By Judith Ugwumadu | 25 March 2014
China needs to reform its public finances and regulate local government borrowing if it is to tackle the strains of rapid urbanisation, the World Bank said today.
In a joint report with the Development Research Centre of China’s State Council, the bank highlighted the scale of urbanisation that has taken place in the country. There are now 200 million more people living in cities in China than was the case a decade ago.
The Urban China report makes a series of recommendations designed to ensure urbanisation is efficient, inclusive and sustainable. These would encourage China’s cities to generate more revenue and to help the nation deal with environmental degradation.
China was advised to place local finances on a ‘more sustainable footing’, while creating financial discipline for municipal governments. The report also called for China to move to a revenue system that would ensure a larger portion of local expenditure was financed by local income. It suggested introducing property taxes and higher charges for urban services.
China’s municipalities should be allowed to borrow directly, but within strict central rules, the report said.
‘Formal access to borrowing will have to wait until a full regulatory framework is in place and preferably come after local government revenue sources have been strengthened.’
Those measures, along with tighter borrowing, would make local governments more accountable. The World Bank also urged local government bodies to improve financial management and transparency, making use of tools such as medium-term expenditure frameworks and full disclosure of financial accounts.
Building denser rather than larger cities would also help the country cut down on traffic congestion, air and water pollution and could save China around $1.4 trillion in infrastructure spending, equivalent to 15% of last year’s gross domestic product, the World Bank said.
Denser urban planning would curb local governments reliance on land-based financing and limit the risk of unregulated borrowing.
World Bank president Jim Yong Kim said these reforms would boost revenue for farmers in land sales, provide more services for migrants and encourage more responsible financing by local governments.
He said: ‘It would mean greener urban planning and stronger environmental management so everyone can breathe easier.
‘China has already made big progress with experiments at local level that can be expanded on a huge scale.’
Lou Jiwei, China’s finance minister, added that the potential of urbanisation could be unleashed through greater reform.
‘We need to accelerate reform of the fiscal and tax system as well as investment and financing mechanisms, promote the application of the public-private partnership model, to help build a diverse and sustainable urban financing mechanism,’ he said.
At the weekend, the Asian Development Bank president Takehiko Nakao called on China to implement tax reforms to as soon as possible in order to lock in sustainable economic growth and inclusive development
