Local governments too dependent on this revenue, says top economist

The new leadership is facing an increasing clamor for reforms and one of its priorities should be to reduce the reliance of local governments on land sale revenues, said a leading economist.

Resolving this issue is important for further urbanization, a major objective, said Hua Sheng, who was on a key research body under the Chinese Academy of Social Sciences in the early years of reform in the 1980s.

Local governments should depend on tax revenue for expenditure, Hua said in an interview with China Daily.

Only then can local governments follow the central government's line that the purpose of urbanization is to enable migrant workers and their families to settle down in cities where they work, rather than making money through more land auctions.

"Expectations of more reforms are running very high after the leadership transition," Hua noted. "This will be a crucial year, a time to address major issues and set the tone for the nation's progress over the next decade."

Income from land sales hit 2.9 trillion yuan ($467 billion) in 2011.

Revenue slumped to 2.35 trillion yuan in the first 11 months of 2012, thanks to the tightening regulatory measures on real estate.

However, figures from the Ministry of Finance revealed that the costs of land acquisition - including compensation for demolition and resettlement for the people involved (mainly farmers) - also rose to 1.69 trillion yuan to December. This accounted for 72 percent of land sale revenues.

If farmers are not satisfied over levels of compensation, authorities have to pay them more to avoid protests, resulting in growing debt for local governments and increasing prices for home buyers.

Hua said it is "abnormal" for local governments to draw direct revenue from land sales. Instead, they should adjust and redesign land policies by integrating them with the hukou system, he said.

China's rate of urbanization passed 50 percent in 2011. Urban residents accounted for 51.27 percent of the population in 2011, up 1.32 percentage point from 2010.

Hua said the figure should be about 65 percent at this stage. Japan and South Korea finished urbanization in about 40 years.

The definition of urban residents includes migrant workers who have worked in cities for more than six months. The number of migrant workers rose to about 252 million in 2011.

There are more than 400 million migrant workers and their immediate relatives, about one-third of the population.

The hukou system hinders consumption as urban residents consume about three times as much as rural dwellers.

"In addition, it is a colossal waste of social resources and also the root of social unrest. It has become a major cause of economic and structural imbalance," said Hua.

According to Hua, migrant workers should be allowed and encouraged to exchange or transfer contracting rights for farmland for land earmarked for property.

Then they should be given financial support from public funds to help them settle in cities, accompanied by a host of supporting measures.

Income distribution is another hot topic, Hua said.

To narrow the gap, policymakers should consider more direct taxes, such as property tax, personal income tax and inheritance tax, while lowering indirect taxes, Hua said.

"Contributions from other sources, such as land revenues, rather than tax revenues, accounts far too much for fiscal revenue, and redistribution is obviously tilting toward urban dwellers, " he said.

A long-awaited income distribution framework was scheduled to come out in December, according to media reports. But it now looks set to come out this year, according to the National Development and Reform Commission, the top economic planner.

lanlan@chinadaily.com.cn