#29 event report: Rich and Poor. China’s Unfinished Economic Transformation

October 15th, 2013, Bridge Café (Wudaokou)

Speaker: Prof. TAO Ran, Professor, School of Economics,  Renmin University of  China

Special screening of excerpts from the documentary: China Rural Economy by Dr. Michele Geraci, Head of China Economic Policy Program, University of Notthingham in Ningbo, China 



This month’s ThinkInChina event came with the added bonus of a special preview of part of a series of documentaries entitled “China Economy and Society,” put together by the head of the China Economic Policy Program, Dr Michele Geraci of Nottingham University in Ningbo, China. With the knowledge that traditional written reports are rarely read, this documentary series has been created with the intention of more effectively – and widely – conveying the research the CEPP has done into various aspects of the Chinese economy. The excerpt came from the first episode of the series, ‘China’s Rural Economy.’

The clip shown examined Chinese economic growth from the perspective of the countryside and the farmers who have, notably, not taken part in the mass migration of people out of rural areas into the cities. The latter largely stemmed from, and was supported by, Deng Xiao-Ping’s policies of 1978 but the documentary discussed what the future for this movement is – an important question since China’s current growth still relies heavily upon it. Interspersed with interviews with farmers voicing their attitudes towards their own land and the possibility of moving to the cities, Geraci takes the viewer through the potential future of China’s current migration to the cities.

While individuals’ views spanned from ‘I’ll go wherever I can make money’ to ‘the countryside is, and always will be, my home’ there was an underlying assumption that everyone – having moved to the city – will eventually want, or indeed need, to return home as a result of the hukou household registration system (which continues to bind people to their original place of residence in order to receive services.) Evidently, this impacts upon levels of migration as some conclude, if return is inevitable, there’s no point leaving in the first place. However, with the proportion of urban residents in comparison to rural ones crossing beyond the 50% threshold last year, it is clear that migration is still very much taking place. The clip ended by speculating that, with a narrowing gap between urban and rural living conditions and the continuation of the hukou system migration levels are surely set to decrease, with an inevitable impact on China’s economic growth.


This point of view was echoed by Professor Tao in his talk on China’s development model and urbanisation. Leading with a bold statement of pessimism with regards to reform, Professor Tao promised to outline why economic reform here in China is tremendously difficult to enact and yet why, in order to avoid crisis, it is absolutely essential to do so. The speaker first addressed the reportedly false assumption that China’s centralised political system is the reason behind recent growth, directing the audience to focus more attention upon the role of local leaders rather than that of the centralised government.

The second misconception addressed by Professor Tao was with regards to the ever-increasing rise in China’s house prices. While this meteoric rise over the past few years is often attributed to the 200million migrant workers who have moved to the cities, Professor Ran points out that only 1% of these can afford city housing. Instead, most are forced to live in dormitories or basements.Moreover, permanent residency in the cities is still relatively difficult and, indeed, uncommon for those coming from the countryside, largely as a result of the hukou household registration system which prevents rural children from attending urban schools – often forcing mothers and children to leave the city for schools. Thus labour shortages occur as a result of systems and the institution (i.e. hukou and land systems,) rather than a natural shortage of workers.

Thus, to examine the truth behind China’s growth, the speaker gave his own view: China’s growth during the last two decades has indeed in many ways typified the type of growth and development occurring throughout East Asia (mostly involving elements of ‘labour suppression, financial repression and industrial policies’ and all managing to avoid the pitfalls of a largely non-consumer society through the successful development of export-oriented industries.) However, crucially, China — even by East Asian standards — is an extreme model of development: an extremity achieved only, he argues, through the high level competition for investments created by Chinese local governments’ actions.

This extreme model of development, Professor Tao argued, will at some point inevitably reach a breaking point. With an eye to examining the model itself, the speaker posed the puzzle of why there hasn’t been a decrease in productivity and growth within the provinces, since the tax sharing reform of 1994 significantly decreased the amount they gained from taxes. However, conversely, in the case of China, it seems that the incentive to promote economic growth has been maintained. The speaker therefore encouraged the audience to consider what factors have caused the local government to exponentially encourage growth in their provinces despite the fact that they are seemingly receiving less reward for doing so?

He outlined how the centralised government orchestrated a heady combination of cheap RMB, cheap production costs, little adherence to labour and environmental regulations and the possibility of buying land at a negative price (i.e. . the land requisition costs plus the cost to develop the land total more than the investment price) in order to attract investors, though largely at the cost of farmers’ and labourers’ interests. China thereby became an extremely appealing investment and has speedily amassed lots of foreign reserves. While purchasing of manufacturing land yields very little income to local governments (as the price at which it is sold is so low,) the area in which they make money comes from residential and commercial land. With an influx of manufacturing industry, services inevitably spring up around these areas in order to provide for these estates. Therefore, a demand for housing and service land becomes an important potential area of income. Through over-supplying cheap manufacturing land (albeit at a loss,) a demand for residential land which is then under-supplied gains enough income for the government to pay back the loan they originally made from state-owned banks. However, the speaker went on to describe the effects of the global financial crisis of 2008, when the purchasing and investment power of most countries dramatically decreased – the government consequently using a stimulus package of 44 trillion to keep the economy going.

The talk concluded with the question of what happens when this housing bubble bursts? And, indeed, Professor Tao posited that it cannot last forever. While, for now, it is still encouraging tremendous economic growth and yielding high revenues, it is also reinforcing issues of inequality, corruption and pollution, to name but a few. The state monopoly is not providing good jobs for graduates – with systems still relying heavily on the concept of guanxi. The solution? Professor Tao advocated the possible reform of de-monopolising the urban land market and allowing farmers and migrants to personally let, and then, eventually, sell properties on their own land. With the requirement that houses must, within a stated timespan, be sold this disincentives speculators to speculate. Farmers in this deal may then give up some land to the government on which urban schooling and services can be built. Demand for manufacturing and industry will thereby once more rise. The talk ended with a solemn warning of social unrest if reform is not undertaken quickly and carefully.


The talk raised many interesting questions from the floor. One audience-member enquired about the effects of China’s current high-level of debt on the economy. With the startling statistic that China currently has 25trillion RMB of debt – that is to say, 40-50% or local Chinese GDP – Professor Tao speculated that the government would potentially need to sell off residential land at a faster rate than it is now in order to accrue money, a process which could potentially be the trigger for the burst of the housing bubble.

A similarly pessimistic response was given to the question of what China was to do with the 3 trillion USD it has in foreign reserves. While China currently produces half of the world’s steel, according to the speaker the government no longer has the money available to maintain this infrastructure and, he goes on to say, no country on earth has the expertise and certainty of what will occur in the future to manage 3trillion USD effectively. The outcome of such, therefore, is still unknown yet, worryingly, increasingly uncontrolled.

The discussion was summed up by a more practical examination of what reforms must now take place, according to Professor Tao. Stating that necessary hukou reform cannot take place without land reform first having been enacted, it was pointed out that in order to settle permanently in a city, a migrant would require both affordable housing and equal access to urban schools and thereby remphasising his earlier point that, if China wishes to continue reform, gradual urbanisation and deregulation are necessary. In one final example of the problem China is facing, the Professor showed how it is in areas in which the housing market is still booming – for instance in Beijing and TianJin – that this suggested route of reform ought to, and will most effectively, occur. However it is precisely these places where reform will not be considered for a very long time because provincial governments are currently gaining large sums through the monopoly they have on this land.

(report by Clio Chartres)