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. Submit your article to this journal Article views: 1016 View related articles Citing articles: 46 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=rege20 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. 692 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 694 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 695 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. 696 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 KAI YUEN TSUI 697 698 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) 700 EURASIAN GEOGRAPHY AND ECONOMICS KAI YUEN TSUI 701 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. 702 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). 704 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. REFERENCES Ai, Jianguo, Zhongguo chengshi tudi zhidu jingji wenti yanjiu (Research on the Problems of China’s Urban Land System). Wuhan, China: Huazhong shifan daxue chubanshe, 2001. 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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 "..." 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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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