjurisdictional competition. Local governments use infrastructure, such as development zones
(kaifaqu), and cheap land to attract potential investors. The turn of the millennium witnessed
a rush to convert farmland into development zones, and until 2006 land for industrial use
could be leased to investors at negotiated prices (xieye jia), giving local governments discretion to offer land for industrial use at subsidized prices.23 Table 3 shows that land prices (i.e.,
value per hectare) determined through various forms of public auctions and tenders were
much higher than those arrived at through negotiations (xieyi churang). When the numbers
are disaggregated by China’s three macroregions (east, central, west), interregional variations
in value per hectare are smaller for negotiated prices than those determined by auction or tender. For example, in the case of leases granted through negotiations, the respective values for
the central and western regions in 2007 are about 78 and 71 percent, respectively, compared
with that of the eastern region. The corresponding figures under public auctions and tenders
are at much lower rates of 42 and 46 percent.
The urban development machine based on land and infrastructure required one final
critical component to function efficiently—the need for massive upfront financing to defray
For details, see MOF and MOLR (1995) and MOF (1996).
This in turn led to allegations that land was being offered in some cases at effectively a “zero land price”
(lingdijia).
22
23
KAI YUEN TSUI
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Table 3. Average Prices of Land Leased under Different Modes, 2003–2007
(ten thous. yuan/ha)
Region
2003
2004
China
168.53
221.78
2005
2006
2007
141.02
182.03
Transfer by negotiation
155.76
Eastern
175.51
251.52
156.94
149.19
203.16
Central
135.43
152.12
144.86
120.02
158.69
Western
169.41
196.08
161.64
134.08
144.02
Transfer by auction or tender
China
567.00
677.00
733.31
814.51
858.91
Eastern
706.96
930.18
962.63
1080.48
1213.82
Central
405.11
435.05
501.07
494.58
519.67
Western
282.13
412.70
471.91
613.15
561.69
Source: Compiled by author from data in MOLR-b, various issues. D:\urbanfisc\paper\table.xls
the initial costs of land requisition and site preparation.24 Betting on a booming real estate
market, there is no better collateral to increase leverage than future income streams from
land sales. It is here that Chinese banks enter the scene. The incentives underlying the
marriage of convenience between city governments and banks is the subject of the next
section.
BANK FINANCING OF URBAN INFRASTRUCTURE
The data in Table 4 demonstrate that bank loans have been the driving force in infrastructure investment in recent years. MHURD data presented in column A show a fourteenfold increase in the amount of loans (in absolute terms) between 1998 and 2009, routinely
accounting for one-third or more of total urban infrastructure investment. In the crisis year of
2009, the share jumped to nearly 40 percent as infrastructure construction accelerated. Alternatively, based on the aggregate figures of the four infrastructure-related sectors compiled
by the NBS (NBS-4, column B), loans more than tripled between 2003 and 2009, with the
share of loan-financed investment again hovering around 30 percent. Finally, figures from the
People’s Bank of China (PBOC, column C) show that infrastructure projects more often than
not absorbed 40 percent of all newly issued medium- and long-term bank loans.
Chinese banks have played an important role in local economic development. By financing much-needed public infrastructure construction, they have allowed the “for-profit” sectors to allocate their resources to their main businesses without worrying too much about
infrastructure bottlenecks. This notwithstanding, the close ties between the banks and the
state create risks that threaten to undermine the soundness of the financial system. Indeed, in
24
Based on figures released by the Ministry of Land and Resources on the pure return on land (tudi chunshouyi),
which is officially defined as the sales price minus all the costs incurred before putting the land up for sale, the total
upfront cost increased from 360 to 767 billion yuan between 2003 and 2007, or 67 percent and 63 percent of the total
value of land sales in the respective years (MOLR-b, various issues). There were incentives for local governments
to exaggerate such expenditures.
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EURASIAN GEOGRAPHY AND ECONOMICS
recent years, the banks eagerly entered into so-called bank-government collaboration agreements (yinzheng hezuo), some of which involved mega-loans supposedly tied to a bundle of
projects organized by local governments (kunbang daikuan). This activity reached a climax
around 2005 and 2006. The agreements come perilously close to a blatant violation of the
no-borrowing and no-implicit-guarantee constraints, exposing local governments to immense
contingent liabilities.25 The China Banking Regulatory Commission became so alarmed that
it finally terminated such practices in 2006 (CBRC, 2006), but not before trillions of yuan in
loans had already been extended to local governments and their enterprises.26
It is instructive at this point to examine the incentives that motivated Chinese banks to
enter into the bank-government collaboration agreements. First, notwithstanding recent banking reforms, the corporate governance structure of banks still does not insulate them well from
political interference.27 The state continues to maintain tight control over majority-owned
large banks through the appointment, promotion, and dismissal of their key personnel, who
often are recruited from (and thus are inextricably intertwined with) the state bureaucracy.
The same is true for smaller banks, notwithstanding recent capital-raising exercises to dilute
state ownership. Smaller regional banks are still effectively controlled by local governments
as major shareholders and through their power over personnel matters.28 Banks thus perceive
loans to state-owned enterprises and quasi-government agencies as politically “safe.” In addition to politics, a recent history of bailouts also raises rescue expectations and moral hazard
problems on the part of the banks.29
The reform of state-owned enterprises also aggravates the moral hazard problem.
Although the policy of “grasping the large and relinquishing the small” (zuada fangxiao)
has led to a decline in the number of state-owned enterprises (see Table 5), state assets have
been reshuffled to create ever larger enterprises. As shown in Table 5, the level of assets per
enterprise has increased more than fivefold between 2000 and 2009.30 Furthermore, big enterprise groups (da qiye jituan) are often nurtured by local governments to drive local economic
25
China’s Budget Law (yusuanfa) and Guarantee Law (danbaofa) prohibit local governments from running deficits that are financed by debt or to serve as guarantors for local projects.
26
One source put the total amount of credit extended via bank-government cooperation agreements from July
2005 to first half of 2006 at 2 trillion yuan (Difang, 2006).
27
The discussion of Chinese banking in this paper focuses on those characteristics of corporate governance that
render banks more susceptible to assuming excessive risk. Dobson and Kashyap (2006) have reviewed the empirical
evidence that lends support to such concerns. It is unfortunate that detailed and disaggregated information, which
would cast more light on the performance of the banking sector, is difficult to obtain. As noted in footnote 5, measures such as ICOR do not provide definitive evidence.
28
Charged with responsibility for cleaning up local urban banks, local governments in tandem with their local
enterprises have become major shareholders of the restructured banks (e.g., see State Council Development Research
Center, 2005 and 200 yi chongzhu, 2010). Rural credit cooperatives have experienced a similar fate (e.g., see Mu
and Lan, 2007 and Ong, 2006).
29
At the turn of the millennium, the big state banks were technically insolvent and had been repeatedly bailed out.
In 1998, the central government issued 270 billion yuan worth of special treasury bonds to recapitalize the large state
banks. In a subsequent restructuring, the big banks transferred their nonperforming loans to four asset management
companies (or “bad banks”). For details, see Ma (2007). Through these financial transactions, the central government
has effectively absorbed their losses. As noted in the preceding footnote, smaller banking institutions (rural credit
cooperatives and urban commercial banks) also were repeatedly bailed out.
30
The increase was 5.64 times in nominal terms. Deflating the figures by various price deflators (5.40 times and
5.43 times when fixed asset investment price index and the CPI are applied, respectively) does not change the overall
picture. The denominator used to derive assets per enterprise is the number of enterprises (qiye hushu), without taking into account the fact that some of them are actually controlled by a single big enterprise group. Because the total
assets of big non-financial state-controlled enterprises (both central and local) have more than doubled between 2004
and 2008, but their number has declined from 1538 to 1252 (NBS-a, various issues), state assets are concentrated in
fewer and fewer hands.
38.51
29.56
29.82
34.60
34.22
33.49
34.64
27.49
28.56
24.63
24.62
21.15
Percent share
financed by
domestic loans
16,543.80
12,027.95
9,440.80
8,673.71
7,404.78
6,067.98
4,932.74
Loan-financed infrastructure investment
(100 mill. yuan)
29.00
29.60
29.01
30.67
31.84
32.26
32.98
Percent share
of financed by
domestic loans
B. NBS – 4 sectorsb
25,000
11,000
7,984
6,392
6,175
6,268
6,373
3,174
2,456
Loan-financed infrastructure investment
(100 mill. yuan)
37.08
46.89
31.90
33.55
57.43
47.11
43.18
33.75
21.72
Percent share of new
medium- and long-term
loans devoted to
infrastructure investment
C. PBOCc
b
a
Domestic loans to urban infrastructure investments according to the narrower definition of MHURD (see Fig. 1 caption).
Broader definition of infrastructure based on NBS’s sectoral classification (see Fig. 1 caption).
c
Newly issued medium- and long-term bank loans from the People’s Bank of China. This category includes not just loans to the urban sector, and the terms
used to describe the loans differ across different PBOC reports. Consequently, the data may not be comparable over time. For 2001 and 2002 the loans are for
jijian jigai daikuan (basic construction and technical upgrading); for 2003–2005 they are for jijian daikuan (basic construction lending) in renminbi mediumand long term lending; for 2006–2008 they are for jichu sheshi hangye (infrastructure sector including transport, warehouse and postal sector, electricity, gas
and water production and supply, and water conservancy, environment and public facilities) in renminbi medium- and long-term lending; and for 2009 they
are for jichu sheshi hangye in foreign currency and renminbi medium- and long-term lending; the percentage shares in the far right column are derived by
dividing the newly increased medium- and long-term infrastructure loans by the renminbi medium- and long-term loans.
Source: Compiled by author from MHURD, 2010 (column A); NBS-a, various issues (column B); PBOC, various issues (column C).
4,034.8
2009
1,880.5
2006
1,763.7
1,805.9
2005
2,037.0
1,468.0
2004
2007
1,435.4
2003
2008
603.4
428.6
2000
743.8
357.8
1999
2001
284.8
1998
2002
Loan-financed infrastructure investment
(100 mill. yuan)
Year
A. MHURDa
Table 4. Loan-Financed Infrastructure Investment, 1998–2009
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EURASIAN GEOGRAPHY AND ECONOMICS
Table 5. Number and Average Asset Value of Local
State-Owned Enterprises, 2000–2009
Year
N (thous.)
Asset value per enterprise
(100 mill. yuan)
2000
176
0.53
2001
157
0.65
2002
141
0.74
2003
127
0.92
2004
117
1.02
2005
106
1.25
2006
96
1.54
2007
90
1.93
2008
88
2.31
2009
86
2.97
Source: Compiled by author from MOF, 2010c.
development. It is unimaginable that local governments let their local giants default if they
ever get into trouble. With implicit guarantees by local governments, banks’ lending policies
tend to favor these large enterprises.
Although the first decade of the new millennium witnessed efforts by regulators to rein
in the risks of bank-financed infrastructure investments, without any fundamental change in
incentives those risks were only suppressed temporarily, to return when the next opportunity
sparked a new wave of lending. The recent local debt scare is but the latest manifestation of
hidden local government liabilities, mainly in the form of bank loans, that have been rapidly
amassed over the last decade (e.g., see Wei, 2004; MOF/Fiscal Science Research Institute,
2010; Bradsher, 2011; and NAO, 2011).
At the dawn of the 2008 global financial crisis, the volume of local debts already had
reached 5.57 trillion yuan (NAO, 2011), largely in the form of bank loans. But this did not
stop local governments from coming up with new ways to finance infrastructure investment,
further stretching leverage. They gradually gravitated toward the creation of local financing platforms (LFPs), which were mainly behind the unprecedented local debt explosion in
2009.
LOCAL FINANCING PLATFORMS AND OTHER FINANCIAL INNOVATIONS
LFPs were created to circumvent the no-borrowing constraint imposed on local governments by the center and deftly navigate the terrain of China’s nascent capital markets. Public
assets are pooled together and injected into LFPs to build strong balance sheets, smoothing
the way to external financing. The creation of LFPs is not peculiar to mainland China; a successful example of their application can be found in Hong Kong, which has created a public
corporation similar to an LFP to raise capital for the construction and operation of its subway
system. Although China’s LPFs have been widely praised as useful financing vehicles for
the renovation and rapid development of infrastructure, the recent local debt scare has raised
KAI YUEN TSUI
699
concerns over whether there is sufficient transparency and accountability to ensure that the
heightened appetite for bank loans does not undermine the financial system.31
Any discussion of LFPs is incomplete without mentioning the city of Chongqing, which
has mastered the alchemy of LFPs almost to perfection. The municipality has established
eight LFPs since 2003 with the mandate to probe the capital markets for investment financing.
The asset values for six of the LFPs reported in Table 6 skyrocketed over a short period of
time, not least because of asset injections intended to window-dress their balance sheets. The
aggregate asset value of the six listed LFPs alone was close to 300 billion in 2009.
Following Chongqing’s lead, LFPs spread like wildfire to cities, counties, and even
townships throughout China, often under the prodding of their superior governments.32 Short
of a complete picture, we can nonetheless catch a glimpse of the balance sheets of those
subprovincial LFPs that had to meet disclosure rules when issuing bonds in 2008. Their summary statistics are reported in Table 7. The sample includes 89 LFPs, of which 12 are from
provincial-level cities, 61 from prefecture-level cities, and the remainder from county-level
jurisdictions. They vary greatly in size, the largest being an LFP from Tianjin with an asset
value of 185 billion yuan, and the smallest (2 billion) from Bozhou in Anhui Province. In
general, the average size increases with the administrative rank of the city in which they are
located.
Upon scrutinizing their balance sheets and ratings reports, a number of salient features
can be identified. Their assets ballooned in a short time span, often due to injections of public
assets (most notably land) by city governments. One extreme case is the urban construction
company of Jiujiang, a prefecture-level city (dijishi) in Jiangxi. Its total asset value was only
0.12 billion in 2006, but climbed to 52.8 billion in 2008 due to a sharp jump in “inventory”
(cunhuo), a result of the injection of land reserves into the company (Dagong Global Credit
Rating Co. Ltd., 2011).
The balance sheet could quickly deteriorate if there is a sharp downturn in the property
market. Liabilities are mainly in the form of bank financing; for the sample of LFPs in Table
7, bank loans accounted for almost 80 percent of the total. On average, each LFP reported 8
billion worth of bank loans.
LFPs are often propped up by fiscal subsidies and transfers linked to land premiums.
Again the case of Jiujiang is illustrative. Ninety-seven percent of its income is derived from
transfers of revenue from land sales (Dagong Global Credit Rating Co. Ltd., 2011). Whether
many of the LFPs will be able to repay their debts thus ultimately hinges on the health of the
local property market and the local government budget.
As enterprises, LFPs can cast a wide net to ramp up their leverage. There has been much
talk about developing the bond market to boost direct financing of investment and diversify
risks away from the banking sector (State Council, 2004). To broaden channels of bond financing, the PBOC over the years has issued short-term commercial paper and medium-term notes.
In 2008, the National Development and Reform Commission (NDRC, 2008) lifted the cap
31
The focus here is not to discount the positive role of LFPs in driving China’s infrastructure development, but
rather to understand the political economy underlying their mushrooming growth and to question whether China’s
institutional landscape has put in place sufficient checks and balances to ensure prudent LFP borrowings. Indeed,
there is much discussion on relaxing the no-borrowing constraint, the reform of the tax-sharing system, and devolving more power to local people’s congresses to oversee off-budget LFPs and other financial instruments.
32
A by no means exhaustive listing of local documents encouraging local governments to establish LFPs includes:
Hebei People’s Government (2007, 2009); Hefei People’s Government (2007); Liaoning, Office of the People’s
Government (2008); Anhui Communist Party Committee and Anhui People’s Government (2009); Henan People’s
Government (2009); and Nanjing Liuhe District (2009).
113
51
47
Total liabilities
Liabilities/assets (%)
55
Liabilities/assets (%)
Total assets
82
Total liabilities
44
149
Liabilities/assets (%)
Total assets
92
212
Total liabilities
Total assets
70
269
Liabilities/assets (%)
382
46
Liabilities/assets (%)
Total liabilities
26
Total liabilities
Total assets
56
Total assets
68
206
Liabilities/assets (%)
303
Total liabilities
2005
Total assets
Assets and liabilities
46
52
112
59
113
193
49
128
261
61
269
443
48
34
71
76
382
501
2006
44
49
115
63
148
236
53
166
312
60
262
437
38
52
137
76
491
643
2007
44
51
113
66
185
281
54
229
421
60
310
515
56
73
129
68
552
810
2008
42
52
124
73
258
355
64
356
557
63
411
651
53
146
276
69
659
955
2009
–
–
–
–
–
–
64
414
650
61
416
685
–
–
–
65
695
1070
2010
Sources: Compiled by author from data on the China Bond website (www.chinabond.com.cn); the 2005 figure for Chongqing Expressways is from the
Chongqing Public Finance Yearbook 2005 (Chongqing Fiscal Bureau, 2006); the 2006–2008 figures for Chongqing Water Group were derived from its IPO
documents at the end of 2009.
Water Group
Chongqing Traffic and Tourism Investment Group
Real Estate Group
Urban Construction and Investment Group
Chongqing Water Conservancy Investment Group
Chongqing Expressways
LFP
Table 6. Total Assets and Liabilities of Chongqing’s LFPs, 2005–2010 (100 mill. yuan)
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EURASIAN GEOGRAPHY AND ECONOMICS
KAI YUEN TSUI
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Table 7. Summary Statistics for a Sample of LFPsa
Statistic
Number of LFPs
Asset value (bill. yuan)
Average (bill. yuan)
Liability value (bill. yuan)
Provincial
Prefecture
County
Total
12
61
16
89
595
844
198
1,637
50
14
12
18
369
439
82
889
Average (bill. yuan)
31
7
5
10
Liabilities/assets (pct.)
62
52
41
54
Lending (bill. yuan)
305
357
43
704
Average (bill. yuan)
25
6
3
8
Lending/Liabilities (pct.)
83
81
52
79
a
The figures are derived from subnationall LFPs issuing bonds in 2008.
Source: Compiled by author using the public documents available on the China Bond website (www
.chinabond.com)
on enterprise bonds issued each year and simplified the approval procedures. There are, however, different requirements for firms issuing different types of bonds. Balance sheets of LFPs
may be creatively packaged to meet various requirements for net asset value and profitability.
Although the scale of bond issuance is small in comparison with bank lending, the funds raised
may nonetheless be injected into the LFPs’ projects as capital funds (zibenjin) to meet minimum capital requirements.33 LFPs may then further mobilize additional financing from banks.
Other than banks and the bond market, collaboration with trust companies has also caught
on in recent years. Subject to less onerous regulation, this funding channel has often been
exploited especially by fiscally weaker jurisdictions, which have difficulty gaining access to
bank loans or the bond market. While enterprises do have to satisfy requirements tied to asset
value and profitability to issue bonds, products designed by trust companies do not. With the
emergence of LFPs, alliances between trust companies, banks, and LFPs have gained currency. Banks may raise funds through their wealth products to buy schemes designed by trust
companies, which in turn pass the funds on as loans or equity investment to LFPs. Attached to
this type of wealth product may be provisions stipulating that the local governments in question will buy back the product. Alliances between banks and trust companies also help banks
evade prudential regulations by shifting loans off their balance sheets to trust companies (e.g.,
see Xindai, 2009).
With the active promotion of local governments, LFPs numbered in the thousands by the
end of 2008.34 Central policymakers, fearing that the economy was at the flashpoint of a great
recession brought on by the global financial crisis, opened the floodgates in 2008 and 2009,
pumping massive liquidity into the economy (State Council, 2008, 2009). LFPs were well
positioned to tap such easy credits, which fueled the next investment drive.
33
The State Council first promulgated capital requirement ratios for the different sectors of China’s economy in 1996
(State Council, 1996). The ratios have been periodically revised to serve the needs of macroeconomic s tabilization.
34
The number of LFPs leaked to the media by the China Banking Regulatory Commission was 8,821 in mid2009, 4,907 of which were at the county level (see The Key, 2010). A more recent figure provided by a report of the
National Audit Office (NAO, 2011) puts the number at 6,576. The lack of a standard definition for an LFP accounts
for the numerical discrepancies.
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EURASIAN GEOGRAPHY AND ECONOMICS
Fig. 3. Year-on-year growth rates of investment in infrastructure-related sectors of the economy.
Source: Compiled by author from monthly data released by the National Bureau of Statistics and
retrieved from China Data Online website (http://chinadataonline.org/). NBS-4 = sum of four infrastructure-related sectors in Figure 1; CPT = City Public Transportation; PFM = Public Facility Management.
CPT and PFM are two of the sectors constituting NBS-4.
LFP-DRIVEN INVESTMENT BOOM IN 2009 AND THE BACKLASH
Figure 3 depicts investments in urban infrastructure–related sectors, exhibiting year-onyear growth rates of more than 60 percent. Fueled by bank credit, renminbi medium- and
long-term loans for infrastructure financing purposes shot up 127% in 2009 (see Table 4 under
Column C). Riding the tide of the property boom fanned by loose credit, local governments
stepped up their land requisition activities to boost their land reserves, which could be used
as collateral for bank loans and generate future income streams to service their debts. Not
surprisingly, revenues derived from land premiums almost doubled in 2010, to 2.7 trillion
yuan (see Table 1).
What happened in 2009 was nothing more than a repetition of the land-infrastructureleverage strategy at the turn of the millennium (cf. Fig. 2), shaped by the same incentives,
although this time the scale was colossal and the leveraging vehicles were the LFPs. While
there is no consensus as to the exact amount of LFP loans due to the different definitions used
by the regulators, various estimates run in the trillions of yuan. According to figures leaked to
the media by the China Banking Regulatory Commission, the initial tally of new loans going
to the LFPs in 2009 amounted to 3.05 trillion yuan, bringing the total balance to 7.38 trillion
yuan at the end of 2009, or about 17 percent of total bank lending (see Table 9). A subsequent
clean-up operation put the balance of LFP loans at 9.09 trillion at the end of 2010.35
35
The 2009 figure was quoted by the head of the China Banking Regulatory Commission (Pingtai, 2010). The
r evised figure of 9.09 trillion can be found in Jiuwanyi (2011). Later, the National Audit Office (NAO, 2011) came up
with a figure of 4.97 trillion yuan of LFP debts out of 10.7 trillion worth of local debts at the end of 2010.
KAI YUEN TSUI
703
Table 8. Bond Financing by Provincial-Level Cities and
Subprovincial LFPs, 2005–2009 (100 mill. yuan)
Year
Enterprise/company bonds
All
Infrastructure
2005
50
30
2006
343
132
2007
515
253
2008
699
353
2009
1578
1335
Source: Author’s calculations from data found on the China
Bond website (http://www.chinabond.com.cn).
Other than bank loans, the liberalization of the bond market described above occurred
just in time to trigger an explosion in the issuance of primary bonds in 2009. My estimate of
funds raised by subprovincial jurisdictions and provincial-level cities through the issuance of
enterprise/company bonds rocketed to 133.5 billion in 2009 (see Table 8), almost four times
the amount issued in the preceding year. Of the 89 enterprise/company bonds issued, 16 were
by county-level jurisdictions. LFPs could then further mobilize additional bank financing, as
explained above.
The aforementioned collaboration between banks and trust companies helped to further
ramp up leverage. With trust companies as intermediaries, funds raised by banks could be
passed on to LFPs as equity investment. With the minimum required capital in place, the LFPs
could then turn to the banks for loans. Given a capital requirement ratio of 25 percent, the LFP
could finance an additional 4 billion yuan for each 1 billion raised through a bank-trust-LFP
collaboration (Yinxinzheng, 2009).36 Local governments could thus initiate infrastructure projects without expending any of their own capital. The CBRC moved to put a halt to this risky
practice, but not before tens of billions in yuan had already been passed on to LFPs, with some
of the mega-deals involving more vulnerable smaller banks (see Hebei nongxinshe, 2010).
Consequently, rather than diversifying risk away from banks, infrastructure financing
through the bond market and trust companies enabled LFPs to secure additional bank loans.
When the dust settled, banks, big and small, strong and weak, were waist-deep in LFP loans
by the end of 2009. Table 9 pieces together the amounts of lending by a group of listed
banks to LFPs. The big four state banks (Agricultural Bank of China, Bank of China, China
Construction Bank, and Industrial and Commercial Bank of China) accounted for more than
30 percent of loans extended to LFPs. The rest of the banking sector, including smaller and
often more vulnerable regional banks, made up the difference, which came to a staggering
5.06 trillion and 6.92 trillion yuan in 2009 and 2010, respectively. These banks would be the
first causalities in the event of local debt defaults.
The land-infrastructure-leverage wheel has now come full circle. With local debt burdens
at a staggering 10.72 trillion yuan by the end of 2010 (NAO, 2011), there are ominous signs
36
A concrete case involved LFPs from Guangdong. A Guangdong trust company issued 23 billion yuan worth of
wealth products, ultimately assisting LFPs in a number of Guangdong cities raise 100 billion (see Qianyi minjian,
2009).
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EURASIAN GEOGRAPHY AND ECONOMICS
Table 9. Lending by Major Banks to LFP, 2009–2010s
Loans to LFPs
(bill. yuan)a
Pct. of
national totalb
2009
2010
2009
Industrial and Commercial Bank
720
640
9.76
China Construction Bank
646
540
8.75
Bank of China
424
482
5.75
5.30
8.8
8.7
Agricultural Bank of Chinad
530
510
7.18
5.61
12.8
13.0
Bank of Communications
139
126
1.88
1.39
7.6
5.6
72
92
0.98
1.01
6.0
8.7
153
201
2.07
2.21
14.4
15.9
Bank
China Merchants Bank
CITIC Bank
2010
Pct. of bank’s
lendingc
2009
2010
7.04
13.5
10.1
5.94
13.3
9.8
Huaxia Bank
60
74
0.81
0.81
13.9
15.0
Xingye Bank
175
133
2.38
1.47
25.0
15.0
Total of the above banks
2,919
2,798
39.56
30.78
12.0
10.3
National totale
7,380
9,090
100.00
100.00
17.3
17.8
Compiled by author from Bobilü dafu, 2010; Nonghang, 2010; Shi sheng, 2010; Zhongxin qunianmo, 2010; Zhongxin yinhan, 2010; and Liu, 2011.
b
The share of each bank is the balance of loans to LFPs divided by 7.38 trillion, a number released
to the media by the China Bank Regulatory Commission.
c
Figures for total lending are from the 2009 annual reports of the respective banks and, in the case of
the China Merchants Bank from Zhaohang xinzeng, 2010.
d
The amount of LFP loans extended by the Agricultural Bank for 2009 was for the first quarter of
2010.
e
National totals for LFP loans are figures leaked to the media by the CBRC; see also footnote 34.
a
that the land-infrastructure-leverage strategy has started to unravel. Rumors of some LFPs on
the verge of default have triggered a sell-off of LFP bonds (e.g., Shanghai shenhong, 2010;
Yuntou shijian, 2011); drastic declines in land premiums now raise doubts about whether
local governments can service their debts (Yixian chengshi, 2011); and banks weighed down
by LFP loans are lining up to raise more capital (Qian wuyue, 2011).37 The drama is still
unfolding, raising the specter of yet another costly bailout and re-capitalization of the country’s banks. On the international front, there are growing doubts about whether China could
again provide a backstop to a world economy reeling from S&P’s downgrade of the U.S.
credit rating (China Hamstrung, 2011).
CONCLUDING REMARKS
The most recent episode in China’s debt-driven investment boom is not a one-time aberration triggered by the global financial crisis, for its roots can be traced to China’s idiosyncratic institutions. Without any change in incentives to fuel the land-infrastructure-leverage
paradigm, the current episode will not be the last. Local cadres will not be immune to the
37
As this paper went to press, the state-run China Daily reported that construction of more than 6,000 miles of
new high-speed rail lines had been at least temporarily suspended as major contractors experienced major problems
obtaining funding to pay workers and purchase necessary materials (Shirouzu, 2011).
KAI YUEN TSUI
705
temptation to ramp up debt-financed infrastructure investments if opportunities arise, and a
half-reformed banking system will likely stand by, ready to accommodate their wishes. Cities,
reliant on land premiums to pay for urban development, will have to requisition and sell
even more land to pay their ever-increasing infrastructure bills. Hostage to a volatile property
market and debt overhang, local officials will tend to be cautious not to rock the boat of a
gravity-defying property market, lest they may “kill the goose that lays the golden egg.” But
this risks delaying the application of measures needed to cool the economy and relieve pressure on fermenting property bubbles. With the land-infrastructure-leverage recipe simply too
seductive for local cadres to resist, China’s economy falls into a cycle of sporadic surges in
investment financed at the first sign of easy credit, rapid accumulation of local debt, real estate
booms, and ultimately bailouts as banks and local governments assume too much debt.
As a facet of China’s “new state activism” (Naughton, 2011), the land-infrastructureleverage paradigm has broader implications for the country’s investment-driven development model, often touted as an alternative to the Washington Consensus. Thanks to the latest
investment surge, fixed-asset capital formation as a share of GDP soared to a record high
of 46.2 percent in 2010 from the 2008 pre-crisis level of 40.7 percent (NBS-c, 2011). This
runs counter to the pledge made by China’s leaders to put the nation on a more consumption
oriented development path. The built-in incentives of the land-infrastructure-leverage trap
have impeded efforts to divert China from its high-investment trajectory. Instead of encouraging gradual change to an economic environment more congenial to wealth accumulation
by peasant and urban households, the current land management system has skewed the distribution of land windfall profits toward local governments to fund, among other things, their
capital-intensive projects. Banks appear eager to participate as partners with local governments, channeling large shares of public savings to support ever more extravagant additions
to infrastructure.
A final dimension of our discussion ponders the question of whether the Chinese experience is transferable to other developing countries. Some observers (e.g., Dollar, 2008) refer
to “infrastructure finance and pricing” as if China’s success were the result of mimicking the
market mechanism alone. The narrative presented in this paper suggests that this is at most half
the story. Without China’s dualistic land management system, half-reformed state-controlled
banking sector, and a local bureaucracy almost unfettered from below, it is a moot question
whether the “Beijing Consensus” is a genuine option for other poor nations to embrace.
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“Yinxinzheng lianjinshu (The Alchemy of Alliances between Governments, Banks and Trust Companies),” Caijing, 12, June 8, 2009.
KAI YUEN TSUI
711
“Yixian chengshi tudi churangjin zhoujiang, Beijing diefu wuchang (Sharp Drop in First-Tier Cities’
Land Premiums, with Beijing Declining by 50%),” Caixin Wang, July 20, 2011.
“Yuntou shijian chongji zhaishi (The Yunnan LFP Incident Sends Shockwaves Through the Bond
Market),” Xin shiji (New Century Magazine), 28, July 17, 2011.
“Zhaohang xinzeng zhengfu rongzi pingtai daikuan 400 yi (Loans Extended by China Merchant Bank
to Local Financing Platform Reached 40 Billion),” 21 shiji jingji baodao, April 15, 2010 [http://
www.21cbh.com/HTML/2010-4-15/4OMDAwMDE3Mjg4OQ.html].
Zhao, Jian, “Gaosu keyun zhuanxian shengcun de shichang zhai naer? (Where is the Market for the
Survival of High Speed Rail Links?),” 21 shiji jingji baodao (21st Century Economic Herald),
June 26, 2006.
Zhao, Jian, “Zhongguo gaotie zhaiwu weiji zhidu genyuan (The Institutional Root of China’s Railway
Debt Crisis),” Zhongguo gaige (Chinese Reform), 4, April 1, 2011.
“Zhongxin qunianmo rongzi pingtai daikuan yu’e 1530 yi (Balance of Lending by CITIC Bank to
Financing Platforms Last Year Amounted to 153 Billion),” Zhongcaiwang, June 23, 2010 [http://
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“Zhongxin yinhang cundaibi chao hongxian (The Deposit-Loan Ratio Exceeds the Red Line),” 21 Shiji
jingji baodao, April 28, 2010.
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Essay Planning
Jennifer Coates
Senior Lecturer in Japanese Studies
School of East Asian Studies, University of Sheffield
3000 words, including
bibliography, for 100%
weighting.
Research
Essay
The deadline for the PLA
research essay is 3 February
2021 at 11:59pm.
Writing Essays
Essays should be 3000 words in length, with
an acceptable margin of 10% either side;
between 2700 and 3300 words.
If you are a student from SUMS or Politics
departments, your PLA will be 1500 words.
All essays must be word-processed. They
must be double spaced, in a font of
reasonable size (Times Roman 12pt; Arial
11pt or similar) and have margins of 2.5cm
on all sides.
This Photo by Unknown Author is licensed under CC BY
How to submit your essay
There is a standard essay header sheet on the SEAS Information site (linked via
Blackboard). You must enter the following information on that form and then cut and
paste to the top of your essay:
Your registration number (not your name)
Essay title and word count
Keep a copy of the essay for your own reference.
Then, upload an electronic copy of your essay to Turnitin via the link in Blackboard.
Anonymous marking has been enabled for this assignment; Blackboard will recognise
you by name but will not identify you to us until the ‘post date’, several weeks after
submission.
You will receive your feedback electronically – there will be both free text comments
and comments on individual sections of your essay. Please read these carefully as they
are there to help you improve your work.
All work submitted must be the result of a student’s
independent efforts. In particular, everything that you take
from your sources (facts/data, interpretations, images,
words) must be correctly attributed at point of use, and all
content must be EITHER fully paraphrased/reworded OR
indicated as quotation by the use of quotation marks "..."
More detailed information about plagiarism is available on
the SEAS Current Students pages here:
Plagiarism
Statement
https://www.sheffield.ac.uk/seas/currentstudents/submissio
n/plagiarism
A signed plagiarism declaration must be submitted with all
assessed work. You will be subject to a 5% penalty of the
mark originally awarded on merit if you submit an
assignment without this cover sheet.
Late Submission
If you miss a deadline for an assignment,
submit the work as soon as you are able to.
Work which is submitted late without
extenuating circumstances will be
penalised. Details of penalties can be
found here:
https://www.sheffield.ac.uk/seas/currentstu
dents/submission/penalties
This Photo by Unknown Author is licensed under CC BY-NC-ND
Basic Essay Requirements
Essays should be…
Analytical rather than descriptive: move on from the ‘what’ of a
question to the ‘why’ and how’.
Clearly structured: Your arguments will have more impact if you present
them effectively; use your introduction to set out your key arguments
and develop these through the body of your essay.
Based on wide reading: You may use seminar readings for your essay,
but you should also read more widely. Use databases available via the
library website to find the most relevant academic literature.
Accurately and consistently referenced, with all material taken from
other sources attributed at point of use: Failure to reference properly will
lose marks and may constitute plagiarism.
This Photo by Unknown Author is licensed under CC BY-SA
Basic Essay
Requirements
Don’t underestimate the importance of presentation!
It will be easier to read your essay and give it a good
grade if it has been spellchecked, if fonts are
consistent, and the layout makes sense.
Be sure that your sources are reliable. Its fine to use
blogs, critical journalism, and online reviews in your
essays, but these should be treated as evidence of
audience response and critical reception, NOT
authoritative scholarship. Make sure that at least half
your references are scholarly.
Don’t be afraid to use simple language. Short clear
sentences are more effective than long and
rambling ones. Similarly, if you are not 100% sure of
the meaning of a word, use a simpler equivalent.
This Photo by Unknown Author is licensed under CC BY-SA-NC
Slightly-lessthan-basic
Essay
Requirements
A successful essay will contain in-depth analysis
and critical thinking.
A high-scoring essay will have a degree of
originality. We want to know what you think! Try to
take a new angle on your topic, or think of a single
point that you have not read in other scholarship.
Speaking of scholarship – read widely! You will do
well if you read beyond the curriculum.
Remember to back up your points with evidence.
X argues that “…” (X 1960, p.
13)
How to cite
an
academic
source
Scholars have shown that …
(X 1960, p. 13)
In this text we can see that (X
1960, p. 13)
PLA information
session
Dr. Anna Vainio
8.12.2021
Programme level assessment
What is it?
Why do I have to do one?
Who writes a PLA?
How do I write and submit a PLA essay?
Key dates and details
The Programme Level Assessment (PLA) is a larger
piece of work that everyone registered for SEAS
Programmes / taking SEAS modules will have to do
You will need to do ONE PLA essay for each semester /
semester you take SEAS modules
What is a
PLA?
The PLA will constitute 40% of your overall grade for
the semester, with MLA work constituting the rest of
the 60%
For instance, if you take 3 modules in semester 1 plus
your PLA, your grade will be calculated as follows:
MLA 1: 65
MLA 2: 68
MLA3: 59
PLA: 62
Your average grade for semester 1: 63.2%
Students enrolled on SEAS Programmes:
MSc East Asian Business
MA Politics and Media in East Asia
MA International Relations and East Asia
Who writes a
PLA essay?
Students taking SEAS modules from the Sheffield University
Management School (SUMS) and the Department of Politics and
International Relations
You will only write a PLA at the end of the semester you have taken
a SEAS module
For instance, if you take one SEAS module in Semester 2, you will
only do a PLA at the end of Semester 2
Why do I have to do a PLA
The purpose of the PLA is for you to show that you are able to extend and
combine your knowledge from your Module level work and apply it to a
problem/question outside of the immediate module level content
The PLA therefore tests not only what you have learned on your modules, but how
you are able to apply that knowledge in the sphere of politics, media, business,
etc.
How do I write a PLA
essay?
For students registered on SEAS programmes:
Essays should be 3000 words in length, with an acceptable margin
of 10% either side; between 2700 and 3300 words.
Stucture and
length
For students enrolled in the Sheffield University Management
School (SUMS) and the Department of Politics and International
Relations and taking SEAS modules:
Your essay should be 1500 words in length, with an acceptable
margin of 10% either side; between 1350 and 1650 words.
All essays must be word-processed:
They must be double spaced
In a font of reasonable size (Times Roman 12pt; Arial 11pt or similar)
Have margins of 2.5cm on all sides.
• You should choose only ONE essay question
from your Programme’s list of questions on the
Blackboard site.
Questions
• There are separate essay questions for MSc East
Asian Business, MA Politics and Media in East
Asia, and MA International Relations and East
Asia, so make sure you answer to one of the
questions listed under the programme in which
you are enrolled.
Writing your PLA essay is just like writing any other essay
You will need to have a key argument/puzzle that you are working
on to defend
You will need to do your own research (read outside of the MLA
lists of literature) and use academic evidence to back up your
statements
Writing your
essay
Make sure you REFERENCE your work correctly
Find more information and guidance on referencing from the
University Library Website
PLAGIARIMS WILL NOT BE TOLERATED!
Learn what counts as plagiarism and how to avoid it here
If you need help with essay writing, please check the 301
Study Skills Centre and their workshops on academic skills
Writing your
essay
They have Online workshops, In-person workshops as well as
pre-recorded lectures on their website
The following workshops might be particularly useful for you
‘Essay Writing’
‘Academic Writing’
‘Paraphrasing and Using Academic Sources’
For students on SEAS Programmes:
Under the 'Assignment Submission' header on the left-hand side panel
you will find submission links for handing in your work once you are
finished. Make sure you select the correct submission link and follow
the steps for submitting your work carefully.
Submitting
your work
For Sheffield University Management School (SUMS) and the
Department of Politics and International Relations:
There are separate submiss...
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