Li Seeks Reform With Urbanization Proposal

Sources tell Reuters that Chinese Premier Li Keqiang rejected an urbanization proposal from the National Development and Reform Commission (NDRC), citing concerns over the risks of another debt-funded spending binge at the local government level:

To fund the urbanization plan, local governments would issue long-term bonds to finance spending on roads, housing and social safety nets, Reuters reported in March, quoting sources with ties to the leadership.

But a fiscal overhaul is needed because local governments don’t have steady tax revenues to back the issuance of bonds. Under China’s tax structure, in place since 1994, the central government gets most receipts while local governments do the spending, forcing them to rely on land sales for survival.

To support the process, Beijing needed to overhaul its land and tax codes as well as free up the rigid residency registration, or “hukou”, system to give migrant workers access to education, health and other services where they work, experts have said. Li wanted more detail on these sorts of reforms in the plan, the sources said. [Source]

While Reuters also reported that Li and President Xi Jinping preferred reform to any short-term economic stimulus, The Economist asks why they can’t pursue both:

Just as structural reforms have implications for demand, the converse is also true: efforts to boost demand can affect the course of structural reform. China’s 2009 stimulus lending was successful in reviving demand. But it also had some damaging structural side-effects. It further skewed the economy in favour of investment, especially property construction; it made a mess of local-government finances; and it forced China’s banks to serve government ends, thus delaying their evolution into commercial lenders.

The stimulus had one other damaging side-effect—on China’s economic philosophy. Many analysts now seem to believe that all stimulus measures delay reform, if only because they ease economic pain without which policymakers will not act.

That is a mistake. Stimulus does not need to be at odds with reform. Cutting taxes or increasing social spending would both stimulate the economy and help rebalance it towards consumption and services. Likewise, many structural reforms, such as removing barriers to entry in industries now dominated by state-owned enterprises, would also simultaneously help to boost spending. The Chinese economy clearly needs reform and may soon need revival. There is no reason why the leadership cannot do both. [Source]