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May 19, 2013

China's 20 year plan to pay 8 trillion to urbanize 500 million people by 2034

After extensive consultation, co-ordinated by the National Development and Reform Commission, the long-term plan for China's urbanisation is being finalised. Behind all the complex issues is one fundamental question: how will it be paid for?

Here the ballpark costs of $400 billion per year are suggested to use increased taxes and temporarily increasing the budget deficit from 2% of GDP to 5% and redirecting funds from rural land acquisition.

The costs of urbanization could be reduced by leveraging the factory mass produced skyscraper technology of Broad Group. China's Broad Group is building the Sky City One using factory mass production. It is to likely completed after 90 days of assembly late in 2013 and the projected cost for the building is RMB 4 billion (US$628 million). Sky City will boast 220 floors, 1 million square meters (11 million square feet) of floor space and 104 elevators, according to the preliminary plans. It will cost $63 per square foot and house 30000 people in 4500 apartments. Five hundred Skycities would cost $314 billion (and costs could go down by having the follow on buildings being learned to be built for less). They would house the 15 million people each year that are urbanized. They would also have all of the schools, offices, hospitals and other facilities that were needed.

Based on estimates by the State Council's Development Research Centre and other sources, 100,000 yuan (HK$125,000) to convert one rural resident to an urban dweller may be a reasonable starting point. So, converting 500 million people (which would see 70 per cent of China urbanised) by 2030 would cost about 50 trillion yuan, or US$8 trillion, the equivalent of China's gross domestic product last year. A comparison may be German reunification, which cost some US$2 trillion for a much smaller base of 16 million people. At four times the cost, China's urbanisation would be 30 times the size of German unification on a human scale.

In this context, suddenly abolishing household registration is unfeasible. Even if hospitals and schools could be built overnight, there is no way to pay for them. Instead, a gradual approach is more realistic. While financially challenging, it should be possible to implement such social integration over two decades. Anything faster is beyond China's financial capacity but anything slower may compound social discontent.



With about 15 million rural people coming to cities every year, the annual costs for their integration would amount to 1.5 trillion yuan, higher than China's projected 2013 budget deficit of 1.2 trillion yuan (about 2 per cent of GDP). Moreover, of the nearly 500 million rural people to become urban citizens, more than 200 million are semi-urban residents who already live in cities. This accumulated urbanisation deficit of 20 trillion yuan would take time to digest. To amortise this manageably over two decades would add 1 trillion yuan per year.

Even at this measured pace, the annual costs would total 2.5 trillion yuan. While daunting, the issue must be addressed now before it compounds.

Urbanisation is a national project. However, the central government has provided limited financial support for it, leaving the job mostly to local governments, who as things stand can hardly service outstanding debts, estimated at 10-20 trillion yuan (20-40 per cent of GDP). Pending reforms in municipal finances, they cannot afford such a burden.

A centrally co-ordinated funding programme could look to:

* Increase fiscal income. In addition to taxing the rich and profitable corporations, a range of taxes may be considered, such as rates, capital gains, goods and services, and inheritance. To become urban citizens, migrants may be required to pay an additional social service tax for a time.

* Monetise state assets. The government could raise capital by further privatisation of profitable state-owned enterprises. Stakes could be injected into mutual funds, to be allocated in small lots to a wide base of citizens. This would provide good outlets to digest excessive liquidity and share prosperity with the people - making state firms genuinely publicly owned.

* Enforce employers' contributions. By law, employers are required to contribute to social security funds for workers. In practice, it is not well enforced. A national provident fund authority could be set up to strictly enforce employers' contributions. This central authority may also better co-ordinate the imbalanced social security funds across regions.

* Redirect rural land value. Rural land has been expropriated by local government at low cost to fund the upgrades and expansion of cities. As property rights for rural land are clarified, the value may be redirected from local governments to rural people. For example, after local and central government taxes, the full market value of rural land can accrue to farmers, subject to a cap per head, with the rest going to a national urbanisation fund.

* Increase the budget deficit. Even if other measures are effectively implemented, there may still be a funding gap. China might need to increase its budget deficit to about 5 per cent of GDP for a time. Such a deficit would moderate over time as GDP grows. Such a deficit may be partly financed by municipal bonds.

With funding from these initiatives, Beijing could drive urbanisation through subsidies or direct management of certain programmes such as public housing. Importantly, the social programmes must be well managed to avoid the dissipation of funds in transfer leakages or local inefficiencies.

China's growth will be driven by domestic consumers, importantly for services. As urban citizens, the hitherto rural people will become full consumers. Thus, investments in social services will have a strong multiplier effect on the economy.

Properly structured, China can fund urbanisation with urbanisation. Migrant workers will pay their fair share of the costs of becoming urban citizens through taxes, social security contributions and consumption, let alone the labour surplus.




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