Financing China's Urbanization
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Transcript of Financing China's Urbanization
Financing China’s Urbanization
Weiping WuProfessor and ChairUrban and Environmental Policy & PlanningTufts University
Outline
China’s urbanization at a glance Context: financing urbanization Land-infrastructure-leverage in China Private participation in infrastructure Prospects for China
China’s urbanization at a glance~1980 ~2010 % change
Urbanization level (%) 19.4 51.0 162.9
Number of cities 193 657 240.4
Eastern region 69 344 398.6
Central region 84 218 159.5
Western region 40 95 137.5
Cities by population size
Super large (> 2 million) - 42
Extra large (1-2 million) 13 82 530.8
Large (0.5 -1 million) 27 110 307.4
Small & medium (< 0.5 million) 153 423 176.5
Agriculture’s share in employment (%) 64 39 -39.1
Ratio of urban-rural per capita income 2.6 3.2 23.1
Urbanization and regions
Local fiscal context
Fiscal decentralization◦ mismatch between expenditures and revenues
between levels of government ◦ fiscal gap for local governments◦ Local governments have neither adequate tax
resources nor authority to borrow externally◦ revenue-rich regions keep more (as result of
1994 tax reform)◦ sharp rise in interregional disparities in fiscal
spending
Local fiscal context
Mismatch between local revenues and expenditures (source: Lu and Sun 2013)
Infrastructure financing
Public investment (e.g. property tax as source)
Municipal bonds Bank loans Private participation (PPI) Other official sources ◦ Multilateral institutions (e.g. World Bank)◦ Development/INFRA banks (e.g. BNDES)
Quick comparisonIndustrialized
countriesOther developing
countriesChina
Borrowing from capital markets(municipal bonds)
Local taxes(e.g. property tax)
Land lease / transfer fees
Local taxes(e.g. property tax)
Grants – internal and external
Borrowing –mostly from statebanks
Grants & subsidies(e.g. DOT, FTA)
Borrowing Local taxes
User fees Others Others
Urban infrastructure financing
1990 1993 1996 2002 2005 2009 Total Sans borrowing 2009 (%)
Budgetary allocationCentral budgetary allocation 1.09 2.70 1.04 7.60 6.22 10.66 1.15 1.71 1.58Local budgetary allocation 1.98 5.95 8.63 39.27 79.59 166.04 14.68 21.96 24.67
Local taxesMaintenance and construction tax 6.51 9.8 15.78 31.60 55.13 77.19 10.17 15.21 11.47Public utility surcharge 2.26 3.3 5.56 4.99 5.55 9.80 1.02 1.53 1.46
Fees and user chargesWater resource fee 0.28 0.48 0.61 1.24 2.50 2.48 0.46 0.69 0.37Infrastructure connection fee 8.66 14.29 32.56 2.64 3.94 4.84User charges 8.94 14.55 25.89 2.68 4.01 3.85Land transfer fee 28.30 59.45 263.60 10.96 16.40 39.17
BorrowingDomestic loans 0.88 4.46 9.57 87.39 166.99 30.80Foreign capital 0.25 1.38 5.59 6.11 9.27 1.71Bonds 0.29 3.43 0.63Stock financing 0.68 0.10 0.02
Self-raised funds 2.58 4.59 11.95 60.08 94.60 27.62 17.45 26.10 4.10Other sources 5.21 25.47 26.05 30.47 30.59 57.08 5.64 8.44 8.48Total 21.04 58.13 84.78 315.62 542.25 672.94 100.00 100.00 100.00
2005 (%)
“Land-infrastructure-leverage”
Common source of financing◦ borrowing through local government financing
vehicles (LGFVs)◦ backed by future land lease revenues◦ Residential and commercial uses generates
more revenues
Driving forces◦ Exhibiting achievement in economic growth◦ Maximizing fiscal profit
Key instrument – LGFVs Treated as municipal SOEs
(Source: Ueda and Gomi 2013)
Dilemmas Urban land constitutes:◦ Principal source of LGFVs’ capital◦ Future extra-budgetary revenue◦ Collateral for LGFV borrowing
Unsustainable source of financing◦ Decline in land value (from real estate
irregularities) could reduce investment◦ End of land capitalization process (circa 2021)◦ Major source of inefficiencies, distorted
incentives, and loss of state assets
Dilemmas
Negative relationship between land supply and fiscal gap (source: Lu and Sun 2013)
Example: Beijing Capital Group
Formed thru merger of 17 state firms Scope: infrastructure, real estate, financial
services Invest in and outside of Beijing Infra projects largely thru BOTs Acquire land development rights for
residential real estate
Alternative financing for China
Municipal bonds Local property taxes Private participation (PPI) Institutional investors◦ Pension funds ◦ Insurance companies◦ Private equity◦ Sovereign wealth funds
PPI: emerging markets ($million)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Brazil Chile China India Russia South Africa Turkey
Sectoral distribution of PPI
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Brazil Chile China India Russia SouthAfrica
Turkey
Energy Telecom Transport Water and Sewerage0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Brazil Chile China India Russia SouthAfrica
Turkey
Energy Telecom Transport Water and Sewerage
Project count
Investment
Source: PPI Database http://ppi.worldbank.org/explore/ppi_exploreCountry.aspx?countryID=50
Risk premiums for equity Regulatory risk◦ “Regulatory environment is first-order issue:
with transparent, published rules, and independent of politics”◦ “Chinese infrastructure space is ‘a black box’
due to unpredictable regulations” Currency risk◦ Higher than expected by domestic investors
Demand risk General business risk
Expected returns estimates
Source Expected returns
Mercer InvestmentConsulting (2005)
9-12%
JP Morgan Asset Management Average: 10-15%Toll roads: 2-8%PPP: 9-14%Airports: 15-18%
Inderst (2009) survey of European pension funds
9.5%
Dutch fund APG 10%
Return comparison (2010-14)
Index Daily return %(annualized geometric)
Own 14-Firm China INFRA Index(Weighted by share of market cap)
13.38
Hang Seng Index 1.58
S&P Global INFRA Index 6.79
Unlisted INFRA Returns (Preqin) 10.0
INDXX(All firms in China INFRA space)
-1.60
Assessment of China INFRA
High
• Water and waste water• Wind, solar, small hydro, and other renewable• Parking• Ports
Medium
• Toll roads• District heating• Solid waste • Airports
Low or uncertain
• Shale gas• Nonrenewable energy• Telecom• Transit and urban transport
Moving forward
Challenges◦ Current financing unsustainable◦ Mounting local government debts◦ Encroachment of agricultural land
Potential sources of financing◦ Municipal bonds (piloting in 10 localities)◦ Regional infrastructure banks
Moving forward (contd.)
Macro environment for investors◦ Capital markets◦ Sovereign and local credit ratings◦ Foreign exchange constraints
Private sector development◦ Domestic institutional investors◦ Independent service providers