China’s post-lockdown recovery, after taking a tragic human toll during reopening, is spurring some optimism. Last week, the International Monetary Fund raised China’s growth forecast to 5.2%, up from its October assessment of 4.4%. Observers are hopeful that the rebound will be good news for the global economy, too.
This optimism is misplaced.
The Chinese economy has deep-rooted problems. I wrote last year about a particularly damaging problem: local governments’ lack of incentives to grow the economy. But just last week, Beijing made yet another misguided move that hurt those incentives even further.
Local governments in China have played an instrumental role in the country’s impressive economic growth over the last few decades. That’s because of how local authorities are fiscally rewarded. Since 1994, local governments have been required to share a large fraction of the tax revenues they collect with Beijing. But in return, they get to keep all the revenues from selling public land to developers.
WHAT CHINA’S BALLOON WAS DOING
Naturally, local officials have done what they can to make the most out of land sales, including building business-friendly environments to make each parcel of land worth more in private hands. Some local governments have even given out free electricity and water if that helped win a factory over from the next town. Local officials understand the economics very well: When their economies take off, so do proceeds from land sales, which eventually grew to nearly half of their dough.
But that was before Beijing made a subtle-yet-consequential change last year when it announced that it would take over the collection of land sales revenues and return the funds to local governments only afterward. Fast-forward to last week, when a leaked document circulated in China revealed that, in addition to not collecting the proceeds, local governments are also required to publicize each parcel of land they intend to sell at least three months ahead of time. The amount of land for sale is required to be “close to” the previous three years’ average.
Last year, I made this analogy: Imagine working your same job but having the Chinese government handle your paychecks. If that makes you feel uneasy, imagine that now you also need to submit work plans to Beijing at least three months ahead of time and work only about as hard as you have during the past three years.
Beijing may have had good intentions when it required local land sales to be more transparent. The move brought (mainland) China closer to the land allocation system in Hong Kong, which has worked well given the city’s scarcity of land and other natural resources. But officials in Beijing have forgotten a crucial difference: Land sales revenues might be nice for the Hong Kong government to have, but they are a lifeline to local authorities on the mainland. Chinese leaders are deluded to think that planning people’s lifelines from their armchairs can lead to any good result.
To paraphrase Friedrich von Hayek, once we think through how the Chinese economy works, it becomes abundantly clear how little the Communist leaders really know about what they imagine they can design. Those who are hoping for a strong economic recovery may have to hold their breath a little longer.
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Weifeng Zhong is a senior research fellow with the Mercatus Center at George Mason University and a core developer of the open-sourced Policy Change Index project, which uses machine-learning algorithms to predict authoritarian regimes’ major policy moves by “reading” their propaganda. He’s also the curator of the Wei To Think Again newsletter on U.S.-China competition.
