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✪ zhao yanjing | xiamen university

【guide】 today (september 24), the central bank announced that it will lower the interest rate of existing mortgage loans and unify the minimum down payment ratio for mortgage loans, guiding commercial banks tothe interest rate of existing mortgage loans has dropped to the interest rate of new mortgage loansthe average drop is expected to be around0.5 percentage pointsat the same time, the minimum down payment ratio for first and second home loans will be unified, and the national levelthe minimum down payment ratio for second home loans has been reduced from 25% to 15%., reaching the lowest level in history. as soon as the news came out, it immediately triggered heated discussions across the internet. amid market expectations, lowering the interest rate on existing mortgage loans is a complex issue involving the interests of multiple parties.

this article points out thatchina's urbanization has now entered the second half, that is, from the capital-based growth stage relying on land finance to the operational growth stage centered on the housing system.during the transformation process, local government fixed investment, which had been growing very fast, will drop sharply, and the economy driven by land finance will lose momentum, thus exposing various problems.operating costs are increasing rapidly and the city’s cash flow (taxes) is becoming increasingly tight.this results in a city being successful in the first half of its infrastructure investment, but gradually eliminated because it cannot generate sufficient cash flow income in the second half of its operation.

the author believes thatin the second half of china's urbanization, taxation and consumption will replace investment as the main driving force for local economic growth. at this time, the real growth constraint comes from effective demand, that is, the size of the local market.this is not only related to the core competitiveness of the city, but also the backing for china to participate in global competition.if china wants to create a world-class local market, housing is also indispensable.because under the condition of a certain total social wealth, the gap between the rich and the poor will have a huge impact on the depth and scale of the market. only by narrowing the gap between the rich and the poor can we reduce the budget surplus held by the rich, stimulate national consumption, and expand the market scale.china's most important capital market is the housing market. only by allowing everyone to own housing can the whole society fairly participate in the secondary distribution of urban wealth and enjoy equal public services, and effective demand will be expanded to the extreme.

the second half of china's urbanization

the topic is very broad and the time is very short, so i can only talk about the simplest logical chain and core conclusions.

(picture from "national strategy")

in order to avoid the impact of ambiguity in basic concepts on subsequent discussions, let me first clarify what the "city" mentioned here is?in my concept, a city is a collection of public (product) services.the so-called public (product) services are not services that do not require payment, but services that everyone needs in urban economic activities. for example, every factory needs roads, electricity and water supply...; every family needs schools, hospitals and fire protection... if each economic entity is allowed to provide these public (product) services by itself, each economic entity must bear the heavy burden of assets. in the planned economy era, the chinese government invested very little in urban infrastructure, and as a result, enterprises were forced to "run the society" and bear the responsibility themselves. practice has proved that the cost of this approach is very high. the role of the city is to concentrate the infrastructure needed by everyone - we call it "public (product) services" - and provide it uniformly by a "company" called the government, thereby greatly reducing the capital threshold for market activities.

based on the above discussion, we can draw several conclusions: (1) the essence of a city is a place for trading public (product) services; (2) the government is the main body providing public (product) services; and (3) all other economic entities other than the government pay for the use of public (product) services through taxation.in this sense, it can be said that cities and the governments that provide urban public (product) services are at the core of the entire market economy and provide a platform for all economic activities.since cities gather all the heavy assets of economic activities, the biggest feature of the local government business model is huge investment; but conversely, it is precisely because of the heavy assets of city governments that families and businesses can operate with light assets. imagine if there were no city governments, each factory would provide its own electricity and water supply, build roads and bridges, and each family would hire their own tutors and family doctors, and the cost would be very high. the real value of cities lies in reducing the operating costs of the entire society through large-scale production and operation of public (product) services.

based on the above unified basic concepts of cities, we can discuss urbanization. as the deepening of public (product) services, urbanization, like any product production, can be roughly divided into two stages:

the first is the capital-based growth stage.for an enterprise, before it starts production, it must first purchase land and add equipment... the same is true for city governments. in the early stages of a city's development, the city government must first build roads, bridges, airports, ports, schools, hospitals, and so on.we can call this stage of only input but no output the capital growth stage.

the second is the operational growth stage.a factory cannot just keep building a factory and buying equipment. once the factory is built and the equipment is installed, it must immediately start production and then work hard to sell the products in order to finally make a profit.we can call this stage of recovering investment the operational growth stage.for cities, their operational growth stage is similar to that of enterprises. they must “sell” the city’s public (product) services – attracting investment, absorbing population, and obtaining tax revenue – before they can finally complete the production of public (product) services. obviously, cities at different stages of development should face completely different purposes and have completely different development goals. since the capital growth stage and the operational growth stage are completely different stages of development (they are two completely opposite processes in the sense of capital formation) and have completely different development goals,therefore, what leads to success in one phase (capital growth phase) may have the exact opposite effect in another phase (operational growth phase).after a general analysis of the development stages and laws of urbanization, the next question we need to answer is what stage of urbanization is china in?

in my personal judgment, i believe that china's urbanization 1.0 stage, that is, the capital-based growth stage, is coming to an end, and the second half of urbanization, that is, the operational growth stage, has begun.although official statistics show that china's (population) urbanization level is only 60.6% (2019), the infrastructure required for china's spatial urbanization - roads, pipelines, airports, etc. - has approached or even exceeded the scale required for my country's urbanization to reach a stable stage. a simple data can show this trend. in 2015, the area of ​​my country's urban built-up areas plus industrial and mining land exceeded 100,000 square kilometers. according to the loose standard of 10,000 people per square kilometer, even if china's urbanization construction stopped immediately in 2015, the built-up urban areas that have been built are enough to accommodate 1 billion people. but we know that china's urbanization did not stop in 2015. as of today, the area of ​​urban built-up areas that have been built is estimated to accommodate 80% of china's total population.

this means that, on the surface, china's population urbanization rate is only 60%, but in reality, most of the related fixed investment has been completed ahead of schedule. this phenomenon of disconnection between urban built-up areas and urban population is rare in other countries around the world. in other countries, the built-up area is generally the same as the urban population. the city government completes capital accumulation and then builds cities based on the increase in the new urban population. the reason why china has a completely different urbanization phenomenon from other countries is closely related to china's unique model of relying on land to finance urbanization.in the first stage of urbanization, the biggest bottleneck faced by local governments is capital shortage.at this stage, whoever can create capital can achieve faster development. the financing efficiency of land finance of local governments in china far exceeds other financing methods, so china can complete the capital-based growth stage of urbanization at a speed and scale rarely seen in the world.

figure 1 capital market size and comparison of major countries in the world

figure 1 shows how staggering the scale of land financing in china is.if we compare some of the most powerful capital markets in the world, we can find that japan's stock market is 6 trillion us dollars and its real estate market is 10 trillion, which together is about 16 trillion us dollars; the eu stock market is 20 trillion us dollars and its real estate is also about 20 trillion us dollars, totaling 40 trillion us dollars; the us stock market is about 30 trillion us dollars and its real estate market is 30 trillion us dollars, totaling about 60 trillion us dollars; while the size of china's stock market is only 6 trillion us dollars, which is comparable to that of japan, but the market value of real estate alone is as high as 65 trillion us dollars, which exceeds the combined size of stock and real estate markets in other countries.this is why china's spatial urbanization will be much earlier than its population urbanization.

based on the above analysis, we can draw a conclusion that the first stage of china's spatial urbanization is coming to an end.so the next question that needs to be answered is, what are the development characteristics of the urbanization 2.0 stage that we are about to enter?can land finance still play a similar role as it did in the urbanization 1.0 stage? figure 2 shows the changes in the cost of local government providing public (product) services during the urbanization process from 0 to 100. in the early stages of urbanization, the funding gap for local government investment in infrastructure is particularly large. at this time, as long as capital can be obtained, the city can achieve rapid development. land finance just meets the financing needs of local governments at this stage.however, once urbanization enters the second half, the city’s infrastructure will have been basically built, and the local government’s investment demand will also decline.since the fixed investment of local governments grew very fast in the first half of urbanization (the capital growth phase), once urbanization enters the second half (the operational growth phase), the fixed investment of local governments will also decline very steeply.many local governments found that their previously fast-growing economies suddenly lost momentum.

when entering the second half of urbanization, although local governments sold land at higher prices, they could not find enough investment projects to obtain capital income, and capital became no longer scarce.during this phase, operational costs increase rapidly, making the city's cash flow (taxes) extremely scarce.the so-called operating income is relative to capital income. the income from land sales is capital income, which is essentially the money borrowed by the city government; taxes are operating income, which is essentially the money earned by the city government. they both look like "money", but because the two are obtained in different ways and channels, the corresponding expenditures are also different. capital income (such as land sales) can only be used for capital expenditures (such as fixed investment); operating income can be used for operating expenditures (such as wages, social security, and welfare).

when urbanization enters the second stage, operating expenses will grow rapidly. since these expenses cannot be covered by capital income (in reality, many city governments have no problem selling land, but have difficulty paying social security, pensions, and even wages), they can only rely on operating income. as a result, operating income replaces capital income, becoming a bottleneck restricting local economic development in the second half of urbanization.just now, xiao lu said that government spending should be shifted more to people's livelihood and provide better public services. i completely agree, but the premise for this policy shift is that the government must have sufficient tax revenue. if obtaining sufficient capital is the premise for achieving high-speed growth, then obtaining sufficient tax revenue is the premise for achieving high-quality growth. the government's reduction in fixed investment does not mean an increase in tax revenue, because the money used by the government for fixed investment is borrowed from residents with the surplus of investment as collateral. if the government does not make corresponding investments, this money will not exist at all.this is similar to the fact that a person's mortgage can only be used to buy a house. once you don't buy a house, the money is gone. therefore, the mortgage cannot be used to pay water, electricity, property fees, etc.the same is true for cities. schools, hospitals, social security, pensions, infrastructure operation and maintenance... these funds can only be covered by general fiscal revenue. the money from land sales and general expenditures are two different sums of money.

based on this, we can conclude that the economic characteristics of the second half of urbanization are: (1) capital income (such as land sales) is no longer important, and operating income (such as taxes) has become a new constraint on growth; (2) investment is no longer the main driving force for the economy; the new driving force comes from effective demand - the local market has become the core competitiveness of the city. these two characteristics mean that in the second half of urbanization, the most important economic goals of local governments are:one is taxation, the other is consumption.both of these points are closely related to household investment.

in the urbanization 2.0 stage, most of the heavy assets of government departments have been completed, and the demand for investment mainly comes from the corporate and household sectors. among them, the heavy assetization of the household sector is the key to whether the urbanization 2.0 stage can create sufficient investment demand.the household sector is what we have neglected during the urbanization 1.0 stage: (1) if the cost of living for households is high, the labor cost will be high; if the labor cost is high, local enterprises will lack competitiveness; and since local government tax revenue in china mainly comes from enterprises, if enterprises are weak, the government’s tax revenue will be greatly affected; (2) if households lack property income, consumption will be insufficient; and if consumption is insufficient, it will be difficult to expand the market size, and tax revenue and employment related to consumption will be insufficient.

in china's tax structure,the main cash flow income of local governments comes from the corporate sectorthe cost structure of a business sector determines its ability to generate cash flow.the most important item in the operating costs of an enterprise is labor cost.;the price of labor is closely related to the main expenditure structure of the household sector.the most important cost for the household sector, that is, the most important cost of labor, is housing cost.as long as the cost of living remains high, all economic activities related to labor will face huge cost pressures. it can be said that the availability of low-cost rental housing in a city determines whether the city can continue to support the survival and development of the manufacturing industry. if the cost of living is very high, resulting in excessively high labor prices, companies will move out of the city, and tax revenue and employment will also be lost.although a city is built and has achieved success in the urbanization 1.0 stage, if the infrastructure investment does not generate enough tax revenue,the government cannot obtain sufficient cash flow income, and the city may still be eliminated in the urbanization 2.0 stage.——we will see more and more cities experiencing a net outflow of population due to a lack of low-cost housing, which will in turn trigger a large-scale relocation of businesses.

china currently does not have a mainstream supply channel for low-rent housing. many functions of low-cost rental housing are undertaken by informal "urban villages". in recent years, the gap between urban development in the south and the north has become increasingly larger. in the study of explaining this phenomenon, the proportion of urban villages in the total urban built-up area should be a variable with great explanatory power.the semi-illegal urban villages in many southern cities make the availability of low-cost rental housing much higher than in northern cities. it is these low-cost housing that allow the manufacturing industry with meager profits to survive in big cities with expensive land prices.shenzhen, where urban villages account for as much as 60%, has almost single-handedly borne all of the us's blow to china's manufacturing industry, and informal housing has played an indispensable role in this.

when entering the second half of urbanization, the 2.0 stage, the production of public (products) services has basically not constrained economic growth. at this time, the real growth constraint comes from demand - the products produced are difficult to sell. today, china already has the world's most powerful manufacturing industry, but many of the products produced cannot be digested by the country at all, and can only rely on the external market provided by developed countries such as europe and the united states.in an era of oversupply, the party that owns the market will enjoy huge consumer surplus. from the perspective of creating a domestic demand market, shenzhen, which has gained a low-cost advantage by relying on informal rental housing, may lose to its long-term rival, guangzhou.although shenzhen's economic output surpassed guangzhou not long ago, guangzhou has contributed a much larger market share to the regional economy and even the national economy. in 2019, guangzhou's total retail sales of consumer goods reached 997.559 billion yuan, while shenzhen's was only 658.285 billion yuan, not only lagging behind shanghai, beijing, and guangzhou, but even worse than chongqing, chengdu, and wuhan, ranking seventh in the country.

the housing structure dominated by informal rental housing is the main reason for the above phenomenon. the most intuitive explanation is that housing is the heaviest asset investment of a family and also the basis of its consumption. only those who own a house will buy durable consumer goods such as cars and refrigerators. otherwise, even if you have money, you cannot bring the goods from the store home because you don’t have a home.a deeper reason is that although informal rental housing can reduce living costs, it also limits residents' participation in the secondary distribution of social wealth and inhibits the growth of family wealth.the so-called secondary wealth distribution refers to the distribution of new social wealth among residents brought about by the government’s public investment (such as roads, green spaces, subways, schools, airports and ports, etc.). this process is mainly achieved through the appreciation of real estate.whether or not you own property determines whether or not you can participate in the secondary distribution of wealth. in this wealth redistribution mechanism, the wealth increase brought to the household sector by property income is far greater than general income (wages). this is why in china today, families can be divided into two classes based on whether or not they own housing.

it can be said that a correct housing system is the key to solving the two major problems in the second half of urbanization: labor costs and household consumption. if you want to lower the threshold for entering the city, houses should be rented out; if you want to obtain property income, houses should be sold.faced with a dilemma, the best solution is neither renting nor selling, but combining renting and selling - renting first and then selling: at the beginning, the residents have low incomes, so the government wants to allow them to lower their living costs by renting houses, so that these people can work and live in the city. after they earn income and pay taxes to the government for a sufficient number of years, the government will sell them houses at cost price, and the rent can be counted as a mortgage. in this way, a path for urban workers to obtain urban housing at a low price is designed.in the process of these people "renting" houses, companies also obtain cheap labor, and the government obtains corporate taxes; after the government "sells" the houses, household consumption will bring markets to businesses, and the government can also obtain taxes through consumption.the urban economy naturally shifted from being driven by "land sales-fixed investment" to being driven by "taxation-consumption". "rent first, sell later" is actually an expanded version of the 1998 housing reform, which also created china's first batch of property owners by selling long-term leased public housing to tenants at low prices. it is these property owners who support most of china's domestic demand today. from the actual effect of the 1998 housing reform, it can be seen that the consumption of families with and without houses is at completely different orders of magnitude.

in the era of globalization, facing the overcapacity economy, the internal market is the backing for participating in global competition.it turns out that china is mainly involved in the production link in the global division of labor. both ends of the smile curve - upstream capital and downstream market - rely on developed countries. from the current sino-us trade war, we can see that only the party with the market can have the main field of global competition. without the market, it will be controlled by others everywhere. the stronger the production capacity, the weaker the negotiation power - because your products cannot be sold, your production capacity cannot recover cash flow, and the production capacity that needs to be continuously depreciated and paid interest will become your negative asset.in the second half of urbanization, if china wants to gain a voice in global competition, it must have strong local demand. when china's domestic demand exceeds that of the united states, any industrial chain that decouples from the chinese market will be courting death. closing the door to china will only lock itself out.

if china wants to create a world-class local market, it also cannot do without housing, because the market size is not only restricted by the amount of wealth, but also by the distribution of wealth.under the condition of a certain total social wealth, the gap between the rich and the poor will have a huge impact on the depth and scale of the market.the consumption function includes two variables: utility and budget. only the intersection of positive utility and positive budget can constitute effective demand. in other words, demand is effective only when you have both demand and sufficient budget. in a society with a huge gap between the rich and the poor, the rich will have a lot of budget left after their consumption desires are fully satisfied, while the poor will have a huge consumption desire (utility surplus) but not enough budget.although social wealth seems huge, effective demand is smallin a society with equal wealth, both the utility surplus and the budget surplus will decrease, and effective demand can maximize the market size.

based on the above discussion, we can transform the problem of market size into the problem of narrowing the gap between the rich and the poor. how to narrow the gap between the rich and the poor? the traditional approach is to start with cash flow income and narrow the gap between the rich and the poor through taxation. piketty's research in "capital in the twenty-first century" shows that this approach has little effect. therefore, we cannot only equalize the rich and the poor at the end of the income stage, but must start from the source of capital. the most important capital market in the united states is the stock market. if the united states wants to equalize the rich and the poor, it must allow stocks to be evenly owned among residents. the most important capital market in china is the housing market. if chinese houses cannot be owned by everyone, the gap between the rich and the poor cannot be fundamentally eliminated.only by allowing everyone to own housing can the whole society fairly participate in the secondary distribution of urban wealth, enjoy equal public services, and effective demand will be expanded to the extreme.

finally, here are a few simple conclusions: as china enters the second half of urbanization——

(1) taxation will replace financing (selling land), and consumption will replace fixed investment as the most important competitive advantage of cities.in the future, the competitiveness of a city should not be evaluated by the amount of investment (fixed investment), but by its cash flow (tax revenue). a city that can sell land is not necessarily a capable city. the real capability lies in the ability to generate tax revenue.

(2) the household sector will replace the government sector as the core of growth.in urbanization 1.0, it was mainly the government and corporate sectors that made heavy asset investments, but in urbanization 2.0, it is the households that have to make heavy asset investments. among the family’s assets, the most important is housing. the function of housing is not only “residence”, it is also the main tool for the family to share social wealth, the carrier of urban public services, and the interface for the family to participate in the social division of labor.

(3) labor costs are the key to the corporate sector’s participation in market competition.if the labor force in the city where the enterprise is located is very expensive, the enterprises in this city will not be competitive - even if some enterprises have created new business models in silicon valley and obtained investment, they must move their products to shenzhen for production. therefore, low labor costs are very important for the survival and competition of the manufacturing industry, and the manufacturing industry is the basis for the government to obtain population and tax revenue in the urbanization 2.0 stage.

(4) the local market is the main arena for global competition.only with a strong home field can we have a say in the global division of labor. in a world economy with oversupply, only consumers can punish producers, but producers cannot punish consumers. in the second half of urbanization, it is not only production that matters, but also consumption. the economy with the largest market will also upgrade production first.

(5) housing determines business costs and local markets.first, housing can reduce the cost of enterprises. the singapore government has reduced the labor cost of enterprises by building public housing, so enterprises will move to singapore. hong kong's high housing prices have pushed up labor costs, so enterprises will move out of hong kong, and the city's economy will become hollowed out. second, housing can expand the local market because of its crowding-in effect on consumption. through the secondary distribution effect of housing, the rich and the poor can be evenly distributed, so that people with consumption desires have consumption capacity, thereby maximizing the market size.

(6) how to effectively solve the housing problem?we must fully learn from the experience and lessons of the previous affordable housing construction, that is, the construction of affordable housing cannot rely solely on government investment and be considered as welfare provided by the government, but through the design of financial systems, the labor income should be capitalized. simply put, it is "rent first and then sell" - by "renting" first, lower the threshold for families to enter the urban division of labor; by "selling" later, complete the heavy assets of the family sector.

china's urbanization is about to enter the second half, and there are many strategies to deal with it, but the core of them is the design of the housing system. any strategy must grasp the core of the problem and avoid "multiple ends and few essentials".if the design of the land system was the core of competition among urban governments in the first half, the design of the housing system should be the core of competition among governments in the second half of urbanization.there will be no successful urbanization without solving the housing problem.

thank you everyone!