Hangzhou's Disease: Relying on Land Sales for Development

By Chen Zhe, Chen Zhouxi
Published: 2010-10-28

Nation, page 14, Issue 491, October 25
Translated by Tang Xiangyang
Origina article

In 2010, Hangzhou topped the list of mainland cities with the highest property costs.

The city had set strict rules for managing land grant fees and the fees have contributed to the development of local economy. However, the large land grant fees have also led to surging property prices.

Hangzhou's careful management of its land had greatly contributed to modernizing the city, but while land development may be positive for the appearance of a city, it increases the cost of living, rent and industry, eroding the health of the local economy.

The Government’s Hidden Income

The EO has learned that the huge investment development project, Hangzhou Xixi Wetland, plans to earn an income of 200 million yuan from tourism next year, establish itself as a 5A scenic spot in two years, and be listed on the A-share market in five years.

Tourism income aside, housing prices around the Xixi Wetland have risen to around 20,000 to 30,000 yuan per square meter.

And Xixi Wetland is just one example.

In 2009, the government fund absorbed 55 percent of Hangzhou’s 120 billion yuan in land grant fees. The remaining 45 percent went to the local land reserve center. The entire revenue from land grant fees went toward public use.

Last year, Hangzhou gained fiscal revenue of 52.07 billion yuan and spent 49.03 billion yuan.

However, according to materials leaked from an internal meeting, the city received 45.43 billion yuan in governmental fund revenue last year, among which, 43.90 billion yuan, 96.8 percent of the total, came from land sales.

The materials reveal that the city government was permitted to use 26.81 billion yuan from the governmental fund; 11.33 billion yuan of the land grant fees could be used in urban construction and management, indicating that over 40 percent of Hangzhou’s land grant fees could be used in urban construction and management.

According to an anonymous source from the local fiscal bureau, the budgetary fiscal revenue and governmental fund are two main sources of governmental revenue: one public, the other concealed.

According to the 2010 local budget projections, the city government will receive 79.28 billion yuan, 75.5 billion yuan of which will come from land grant fees. Based on the statistics, Hangzhou has to receive at least 130 billion yuan in land grant fees; otherwise it cannot carry out its budget. 

Behind the Beautiful City

In the past few years, tremendous changes have taken place in Hangzhou. The city has been named as one of China’s best places to live.

The changes come from local government investment in reforms. According to a report released by the Hangzhou Bureau of Statistics, from 2003 to 2008, the city invested 232.15 billion yuan in improving infrastructure, creating an annual growth rate of 11.4 percent. Chen Jinmei, director of the Hangzhou Municipal Finance Bureau, said that before the 1990s, Hangzhou spent less than 200 million yuan in urban construction every year, including the expenditure per capita of the local construction department.

The surge in land grant fees is responsible for the change.

From 2007 to 2009, Hangzhou had spent 9.21 billion yuan, 13.8 billion yuan and 12.09 billion yuan each year in urban construction, management and comprehensive protection, accounting for 25.44 percent, 55.51 percent and 45.08 percent respectively of Hangzhou’s entire fiscal expenditure.

It is worth mentioning that during those three years, the government spent 8.86 billion yuan in 2007, 11.85 billion yuan in 2008, and 12.08 billion in 2009 of the total governmental fund, which relied mainly on land grant fees to source its income and the pay for the costs of management and safety measures. That’s to say, Hangzhou owes its magical transformation to exorbitant land grant fees.

The city’s improved image has boosted the local economy, especially its tourism industry. According to statistics, the growth rate of Hangzhou’s tourism revenue reached a historical heigh in the first half of this year.

Additionally, Hangzhou’s economy now ranks No. 5 among 35 Chinese cities. The first four cities are Beijing, Shanghai, Shenzhen and Guangzhou.

Above is the positive side of the coin.

The Ailing Real Economy

Inside the city, dangers brought about by land operations have intensified.

Wei Yiguang, director of the operation department of the Hangzhou Municipal Economic Committee, said that the ability for local investment to drive the industrial economy has weakened and industrial investment is decreasing. “It’s mainly because of the inadequate land supply and the surging cost of energy that it is becoming difficult and risky for companies to invest in projects.”

Hangzhou’s industrial investment increased by 7.0 percent in 2009, a growth rate 8.7 percentage points lower than that of fixed-asset investments. From January to August this year, the gap between the former two was still at 8.5 percentage points. The over dependence on land sales has lead to high prices, and local industries are under pressure to maintain development. 

The high price of industrial land and the expensive rentals of office buildings are not the only problems for Hangzhou companies. “Labor costs are lower in Hangzhou than in Beijing, Shanghai, Guangzhou and Shenzhen. But employees face the highest housing prices in the country. Under these pressures, employees must choose to leave or the companies must offer them higher salaries.”

Statistics show, labor costs in Hangzhou rose 28.52 percent in the first eight months of this year compared with the same period last year. The Hangzhou Municipal Economic Committee has warned in a report that labor costs may steadily rise in the future. 

The Hangzhou government has admitted in its budget report this year that, “Our city has relied on policy-based revenue and increased revenue from the real estate sector to maintain our growth rate and high levels of fiscal revenue in 2009. The momentum to drive the real economy up is still inadequate.” It also states that Hangzhou will “accelerate plans to restructure the economy and feed sustainable sources of fiscal revenue.”

The State Council has placed high hopes on Hangzhou. In its latest “Plan to Develop the Yangtze River Delta”, Hangzhou will be required to set high-tech industry development as its top priority.

However, Hangzhou’s high-tech industry has been shrinking since 2007. The EO has learned that in 2008 the value of Hangzhou’s high-tech industry ranked No.9 among China’s top 13 leading high-tech industries and accounted for 26 percent of Hangzhou’s total industrial value. Last year, the percentage was 24.88.

“The ranking might be flawed because different cities have different ways of calculating and gathering data.” However, the local official admitted that Hangzhou had done an unsatisfactory job in importing large high-tech projects.

The local government recognizes the need to “supply blood” to the real economy.

The implementation report of Hangzhou’s 2009 budget shows that the city has invested 10.07 billion yuan in tax reductions for local companies and another 3.03 billion yuan in developing industries, the modern services sector, and technological development. The local government also plans to provide financing and support for local enterprises. In 2010, it plans to invest an additional 3.44 billion yuan in reducing carbon emissions, promoting foreign trade and the private economy.

According to Wang Xingming, director of the high-tech department of the Hangzhou Municipal Economic Committee, the city government is prepared to spend 1.1 billion yuan on improving technology, aiding small and medium-sized enterprises, and developing the heavy chemical industry. “This money is already in place. It will play an important role in promoting local high-tech industries.”

“This is only a temporary solution. We still haven’t found a way to solve the problem of overdependence on the real estate sector,” said a local analyst.

This article was edited by Ruoji Tang and Rose Scobie