· The full text is 4500 words in total and takes about 8 minutes long
· Source of this article: Liu Shengjun's overall view (produced by Liu Shengjun Micro Finance)
Text: Liu Shengjun
For local governments, local financing platforms are a "great invention".
On the one hand, some local governments are struggling to "ensure wages, operation, and basic livelihood", but on the other hand, they are engaged in "capital investment" in a big way, which can really be described as half sea water and half flame. Behind this, there is a complex game of interests.
I
One of the first words that foreigners learn to do business in China is: attracting investment.
Indeed, since the reform and opening up, local governments have played an important role in economic activities, and it has been increasing day by day, so much so that economist Zhang Wuchang called the competition between county economies the most important underlying code of China's economic miracle.
Internet celebrity temperament economist Zhang Wuchang
Today, China's economy is undergoing a profound transformation to achieve high-quality development. This transformation is a mix of opportunities, pains, and reshuffles, and is inevitably projected into the way local governments behave.
In recent years, there have been several major events related to local governments.
Change 1: When the sea is low, some local government projects run aground on the beach like whales.
The world's martial arts, only fast is not broken. Some local officials blindly embark on projects, and their small calculation in their hearts is to "make political achievements quickly", attract the attention of their superiors, and then promote and leave. Unexpectedly, in the past few years, the central government has vigorously guarded against risks and pushed finance back to its roots by thunderbolt means, and even giants such as HNA and Evergrande have been "cleared", and some local "performance projects" and "image projects" can be imagined. The first to be exposed was the "No. 1 Water Division Building in the World" in Dushan County, Guizhou.
Recently, the Central Commission for Discipline Inspection has exposed two more typical examples:
1) Li Zaiyong, former vice governor of Guizhou and vice chairman of the Chinese People's Political Consultative Conference, promoted the construction of 23 tourism projects during his tenure as secretary of the Liupanshui Municipal Party Committee, of which 16 projects have been listed as inefficient and idle projects in Guizhou Province. During the more than three years he was in charge of Liupanshui, the local government has incurred more than 150 billion yuan in new debts, which is equivalent to 25 years of local tax revenue! Not long ago, the incident of a woman entrepreneur who was arrested for "picking quarrels and provoking troubles" for asking for project funds occurred in Shuicheng District, Liupanshui City.
2) During his tenure as secretary of the Xiangtan Municipal Party Committee in Hunan Province, Cao Jiongfang ordered his subordinate officials to go all out to raise debts, resulting in Xiangtan's illegal borrowing of 43.5 billion yuan (about 5 times the local tax revenue), forming 33 unfinished projects, causing bad social impact and major economic losses ().
Change 2: The real estate market is frozen, and the local government is miserable
It's an open secret: real estate is the lifeblood of local governments. In 2019, the proportion of real estate tax and land transfer revenue in local fiscal revenue reached 53%. Not only that, but there are also many state-owned enterprises in the local government itself that are engaged in real estate or construction business. When real estate is booming, local financing platforms can also easily obtain all kinds of financing secured by land or real estate. Compared with first- and second-tier cities, third- and fourth-tier cities are more dependent on real estate due to the weak real economy.
In 2020, the "three red lines" of real estate were born, and the good life of local governments "making quick money" came to an end. Due to the high degree of involvement between the upstream and downstream of real estate, the real estate shutdown has an all-round impact on the local economy. Due to the sharp increase in expenditure and the decline in tax revenue during the epidemic, coupled with the sharp decline in land transfer fees, not only some projects have been forced to run aground, but the pressure on grassroots governments to ensure wages and operations is indeed increasing, and some counties and cities have experienced difficulties in capital turnover. For the long-sleeved local government, there are too few lids and too many teapots to cover. Bai Jingming, former vice president of the Chinese Academy of Fiscal Sciences, pointed out in 2022:
• However, the call for local financial difficulties is gradually rising, and in some areas, and even in some cities and counties in some provinces with large financial resources, there are gradually aggravating difficulties in ensuring the three expenditures of wages, operation and basic livelihood, and the scope and extent of the impact are expanding. In 2019, the central government proposed to make great efforts to solve the problem of "three guarantees" (ensuring wages, ensuring operation, and ensuring basic people's livelihood), and the implementation of the "three guarantees" has become one of the main tasks of macroeconomic regulation and control, and the "six guarantees" proposed by the central government in 2020 also include ensuring the operation of the grassroots level. In December 2021, information about the implementation of the fiscal restructuring plan in Hegang City, Heilongjiang Province, was widely circulated in the society, and concerns about local financial difficulties increased again, and people generally worried that local finances were in a state of crisis.
Some local governments owe funds to private enterprises, and in my opinion, most of the cases are not that they do not want to pay back, but that the local governments do not have money.
It seems that it is no longer possible for local governments not to "live a tight life".
In hindsight, the World Bank and the National Research Center proposed in the "383" plan before the 18th National Congress of the Communist Party of China to "change the government's land sales to state-owned land asset management...... It is far-sighted to clarify that the operating income of state-owned land assets shall not be used in the current period, and its use and performance shall be reviewed and supervised by the people's congress." If there are no restrictions, who will not want to sell more land and spend more money during the term of office? No matter if he floods in the future, the short-term consequences of such behavior are already roaring.
Change 3: "Capital investment" is in full swing in Kyushu
An extremely abnormal phenomenon is that although local governments are in a financial situation, local governments are generous in "attracting investment". The economy is becoming more and more "volatile", and attracting investment will not be an exception. With the "evolution" of investment promotion, "capital investment" has become popular in recent years. The so-called capital investment is that local governments set up various funds as bait to fish. If a company wants to get investment from the local government, it must commit to investing in the local government to build a factory.
Yao Pu, deputy general manager of Guangzhou Industrial Investment, explained:
• The traditional investment promotion model is to give policies and subsidies, but the new model of capital investment promotion is to introduce high-quality projects through market-oriented mechanisms, invest in enterprises through local financing platforms and industrial funds, leverage capital with funds, and introduce industries with capital, so as to introduce a number of outstanding enterprises and play a leading role in regional economic and industrial development.
The scale of the Guangzhou Industrial Investment Fund of Funds reached 150 billion yuan, and the scale of the Guangzhou Innovation Investment Fund of Funds reached 50 billion yuan. In the past two years, Guangzhou Industrial Investment has cooperated with hundreds of leading institutions, leading enterprises, large institutes and excellent teams in the fields of semiconductors and integrated circuits, new energy vehicles, biomedicine and health, and has invested in 94 funds and projects (including 9 projects exceeding 10 billion yuan and 22 projects exceeding 1 billion yuan), with a contracted investment of more than 35 billion yuan, introducing more than 20 major industrial projects for Guangzhou and leveraging social capital of more than 100 billion yuan.
Not only Guangzhou, but also many counties and cities with financial difficulties are also in full swing in terms of capital investment. When things go wrong, there must be demons. The risks brought by "capital investment" should not be underestimated:
1) For local officials, the "political risk" of concentrating the "capital investment" target on popular tracks such as chips, biomedicine, and new energy vehicles is the lowest. But if governments across the country do this, there will be a "synthesis fallacy" that leads to overinvestment. At that time, the photovoltaic industry was rapidly moving towards surplus, which was not unrelated to the promotion of local governments.
The tragedy of "Jiangxi Saiwei" must be taken as a warning. In 2005, Peng Xiaofeng was attracted to invest in Xinyu, Jiangxi, and it was estimated that the investment required 500 million yuan, but Peng Xiaofeng only had 300 million yuan in his account. At that time, he put forward two conditions: one is to require Xinyu to supply electricity 24 hours a day, and the other is to ask the Xinyu municipal government to support 200 million yuan. The Xinyu Municipal Government not only agreed to these two conditions, but also gave them a large amount of subsidies and preferential treatment in various ways every year. In June 2007, LDK was listed on the New York Stock Exchange and set a record for Chinese companies to raise funds for IPOs in the United States. With a net worth of $3 billion, Peng Xiaofeng ranks sixth on the Forbes China Rich List and first on the New Energy Rich List. Saiwei became the first company in Jiangxi Province to be listed in the United States and the second largest taxpayer in the province.
Recently. In the context of rapid development in various places, the situation of the photovoltaic industry in 2011 took a sharp turn. By the time the project was completed, the price of polysilicon had fallen by nearly 90% of the world's largest polysilicon plant, which was built with an investment of 12 billion yuan. In the end, Peng Xiaofeng left Saiwei, leaving a lot of chicken feathers. In the astronomical debt package of LDK, there are arrears from suppliers, arrears from engineering contractors, huge amounts of electricity, water, gas bills, and various arrears from other units and individuals, and the largest is the debt of 12 banks as high as 27 billion yuan.
2) Capital investment exacerbates "competitive distortion". In general venture capital, investors focus on the development prospects of the project itself, and if it fails, it will take risks, and if it succeeds, it can share the benefits. The goal of the local government fund is different: as long as you come to us and invest in a factory. In this way, the goal of venture capital is "alienated". In recent years, due to the difficulty of market-based fundraising, many market-oriented funds can only invest in local governments, and as a result, local governments have become the largest LPs (investors).
According to data from Qingke, an entrepreneurial service agency, in the first half of 2023, the total disclosed capital contribution of state-controlled and state-owned LPs accounted for 71.2%. Wu Shichun, founder of Meihua Venture Capital, ridiculed the current situation of private equity funds in a talk show video:
• I learned to drink in order to grab projects, and I learned to break eggs in order to go to the government to raise funds......
In January 2024, the Shanghai Egg Breaking Sports Association was established in a high-profile manner.
A grand egg-breaking contest
At the two sessions in 2024, He Jie, member of the National Committee of the Chinese People's Political Consultative Conference, deputy director of the Central Economic Committee of the Revolutionary Committee of the Chinese Kuomintang, and deputy secretary-general of the Standing Committee of the Shenzhen Municipal People's Congress, said bitterly:
• Difficulties in raising market-oriented funds. In the first three quarters of 2023, a total of 77 foreign currency funds completed a new round of fundraising, with a year-on-year decrease of 56.4%. Only a few investment institutions can achieve a LP reinvestment rate of more than 50%, and most investment institutions have a very low LP reinvestment rate.
• At present, the structure of investors in the venture capital industry is dominated by government guidance funds and state-owned enterprises, with state-owned background funds accounting for more than 70%, and the diversification of sources in the entire fundraising market has been challenged. Most of the large-amount funds are managed by state-owned background managers. More than half of the RMB funds of more than RMB 1 billion are managed by state-owned background managers, while all RMB funds of more than 10 billion yuan are managed by state-owned background managers.
In the long run, the "market-oriented nature" of the venture capital industry will be gradually diluted. When venture capital is no longer true venture capital, how can innovation be promoted?
Outlook Newsweek's 2023 report states:
• A county party secretary in Jiangxi Province said that almost every department is now participating in investment promotion, but individual cadres have no experience in attracting investment, and their awareness and understanding of the industry are limited, so they cannot truly understand the needs of enterprises, resulting in information asymmetry, and finally they can only fight for policies. A secretary of a county party committee in Guangxi said that due to the lack of precision in attracting investment, after the introduction of some projects, the development stamina is insufficient, and they can only rely on government subsidies to get by. "Following the trend of investment promotion can easily lead to a high degree of convergence of industries. A municipal party secretary of Hunan Province said that in the process of attracting enterprises and cultivating industries, there is a lack of coordination between cities, especially emerging high-tech projects are the focus of many places. Some localities have vigorously engaged in "attracting investment from all employees" and have issued documents, set targets, and conducted rankings, and some unreasonable targets and practices for attracting investment have dampened the enthusiasm of grassroots cadres in their work and may even lead to fraud. In order to complete the task of attracting investment, some places do not set thresholds, regardless of the good or the bad, "picking up the basket is all vegetables". Some of them recruited "Li Ghost" enterprises.
II
Everyone will ask: Where does the money come from for the local governments that shout "live a tight life" to engage in "capital investment"?
The answer is: local state-owned enterprises and local financing platforms.
For local governments, the local financing platform is a "great invention". As we all know, local governments have budgets, and every expenditure within the budget is not only limited, but also riveted and riveted, and the room for maneuvering is almost zero.
Can a living person suffocate to urine? Thus, "local financing platforms" were created. On the one hand, local financing platforms are not within the scope of the budget, and revenue and expenditure are not constrained; on the other hand, although the central government has repeatedly ordered that local financing platforms cannot be guaranteed, the market players are all people who understand and know that local financing platforms are the "conjoined" of local governments. Even if the local government cannot publicly guarantee the local financing platform, the relationship between the local government and the financial institution is not a one-shot deal, but a "repeated game".
It is okay for local state-owned enterprises and local financing platforms to use funds for "capital investment", but it is impossible to divert them to pay salaries to civil servants. As a result, such a peculiar situation has emerged: on the one hand, it is difficult to operate, and on the other hand, it has made a generous effort to attract capital.
III
In fact, as early as 2009-2010, during the "four trillion" stimulus, the debt of local financing platforms was out of control, but then only through "debt swap" to tide over the short-term difficulties, the mechanism has not changed. So, every few years, this phenomenon returns.
How can this chaos be ended?
The most important thing is: first, we must respect the law, and second, we must rely on institutional constraints.
What is a pattern?
Since it is a matter of law and human nature, we cannot rely on moral education and gravity to solve the problem. It must rely on the system:
1. Through the assessment mechanism, "high-quality development" will be transformed into a "mantra" for officials, and the soil for GDP competition and performance projects will be eliminated from the mechanism design. From "Zibo barbecue" to "Harbin ice and snow", it fully shows that innovation and business environment are the real competitiveness, and officials should "emancipate their minds" when pursuing political achievements, not just focus on engineering projects;
2. From the perspective of the assessment mechanism, it is necessary to let local government officials take real responsibility for local debts (including local financing platform debts) during their tenure, and strictly hold them accountable, so that officials know that "local debts are not a free lunch";
3. Local governments can be LPs of market-oriented venture capital institutions, but it is strictly forbidden to bind them to investment promotion and cut off the root of "capital investment";
4. Local governments should do something and not do something, and the money should be used on the cutting edge. First, it is necessary to improve the transparency of local government expenditures and accept social supervision; second, it is necessary to establish a restraint mechanism for the people's congresses; and third, it is necessary to clarify the "negative list" that local governments cannot do at the national level.
Of course, these reforms will not happen overnight. For the time being, it is still necessary to stabilize the real estate market and restore the normal capital turnover of local governments. The need to get rid of real estate dependence is undeniable. But given the huge volume of real estate, it must be taken step by step, and it is unrealistic to expect "one battle".
In the TV series "Yongzheng Dynasty", Kangxi handed Yongzheng a string of Buddhist beads on his deathbed and gave Yongzheng four words:
Emergency Shinobi
This is a summary of the wisdom of Emperor Kangxi's life, and he is very knowledgeable.
Liu Shengjun @ Shenxian Ju
Economists who insist on telling the truth
Political Economy + Big Historical View
In 2014, he participated in the Prime Minister's Economic Symposium
Liu Shengjun is the founder of Micro Finance
Member of the Shanghai Economic Committee of the Zhi Gong Party
Chief expert of Shandong Provincial Human Resources Development Promotion Association
Author of "The Next Decade"
Shandong Heze Dingtao people