I think this story warrants quite a bit more attention than it’s getting.
A few days ago, you may have read that the first-ever audit of China’s local governments determined that they had somehow amassed $1.6 trillion in debt. This is notable and important in and of itself, but in light of where China’s local governments get their money, I think it’s bound to lead to even more forced demolition and land seizures.
Back in January, we published a translation of a summary of a report from a team of Chinese lawyers on illegal demolition in 2010 (Part 1, Part 2). The report said that local government budgets are increasingly dependent on land sales, and with little land available for sale they often turn to seizure:
The total income from all land sales nationwide in 2009 was 1,423,970,000,000 RMB, up 43.2% from 2008. This amounts to about 46% of the total national income for local financial administrations during the same period.
But in 2009, the total spent on land acquisition was 1,232,710,000,000 RMB, up 28.9% from 2008. 498,576,000,000 RMB was spent on land takeovers and demolition compensation, or 40.4% of the total expenditures. 10.7% of total expenditures were spent on land development, 27% on city construction, 3.5% on rural infrastructure, 1.6% to subsidize farmers whose land was seized by the government, 0.7% on professional land sales, 1.5% on low income housing. Land arrangement and basic rural construction got 3.9%, development of farming land 0.9%, disaster relief/reconstruction and bankruptcy bailout 9.7%.
In 2010, land sales deals brought in over 2,700,000,000,000 RMB, an increase of 70.4%, and even more worrying, local finance has taken another step further in relying on land sales profits [to function]; the four major cities all relied on land sales for at least 50% of their funding this year. Before this, land sales income was only 25% of Beijing’s budget. According to statistics, in China’s ten largest cities, income from land sales hit 875,241,000,000 RMB, an increase of over 54% from 2009.
Because of this, local governments everywhere have pushed through “transform the city” and “transform the village” programs with overwhelming force, for the purposes of tearing down housing and selling the land, which makes the demolition of housing even more prevalent. This movement to increase the income of land finance administrations is currently apparently unconstrained by any restrictions or appropriate guidance. This has become the main new source of the intensification of demolition conflicts; we are very confident in this appraisal.
So, in addition to using land sales to maintain their budgets, local governments will now also have to use them to help pay off their apparently massive debts. The Business China article I linked above suggests land sales will likely be used to pay for 40% of the debt payback, or about 2.5 trillion RMB. I have no idea where that number comes from, but given that land sales account for more than 50% of most local government budgets already, it’s hard to imagine land sales won’t play a major role in attempts to pay down this debt.
And whatever rules the central government may have made about illegal demolitions, a rise in land sales means a rise in land seizures, and that means a rise in forced demolitions. Forced demolition is, of course, currently the biggest single cause of social unrest in China.
Keep an eye on this story. Despite efforts to cut down on demolitions through new laws — pause for laughter — I have a feeling that economic realities are going to force another wave of divisive demolitions and, as usual, the poor and weak will be forced to pay for the sins of the rich and powerful by giving up their homes so developers can build luxury apartments no one will ever actually live in.
Happy 90th birthday, CCP.
Related reading: The First Domino? Yunnan Highway Breaches its Financing Platform Contract (Caijing)
chinageeksarchive 
This is a great article. You’ve shown so clearly a massive motivation for the relentless development and house-price rises from the government side – ie. to continue paying off debts and funding new projects.
From the other side, there seems to be another hole too – I’m in Fuzhou in the south, and on the ground, the housing situation is crazy. Average rents in the town are around 1000-1500 RMB for a tiny single bed apartment, and wages are @2000 RMB a month. Yet huge housing projects are going ahead everywhere, and average prices are around 1.3 – 1.6million RMB for a new apartment. A large number of rich friends are buying up apartments by the dozen (literally), but they have no hope of recovering the money through rents.
It seems like those two factors are pointing to a big collapse where there aren’t any customers buying into the new developments, the rich investors suddenly find themselves sitting on 40-50 worthless apartments, and the government has no new land to sell (or runs the risk of alienating the poor/average citizens who can’t afford new property in the first place).
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I fail to see the government debt and price of housing has anything to do with ‘The Coming Wave of Unrest.’
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The Economist had a special on China last week, Custer. landuse rights ownership played a big role there, too, but not the only one, of course. I’m still reading.
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Great article. To close the loop lets not forget that real estate development and associated industries make up about 50% of GDP, and create a huge number of jobs.
So now we have a clearer picture of what the Chinese miracle has become: grind up the poor -> to fuel “development” -> then out comes GDP, empty decaying apartments & impoverished (but busy) citizens.
Truly an ingenious method of slavery.
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pug_ster,
Do you also fail to see how tripping and falling will cause you a skinned knee?
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Sorry, folks – but if people keep reacting to pug_ster’s, umm,. contributions, I’ll be out of here. I prefer reasonably focused discussions.
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@interested – not to justify it, but I guess the equation so far has been that most people do better through this process. There’s a large number of down-trodden, but a much larger number of people living in better houses, better conditions.
That said, the big worry now is that the gov. might be forced to be more and more desperate when it comes to land seizures, less and less able to compromise. The test will come when the ’70 years’ rule starts to come into play, whereby ownership of land reverts to the gov. after 70 years of private ownership.
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Let me know if the Chinese government is going to do more land seizures this year than last year. If so, then maybe there is a ‘Coming Wave of unrest.’ Otherwise, if you are implying that the Chinese government is trying to reduce their 1.6 T debt by ‘robbing’ people of their land is just plain ridiculous.
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Chris, I think the matter isn’t only about how well-off people would be, compared with thirty years ago. It’s also how they feel respected or disrespected, and to be shoveled off your turf isn’t only threatening your survival, but your self-esteem, too. It’s a matter of justice, as much as about survival.
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The test will come when the ’70 years’ rule starts to come into play, whereby ownership of land reverts to the gov. after 70 years of private ownership.
I think I can predict that at least nominally, another batch of decades will be added, and using rights will remain unchanged.
If that will be respected on the ground, locally, will be a test indeed.
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There is no doubt that some of the local governments desperately need to raise money to pay off debts, but I don’t think this necessarily mean that they will resort to additional land seizures. I think forced land grabs by the government has been already been getting too attention among the local people. It’s too controversial and destabilizing. Plus I think there are many better ways to raise money.
The Chinese government just announced that it would raise the taxable income level from 2k RMB/month to 3.5/k RMB/month. This change effectively exempts close to 100 million people from paying taxes not at the top (which is typically the case with tax cuts in many western nations) but at the bottom. Put this news into the context of this story, cutting anyone’s taxes would only lower the government’s income. So if the government really wants to screw the poor any further it would not have cut the poorer people’s taxes (though making 2k-3.5krmb/month is hardly considered poor outside of large cities).
As for ways to raise money to cover the debts, the government can always impose additional progressive taxes, such as over luxury items or home sales off multiple properties. This would serve the purpose to both wealth redistribution and balancing the budgets. The Chinese government could start to close in on tax loopholes. The tricky part of course is to do this enough so not to hamper local businesses initiatives and scare away investments.
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@Lolz,
I agree with you on this one. The Chinese government can gain additional revenue by cracking down on rich people for not paying their fair share of taxes (IE Ai Weiwei.) Then again, they are already doing it.
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My instinct is this: I’ve seen people predicting a collapse in the Chinese economy on the basis of the housing market for getting on ten years now. Yes, the numbers in terms of government debt and property prices are increasing exponentially, whilst GDP growth figures, though break-neck, are still progressive. Still, I just don’t see this by itself leading to large-scale trouble.
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justrecently,
“Sorry, folks – but if people keep reacting to pug_ster’s, umm,. contributions, I’ll be out of here. I prefer reasonably focused discussions.”
That’s a pretty arrogant thing to say. I may not always agree with pug_ster or his opinions, but they’re not exactly “u mad, u mad, u mad, u jelly” posts. He doesn’t troll nearly as much as I do, and you trying to give the readers an ultimatum in defense of “focused discussion” seems pretty hypocritical.
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@FOARP
Agreed, housing prices are and of themselves a problem, but not sufficient to spark off a large-scale wave of unrest. After all, these prices have been increasing for years but there has been no result from it.
What we saw in Guanzhou recently is more likely to be a cause of problems for the Comedy Party – high-handedness and arrogance. One day the Chenguan might kill somebody with their brutish tactics, and then the shit will hit the baozi.
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@ lolz: Well, the tax break for poor people means essentially nothing. It’s an empty gesture. How many people do you know who make less than 3,500/month in China and still file for income taxes? There are very few (keep in mind that only 26 million people out of China’s 1.3+ billion file income taxes each year).
I agree luxury taxes and more could help, and that would be a great solution, but I find the chances of that being implemented and executed highly unlikely because the people who control the government are, for the most part, the ones who would then be on the hook for paying those taxes.
Forced land grabs are indeed destabilizing, but without them, local governments would already be crippled, and I find it much more likely that in crisis they’ll turn to what they know works rather than designing and implementing a new wealth redistribution system — especially since the “they” in that sentence are the ones who would be losing their wealth under a new system. That will lead to more unrest, but I think most local governments are confident they have the money to hire enough thugs should a real problem arise. The central government is probably less confident about that, but they’re clearly either unwilling or unable to do anything other than pay lip service to the issue…
@ pug_ster, you’re right, this is all Ai Weiwei’s fault.
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C Custer,
On what basis that makes you believe that the local governments are indeed crippled with the debt that they have? There’s numerous ways for the central and local governments can advert this from happening. The local governments can start instituting real estate taxes, that will drive down home prices and increase revenue for the government.
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Hey,
I was interested in this issue as well, so I asked one of the real estate reporters at Caixin to what extent she thought local governments would rely on land sales to repay their debts. Her reply:
“1. There are quotas for local governments on many acres they can sell each year. and the current trend is to cut the quotas. 2. The market isn’t good, real estate prices are down as a result of measures to control house purchases in cities.”
By the way, I produced a podcast for Caixin on local government debt this week.
http://english.caing.com/2011-07-01/100275102.html
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@ pug_ster: They could, but until they do, they’re in a pretty uncomfortable position. Also, I bet you they won’t, because (like I said before) THEY are mostly the ones who’d be paying that tax. So either they won’t do anything, or they will implement a tax, use a loophole to avoid it, and it will have basically no effect.
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@Chris. Good update. Fz is apparently the 10th hottest real estate market in China. You could see the massive potential for hutong clearance close to the Octypus/Donjiekou in the early 2000s. Bye bye to some really historic old shopping streets.
All meeting between govt officials and developers take place in a particular resturaunt which exists solely for that purpose and is closed to the public. And the officials definitely have the whip hand in these discussions. Each permit is negotiated in a lock step manner and the developers are not given much wriggle room. Muncipal services such as building schools are sometimes also squeezed into the developers to do list. Those displaced have, on occassions, been told to go live with their relatives.
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@Chris. Your post takes me down memory lane. Provided the local govt can contain local pissed offness, it could go on redeveloping for the next 20 years provided the economy does not take a bath. Large swathes of old single storey areas at the centre of the city, all those dead 70s industrial buildings south of the Minjiang. If there is another thing that is going to kill the old civic life of the city, it is cars which are demanding space in a city orientated around its historic canal system. (Incidentally, the PLA has massive real estate interests in the city which run from the court house to the railway station.)
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As much as said about seizing housing – a bigger concern, in the long run, is the lost of viable farmland. As the Gobi makes big headlines as it continues to creep across the north, urbanization is ‘quietly’ wiping out the south. Going to be interesting to see how much of a ‘urban farming’ kick comes into play in the next five years or so.
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Check this out:
http://www.bbc.co.uk/news/world-asia-pacific-13986456
“The new law, which comes into force next year after 12 years of drafting, rules out violent law enforcement.
And the regulations also state that sites should not be cleared during holidays or at night.”
So the central government is concerned about this and is responding, but I’m very skeptical if this will actually make any difference to the way things get done in the jungle.
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@kingTubby – an old Fuzhou local then? Actually, the local gov. is doing a better job right now of the city centre, with some really thoughtful regeneration of the historic areas. That’s definitely encouraging because you can see it being revenue generating (tourism, culture, art, shopping).
The real mess in Fuzhou is south of the MinJiang – it’s just wave after wave of huge apartment buildings that often sit empty for years – they’re sold to private buyers, who sit on them waiting to sell off in a few months when the price doubles (my house has doubled in price since Nov 2010, around 6 months). At the moment, everyone’s doing quite well out of it generally, but it just seems unsustainable (which is why I found this original post so interesting, because when the shit hits the fan, it won’t just be for the poor alienated people, but I think also the richer private buyers who are riding this wave right now.)
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@Chris. Your para two doesn’t surprise me and I did provide two big qualifications. Centre of the city: thats good and I’m a bit surprised. An old Fuzhou local then? Sounds a bit snarky, Chris. Yes, a very long time. Zou Hai Ming Shi.
Your r/e south of the river. Well, you are near Metro and that is some consolation……I suppose.
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“This change effectively exempts close to 100 million people from paying taxes not at the top (which is typically the case with tax cuts in many western nations) but at the bottom.”
Pretty sure this is exactly the same as the Western model. In the West if you make less than the minimum income, you get a Tax Rebate, instead of paying taxes. Your suggestion that the rich don’t pay taxes is baffling. In Canada, the highest tax bracket is about 40%.
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“…Chinese government can gain additional revenue by cracking down on rich people for not paying their fair share of taxes (IE Ai Weiwei.)…”
You’re being facetious right? The rich here are often in bed with the Govt (Guanxi). They probably got rich by seizing property from the locals for 5 cents on the dollar, knocking it over, and turning it into a multi-million dollar development. Anyone can do that.
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Maybe you’re being facetious by making assumptions that officials are buying land 5 cents on the dollar. Do you have any proof?
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I can’t find the link now, but just FYI, I do recall seeing a story several years ago about how local officials in some area were building “low income” housing with government funds, and then allowing their connections and other officials to purchase the apartments for about 5% of the market price at the time. Then everybody flipped the apartments and made a big bundle. Maybe that’s what he was talking about?
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I don’t know what Michael’s rant was all about. The government trying to raise revenue by making more people pay taxes has nothing to do with with the assumption that the Chinese government is making a loss selling land.
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Now it’s getting ridiculous. Those are problems, but not big enough problems to trigger a wave of unrest beyond what it is now. Most people support the government overall based on economic growth alone, even the poor realize it’s only way forward right now.
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@shuaige – I agree with you at the moment, there is widespread support because most people are doing OK.
But I guess the point of the article is that the huge debt, dependence on land sales, and possibility that the gov. will get more and more desperate to seize new land, means that more people will become dispossessed and not happy with the situation. Imagine your response if your government kicked you out of your home, and you had no way of complaining, no courts where you can pursue your case, and no independent press to raise awareness.
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Yeah I agree, I think to name this article “The Coming Wave of Unrest” is a bit hyperbolic to say the least. If there are more land sales then sure, people will be pissed off, but it’ll take more than that for anything serious.
I think by far the most concerning thing about these figures is the possibility for bad debt crisis if there comes a large influx of new properties on the market.
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@Brightgrey –
Yeah. Almost Glenn Beck-ishly so.
@Chris –
Since this has been going on already now for a good many years, I wouldn’t hold my breath. Back when I first went to Mainland China as a university teacher in ’03 the farmers whose land had been used to build the university’s new campus would gather in their thousands to demonstrate outside the gates of the university once a year. As far as I am aware it never did them any good – they certainly never got any coverage in the media, or any sympathy from the government. None of the students gave a damn about their fate.
The same thing with the re-development of Nanjing city centre back around the same time. Some old man even committed suicide in front of Nanjing city hall – something witnessed by hundreds, and talked about all over the city, but not reported anywhere.
The same thing was replicated on a massive scale when the Three Gorges Dam was constructed. The anger of the millions of people displaced has now, at least in a large part, faded, even though the dam itself has since failed to live up to promises.
As someone once said “there’s a lot of ruin in a country”. Yes, recent events in the middle east show that people living under oppression can rise up in protest given the slightest hint that it is a way for them to cast it off. However, whilst this kind of thing can happen – over the year cases where thousands of people have taken to the streets to demonstrate against official excesses – they have never become national.
@Guys – If you want an example of a place where reasonable discussion is being trolled to death, go look at PKD’s latest thread. JR is right, if someone is just blatantly trolling, it makes no sense to respond.
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I somehow feel some people, like Custer and Gordon Chang, have been so strapped to their obsessions with China’s collapse that now they don’t know how to get out without embarassing themselves. So they churn out piece and piece predicting an “upcoming” collapse, for ages now. The best timing to get out might be when the audience get tired of this.
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@keisaat – you’re right, it’s always too tempting to predict some kind of total collapse for China, we’re all guilty of it I think. Living here, I hope that doesn’t happen, because I can’t imagine it would be pleasant for anyone here, myself included. I think they’re right to point out upcoming problems though, and we can all hope that the government doesn’t stick its head in the sand about them, or just revert to traditional methods of stifling change.
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@keisaat I challenge you to find one place, ever, on this blog or anywhere else, where I have predicted a “collapse” for China, either economically or politically. The archives are open, and I’ve never deleted a post. Take your time to sift through. In fact, I’ll even help you out! Here:
http://www.google.com/search?sourceid=chrome&ie=UTF-8&q=site%3Achinageeks.org+collapse
Now, let’s sift through that together, shall we? Let’s see, out of 500+ posts, there are only 26 that even include the word collapse? Yikes, well, that’s not a great start for your theory, but lets take a closer look at how “collapse” was used in these posts….America’s collapse, collapse of the Qing, school collapse in Sichuan, “the collapse of the CCP would be a disaster for the Chinese people”, prices may collapse…oh, damn, it looks like not a single one of those is suggesting that China or its economy will collapse.
Well, gee, that makes you look pretty dumb, huh?
If you’re not convinced though, feel free to search beyond the word collapse. Predicting a wave of protests is not REMOTELY the same, and I have never predicted the collapse of the PRC or its economic system.
So, in conclusion, please STFU and never compare me to Gordon Chang again, kthxbye.
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Picking up on a couple of responses above. To be sure the security forces have been successful in stomping on land reclamation protests to date. The number one priority has always been to cordon of any protests AND preventing them from spreading to adjoining villages and counties by monitering texting and shutting down local communications if necessary.
I think it is reasonable to suggest that land reclamations affect older folk with livelihoods and other attachments to their plots. (Water quality and water access issues also feature here.) Older folk are probably a lot more accustomed to bowing before authority and physical force, even though there are some who turn up in Beijing annually to present their petitions. That said, the feeling of being done over by govt officials and developers must still simmer like a carbuncle just below the surface. Must be great watching the peageant of the famous and filthy rich of CCTV when your prime concern is finding a new roof.
The recent unrest in Quangdong was pretty much a younger generation thing. They couldn’t wait to get out of the boondocks and have bugger all intention of ever returning other than for the annual family visit. They are in the cities for good, and also have a greater sense of self-worth and of their civil rights. Importantly, the old village social ties of both mutual support and coercion are a thing of the past: they are now atomised individuals in the big city
Sure, uncivil behaviour in urban environments can be clubbed into submission. However, the potential for serious social unrest in cities to spread like wildfire is so much greater, and the trigger can be either a minor incident or rumour. Texting and social media will do the rest, and it will always outrun the censors delete button. (I vote for the rumour catalyst.)
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Custer, you should read this:
http://www.moodys.com/research/Moodys-Scale-of-problem-loans-to-Chinese-local-governments-greater?lang=en&cy=global&docid=PR_222068
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“How many people do you know who make less than 3,500/month in China and still file for income taxes? There are very few (keep in mind that only 26 million people out of China’s 1.3+ billion file income taxes each year).”
I am not sure where Custer got his figures from but after the tax cut, the people who will have to pay the taxes will be around 24 million, from 84 million. Granted, that is still a small number compared to entire China’s population but you have to start from somewhere.
http://www.google.com/hostednews/afp/article/ALeqM5hSJaG_V4F45r9-pltfEDmVjdqgSA?docId=CNG.a2e1e11ff51023279bd59f11049ad96b.491
“I agree luxury taxes and more could help, and that would be a great solution, but I find the chances of that being implemented and executed highly unlikely because the people who control the government are, for the most part, the ones who would then be on the hook for paying those taxes.”
That would be true, but at the same time taxes have to be raised in order to pay for the debts. Money doesn’t appear out of nowhere and there is no other way around this. If you don’t raise the tax on the wealthiest then you have to raise taxes on the middle class because the poor don’t have all that much money. Sure there would be some which would use loopholes but that doesn’t mean everyone rich person would cheat on their taxes.
“In the West if you make less than the minimum income, you get a Tax Rebate, instead of paying taxes. Your suggestion that the rich don’t pay taxes is baffling. ”
I didn’t suggest that the rich in other places don’t pay taxes. What I mean is that when countries like the US cut taxes, it would be aimed to cut the taxes of those at the top. If you look into the numbers, the lion share of the tax cuts typically falls into the upper 1-2% of the population.
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“That would be true, but at the same time taxes have to be raised in order to pay for the debts. Money doesn’t appear out of nowhere and there is no other way around this. If you don’t raise the tax on the wealthiest then you have to raise taxes on the middle class because the poor don’t have all that much money.”
OR….you don’t raise the taxes, and instead do the same thing you’ve been doing for years to bloat local government budgets…seize and flip land and housing for developers. See where I’m going with this. I agree a tax on the rich is the best option, but I am not at all convinced the rich will feel that way, especially in a system where there is no judicial oversight into anything the government does.
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