How China’s communists fell in love with privatisation

Cities and towns across China are struggling to pay their bills. As policymakers labour to revive the country’s economy, tax revenues continue to fall. A property crisis makes matters worse, hurting the ability of local authorities to sell land-use rights to property developers, traditionally one of their main sources of income. Land-related revenues fell to 26% of total local-authority revenues last year, down from 36% in 2020. As such, cadres have had to come up with new ways to raise money—no matter how awkward.

Bus operators in small cities are having to suspend services. Low-level civil servants gripe about salaries being delayed or slashed. Tax collectors have been looking back decades for unpaid bills. And cities are raising fines for infractions such as traffic violations. In Wuzhou, southern China, these now provide almost 50% as much income as taxes, compared with less than 8% in most cities. After waiving tolls on highways for over a decade, provinces such as Anhui, Gansu and Shandong have started to collect them again.

So why not sell some assets? Local financial analysts insist that cities are sitting upon incredible wealth. They control the sale of land and are in possession of varied portfolios, which include holdings in state-owned firms, parks, utilities, train lines and even Buddhist temples. If officials can monetise just a small share of these by renting or selling them to the private sector, the thinking goes, they may be able to plug some of the holes in their budgets.

Although there were some asset sales before, the central government first began promoting privatisation in 2022, when it called on local governments to “revitalise" their assets—in other words, to sell, rent or refinance them—as a means of reducing debts. Then last year an internal document circulated by the State Council, China’s cabinet, instructed the dozen most-indebted provinces to “smash the pots and sell the iron", a strongly worded idiom signifying a last-ditch effort to raise funds.

Many areas are picking up their hammers. By May, the government of Ganzhou, in south-eastern China, had brought in 370m yuan ($50m) by allowing municipal water and bus firms to sell plots of land. A district in Chongqing, a south-western megacity, announced in August that it would “smash the pots" in order to relieve a debt crisis. Some local governments have bundled more sought-after government projects with assets they want to dump, pushing buyers to take unwanted office buildings or industrial parks off their hands.

These types of asset sales are now picking up momentum. In Shandong and Jiangsu, two coastal provinces, non-tax revenues, which include proceeds from asset disposals, rose by 15% in the first half of the year. In Qingdao, which includes Laixi, the price of state assets sold on a local exchange hit 5.9bn yuan last year, more than double the year before. This includes sales of use-rights for seven reservoirs with contracts that last for up to 40 years.

Just how many assets can be flogged? The first obstacle is ascertaining which parts of the state actually owns an asset. For those more than two decades old, documentation is poor. As Chinese cities have grown, many have been merged with other jurisdictions or emerged from local districts. Huang Wenyin of S&P Global Ratings, a rating agency, notes that the building in which she grew up in Beijing was owned by a state firm, even as employees of another state firm were allowed to live in it as part of an informal arrangement. A third state firm may have also had claims on the building. As decades passed, a lack of documentation and lost records meant that the building was never demolished. Thus a potentially lucrative plot of land remains undeveloped.

There are also risks for purchasers interested in taking on state assets, since they have a quasi-sacred status. Unlike Russia, which sold many of its assets following the collapse of the Soviet Union, China has never experienced a “big bang". Instead it has slowly privatised since the early 1980s, when little private property existed. Questions remain about how assets have been sold and whether fair prices were paid many years ago. Peking University, for instance, launched a lawsuit in 2019 against the shareholders of a firm called Founder Group, averring that its sale of a stake in the company 15 years ago had happened on fraudulent grounds.

Bosses worry that deals may attract attention and later be probed for corruption. Meanwhile, those at state-owned firms fear making losses when selling assets. Chinese law does not allow deals to be agreed on such terms and the central government has warned that it will punish managers who break the rules. Public opprobrium is never far away. Mr Guo was unhappy to hear about the sales of the reservoirs in Laixi. Some social-media users question the legality of the deals, while online articles also criticise them.

Perhaps the main challenge is to create a true market for state treasures. Private buyers risk being accused of insider dealing and taking state assets on the cheap. At the same time, they fear ending up with a lemon—or an asset that appears nice to outsiders but has little value to those in the know. This might explain why many of the assets are simply being passed between state firms. Such transactions do not involve the private sector and therefore cannot be accused of creating losses for the state. Although documents for the sale of two of Laixi’s reservoirs note that the sale attracted “social capital", or private-sector money, the true buyer was another state firm in the same city. Perhaps the deal will help alleviate short-term liquidity problems for the city government. It will, though, hardly stop its debt build-up.

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