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Financing Local Infrastructure and Public Services: Case of Shaxi Town in Suburban Suzhou, China

  • Xu Chen
  • Min ZhaoEmail author
  • Richard LeGates
Chapter
Part of the Advances in 21st Century Human Settlements book series (ACHS)

Abstract

This chapter introduces the financing mechanisms for local infrastructure construction and service delivery in a town named Shaxi in Taicang City in suburban Suzhou. Shaxi town is located in the South of Jiangsu Province in Eastern China, near Shanghai. The chapter uses the Shaxi case study to illustrate strengths and weaknesses of local government finance in China and their relevance for other developing countries. As local governments in China play a leading role in investment and financing of public goods, this study begins by analysing the fiscal logic of China’s government hierarchy. Then, taking Shaxi Town as a case study, it provides a detailed description of the various sources of investment and financing available to local governments in China, and the problems different kinds of investment and financing address. Finally, this chapter suggests ways to improve financing, planning, construction, and service delivery for small towns in China at different stages of development from the perspective of overall, systemic reform. The findings should be of interest to local officials and planners involved with town planning in China and other developing countries.

Keywords

Local infrastructure and public services Financing mode Township China 

1 Introduction

Since 1982, China has been in the process of rapid urbanization and infrastructure construction. As a result of long time institutional constraints, China has a distinct urban-rural binary structure. In the provision of infrastructure and public services, small towns and rural areas in China have often lagged far behind the larger cities as in other Asian cities (Dahiya 2012a, b). In the process of urbanization in developed countries, there was no distinct urban-rural institutional divergence as is evident in China. Therefore, most policy related discussions tend to focus on the general financing mechanisms for the provision of both of urban and rural infrastructure and public services. But in China, only under the background of special institutional system will we get insight into small towns’ financing mechanism for infrastructure and public services.

As in other countries, there are distinctions between cities, counties and towns in China, which are lower-level governments below central and provincial governments. Cities in China are ranked and more highly ranked cities have greater influence with the central government and more decision-making authority than lower ranked cities. Four cities—Beijing, Tianjin, Shanghai, and Chongqing—are top-ranked “provincial level cities” created by and reporting directly to the national government. Most other cities have been established by the governments of provinces in which they are located. Suzhou is a “prefectural (county)-level city” at the second rank—below provincial-level cities, but above sub-prefectural level cities. Counties are units of local government with some political and fiscal authority that report to cities. Some regions with large ethnic minority populations or other special characteristics are designated autonomous regions.

Townships are a level of government located within a city or county that report to the city or county government. Based on population and area standards, they are approved by the respective provincial or autonomous regional government within whose administrative area they are located. Townships may include several towns and villages. Towns are administrative divisions, confirmed by the city or county level government. All towns in China are located within and report to a city or county. Many towns are economic and service centres for their surrounding rural areas. Towns often have one or more subordinate villages within them. Compared to townships and towns, villages are economic agglomerations with smaller rural populations. Villages are recognized administrative divisions with a village council elected by villagers, but not a level of government. Each village has a branch of the Chinese Communist party. Townships and towns are important nodes for integrating urban and rural areas. The quality of infrastructure services is an important measure of how well a town performs this role.

In China’s governmental hierarchy, governments at the county and township levels are the main bodies in charge of planning and construction in small towns and responsible for supplying basic public services to them. The role of these sub-national governments is an important research subject in China now. China’s National New Style Urbanization Plan (PRC 2014) proposes upgrading the planning and construction capacities of town governments and improving the overall public service levels of towns and villages.

Contemporary research related to small town planning and infrastructure construction in China can be considered to belong to four broad areas.
  • Modes of infrastructure and service allocation: For example, Zhao et al. (2014) studied centralized and decentralized modes of education infrastructure and residents’ satisfaction with them in counties, towns and villages in Eastern and Central China. They proposed delivering education and other services in relation to population concentrations rather than locating facilities equally within an area. In addition, they proposed a planning strategy of “smart shrinkage” of infrastructures in rural areas experiencing outmigration and population decline.

  • Evaluation of infrastructure supply: Studies on this topic have evaluated the supply of public goods and regional differences among small towns, based on indices such as the Gini coefficient (Xie and Zhai 2006).

  • Improvement of town configurations and construction standards: For example, Shan and Zhao (2006) proposed improved standards based on regional development trends, residents’ demands, and existing construction deficiencies.

  • Optimization of town physical space layouts. Zhang et al. (2012) proposed establishing space standards towards equalizing urban and rural infrastructure. Other similar studies have called for understanding different dimensions of basic public services equalization.

Despite a significant and growing number of studies of Chinese small towns, studies that investigate investment and financing mechanisms and government performance in the planning and construction of small towns are limited. There is a lack of deep understanding of the infrastructure challenges that small towns face, their motives for improvement, different financing models, and feasible ways of improving infrastructure construction and service supply. Deepening the understanding of these issues has important theoretical and practical significance, and can provide practical guidance to improve planning and infrastructure construction in small towns in China and other developing countries.

The rest of this chapter is organized as follows. Section 2 analyses the fiscal logic of China’s government hierarchy. Section 3 taking Shaxi Town as a case study, it provides a detailed description of the various sources of investment and financing available to local governments in China. Section 4 concludes the problems different kinds of investment and financing address. Finally, the Sect. 5 suggests ways to improve financing, planning, construction, and service delivery for small towns in China at different stages of development from the perspective of overall, systemic reform.

2 The Fiscal Logic of China’s Local Governments in Planning and Building Infrastructure

2.1 Division of Government’s Fiscal Power and Authority

All countries rely on inter-governmental cooperation across different levels to provide infrastructure and public services. The distribution of state power in a country generally follows one of two models (Wang 2013). The first is federal (split-decentralization) systems in which decision-making power is divided between the federal government and subnational and local governments. It is essentially a “bottom-up” system in which the power of the federal government starts with local governments and is transferred upward through different ranks of government. The United States, for instance, has a federal system in which, inter alia, the national government is responsible for defence and diplomacy; state governments for building highways; and local governments for regulating land use and providing basic public services such as police and fire protection, libraries, parks, and public primary and secondary education through independent school districts. The second model is the unitary government model with responsibility for developing and implementing programs consistent with national policy assigned to lower levels of government by the central government. The unitary government model is a “top-down” system, in which the central government and local governments forge a principal-agent relationship.

China is a unitary state and achieves the division of financial revenue and supply of public services through a five-level government system. After economic reforms and opening that began in 1979, China has reformed the highly centralized political system based on the Soviet Union implemented under Mao Zedong and increased decentralization. However, the control of revenue and responsibility for service provision is not well synchronized. Local governments often lack sufficient revenue to carry out their assigned responsibilities. In 1994, the central government introduced a tax-sharing system reform that transferred a significant amount of fiscal power from local governments to the central government. The 1994 reform left local government with the same or even more responsibilities for providing infrastructure and services (see Figs. 1 and 2). The national government promised to provide transfer payments to aid local governments in meeting their responsibilities. Figure 1 shows the change in nominal central and local government fiscal and authority power from 1978 to 2005. The fiscal power of government refers to the power of government at all levels to raise and control income, authority power refers to the responsibilities for government at all levels to provide infrastructure, and services. There was a dramatic decrease in local government fiscal power between 1993 and 1994—from 78% of all fiscal power in 1993 to just 45% in 1994 and a comparable increase in central government fiscal power at the same time. Figure 1 does not reflect transfer payments, taxes that are transferred back to local government, and fixed subsidies from the central government to local governments.
Fig. 1

Distribution of nominal central and local government fiscal and authority powers (1978−2005).

Data Source China statistical yearbook (1978−2005). Note Data on real central and local government fiscal and authority power is not available before 1997

Fig. 2

Distribution of nominal and real fiscal and authority powers of the central government and local governments (1997–2012).

Data Source China statistical yearbook (19972012)

Figure 2 shows how real—as opposed to nominal—central and local government fiscal and authority powers changed from 1997 to 2012. After transfer payments, which are taxes transferred back to local government, and fixed subsidies that contributed to real local government revenue in 1997 were about the same as in 1993, before the tax sharing reform (78% of all revenue). Over time, local governments’ local fiscal power has decreased to about 60% but their authority power has increased from 75 to 85% Figs. 1 and 2 show why local governments in China have been pushed by the reform to find additional revenue sources, forcing them to become more entrepreneurial and creative (discussed later in this chapter).

The real authority power of governments is reflected by public expenditure data. Public expenditures refer to discretionarily disposable revenue. It includes the sum of local fiscal revenue and tax returns, transfer payments, and fixed subsidies earmarked for specific needs. The central government’s actual fiscal power equals its revenues minus these expenditures. According to China’s decentralization of public finance law, the central government is responsible for public goods of national significance such as defence and highways, high-speed rail lines and other major infrastructure construction. Local governments are responsible for most local goods, such as urban roads and municipal facilities. In contrast to some other countries, China’s central government’s share of fiscal revenue (about 46%) is not excessively high, but local governments cover 85% of the cost of local public expenditures, which is higher than most other countries (Fig. 3).
Fig. 3

International comparison of revenue and expenditure share of central and local governments.

Data Sources Chinese data are from PRC National Bureau of Statistics, China statistical yearbook 2014. Note Countries’ statistics except China in Fig. 34 are from the World Bank (1999) World Development Report 1997

The Chinese government’s expenditures on education, health care, and social security are significantly higher than most other countries (Fig. 4). In urban and rural areas, most expenditure on essential services such as education, healthcare, housing and community development is borne by local governments (Fig. 5).
Fig. 4

International comparison of government expenditures for education, health care, and social security.

Sources Chinese data are from PRC Ministry of Finance, Treasury Department, China Cities and Counties Fiscal Statistics 2000

Fig. 5

Proportion of major public service expenditures By China’s central and local governments (2015).

Source PRC NBS, 2015

2.2 Local Governments’ Financial Revenues and Public Expenditures

At the national level, China’s decentralized system only divides financial revenues and responsibilities for provision of public services between the central and provincial governments, with no decentralization to the sub-provincial levels. The division of fiscal powers to political divisions within a province is diverse and complex. At the local government level (Fig. 6), basic level governments—including towns and counties governments, especially county-level governments—bear most service provision costs. Compared to the national government’s sharing of 18% of the total expenditure, county governments spend 35%.
Fig. 6

Matching of revenue and expenditure of governments at all levels (2009).

Data Source Office of Economic Cooperation and Development (OECD 2016)

The gap between lower level governments’ revenue and expenditure is the result of the initial distribution prescribed by the tax-sharing system. Most of the powers, which the central government has decentralized to provincial governments, have been further transferred down by provincial governments to governments at the county and township levels (Zhou 2006).

According to China’s tax-sharing system, after the first round of revenue distribution, the central government makes a secondary distribution through a transfer payment system. This is similar to payments that state governments in the United States make to equalize school finances. The transfer payments have a “convergence effect” on the revenue and expenditure gap between the general public budget and village and town government budgets. The gross gap between county and township governments’ budgetary expenditure and income is gradually widening. However, the net gap1 between county and township governments’ budgetary expenditure and income remains similar after the transfer payments are redistributed, that is, after subsidies from higher authorities are included (Fig. 7). Thus, transfer payments through the tax-sharing system have largely addressed the town and village government fiscal revenue gap. However, just the balance of payments of gross and general public budgets does not tell the complete story because of regional disparities and variations in public expenditures of local governments’ aggregate financial resources.
Fig. 7

County and township governments’ gross gap, net grants, and net gap of public budgets (1993–2005).

Data Source PRC Ministry of Finance, Treasury Department, China Cities and Counties Fiscal Statistics (1993–2005)

2.3 Patterns of Local Governments’ Service Provision and Regional Differences in Infrastructure Supply

The direct result of China’s tax sharing and transfer payment system since the mid-1990s has been to keep local governments’ public budgetary revenue and expenditures balanced. The tax-sharing system and institutional reforms of finance, corporations, and land have profoundly affected the supply of basic public services by local governments. Consequently, regional differences and regional changes in the financing structure have become more apparent.

2.3.1 Local Infrastructure Supply Incentives and Fiscal Growth

The incentives and behaviour of actors in China’s public service delivery system changed significantly after 1994s tax-sharing reform (Zhou 2006). Before the tax sharing system, local governments pursued the “maximization of local unique income”.2 They sought to transfer as much own-source financial revenue to extra-budgetary revenue as possible in order to reduce their tax burdens and increase local revenue from local operating enterprises. Funding levels were low, and spending local financial income for infrastructure planning and construction was not a top local government development priority at that time.

The 1994 the tax-sharing system, and accompanying financial and corporate reforms, changed the constraints that determined local governments’ expenditure behaviour. The possible ways for Local governments to obtain local proprietary income changed, they suddenly lost access to a large amount of extra-budgetary income from their involvement in business operations. Local governments were incentivized to attract enterprises, expand manufacturing (which would increase their tax base), and generate employment through expanding their service industries that would generate more business tax income. This strategy would only work if the local government planned and constructed sound infrastructure and provided high-quality public services. Since the new regime of institutional constraints and growth incentives was introduced in 1994, local governments have gradually phased out investment in State Owned Enterprises (SOEs) and have turned to investing in infrastructure to improve their business environments and attract businesses. As more attention has focused on the supply of public goods, a fundamental change in local fiscal growth models has taken place—from operation-oriented enterprises to service-oriented enterprises.

2.3.2 Local Governments’ Behavioural Patterns of Expenditure and Spatial Differences in Financing Structures

Following the tax-sharing system reform and a series of related institutional reforms, local governments now have the incentive to increase the supply of infrastructure. They now also monopolize local land markets, which play a key role in shaping infrastructure supply, and thereby economic growth, local proprietary incomes, and infrastructure reinvestment—a feedback loop. Overall, local governments’ strategies can be summarized as constituting a common pattern.3 First, local governments acquire low-cost land and construct limited infrastructure to make available affordable industrial land. Industrial development stokes economic growth and rising demand. Subsequently, commercial and residential land values appreciate and tax revenues increase. Land transfers, and land financing enable local governments to re-invest in successive rounds of infrastructure improvement suitable for expanding existing industries or attracting additional (hopefully higher-end) development.

Since 1994, overall, extra-budgetary revenues and expenditures, including land-leasing revenues, have increased significantly (Fig. 8). Since 2007, the central government has required local governments to include all land transfer revenue in their budgets. The main reason the central government requires local governments to include land transfer income in their budgets is to better control local governments’ land sales. This is probably the reason for a slight downward trend in local governments’ extra-budgetary revenue and expenditures after 2007. However, this increase has not been uniform and there are large regional variations. Figures 9 and 10 show regional differences in budgetary and extra-budgetary expenditures in Chinese provinces in 2010. The south-eastern coastal areas, which have unique locational advantages, can attract domestic and international investment to sustain strong economic growth and raise land values, triggering a positive feedback loop of reinvestment and renewed operation of “infrastructure supply—investment entry—economic growth.” This is harder to achieve in the less developed central and western regions—particularly in locations away from large city clusters and/or lacking well-developed transportation infrastructure. As a result, extra-budgetary expenditures in the eastern coastal provinces are significantly higher than expenditures in the central and western provinces (Fig. 10) and budgetary expenditures in the eastern coastal provinces’ budgetary expenditures are lower than in the central and western provinces (Fig. 9). This suggests that the eastern coastal provinces rely on self-financing to promote infrastructure construction to a greater extent, while the central and western provinces rely on budgetary expenditures that are controlled by the central government to a greater extent. This reflects how the self-financing of infrastructure construction in developed areas has fostered a robust growth in infrastructure supply. The less-developed regions rely heavily on transfer payments to supplement local finance, because their capacity for self-financing and construction is weak. As a result, the pattern of regional imbalance has become more pronounced.
Fig. 8

Extra-budgetary income from central and local governments (1990–2010).

Data Source PRC National Bureau of Statistics, China Statistical Yearbooks (1990–2010). Note Before the fiscal budgetary system reform in 2010, a large amount of fiscal revenue was calculated in the category of extra-budgetary revenue. Land transfer income was included in the extra-budgetary income category before 2007

Fig. 9

Regional difference in per capita public budgetary expenditures by province (2010).

Data Source PRC National Bureau of Statistics, China Statistical Yearbook 2010. Note After the 2010 fiscal budgetary system reform, the China financial statistical yearbook stopped providing data on extra-budgetary expenditures

Fig. 10

Regional difference in extra-budgetary expenditures by province (2010).

Data Source PRC National Bureau of statistics, China statistical yearbook 2010. Note After the 2010 fiscal budgetary system reform, the China financial statistical yearbook stopped providing data on extra-budgetary expenditures

Data on land financing and government debt show that provinces and cities with high extra-budgetary expenditures, and where public construction debts are high, rely on land revenues to a greater extent than other provinces and cities (Ye and Wu 2014). Another difference between the economically developed provinces and cities in southeast coastal region4 and less developed provinces and cities in the central and western region pertains to the level of decentralization. The authority to construct urban infrastructure tends to be much more decentralized to village and town governments in economically developed regions than in the less developed ones.

There are also significant differences in government debt. The proportion of underdeveloped provincial level governments’ debt in underdeveloped provinces is relatively high, and provincial level debt in developed provinces is relatively low compared to that the level of debt in developed provinces, but the debt ratio of counties and townships in the latter set of developed provinces is relatively high. For example, the ratio of county-level debt in Zhejiang Province, a which is well developed province, is over 50% more than that in Sichuan and the provincial-level city of Chongqing, both of which are reasonably well developed (National Audit Office 2013).

3 Small Towns Investment and Financing Mechanism for Infrastructure Planning and Construction

Shaxi town’s experience illuminates investment and financing mechanisms for infrastructure construction in small towns in developed areas. Shaxi is an instructive example because it is located within the prefectural-level city of Suzhou. As the chapter by Fang et al. (2019) in this book discusses, the national government designated Suzhou as China’s first and only National Comprehensive Reform Pilot City for Integration of Urban and Rural Development. In order to close—and eventually eliminate—the gap between urban and rural development, Suzhou has implemented a number of institutional innovations. In particular as a result of its land transfer policy, the level of planning and construction in small towns has significantly improved.

In this chapter, we use Shaxi Town to describe the balance of income and expenditures, capital circulation, and land transfers in detail. This chapter explains how town government in a quite developed region financed and built different kinds of infrastructure, and how Chinese governments promote development at the basic administrative level. It also helps explain the main constraints on development in developed regions.

3.1 An Introduction to Shaxi Town

Shaxi enjoys a favourable geographical location in the north-central region of Taicang city, close to Taicang port near the port of Shanghai (Fig. 11). Its total land area of 132.14 square kilometres is organized into 20 administrative villages, with 160,000 residents, nearly 90,000 of whom have local hukou.5
Fig. 11

Location of Shaxi town.

Source Map from Google Earth

Shaxi town has developed a strong comprehensive economy and development capacity (Fig. 12). Relying on land, labour, and other advantages, Shaxi has vigorously promoted industrial park development, and succeeded in attracting industry from Shanghai and Suzhou, where substantial foreign capital and industrial capacity continue to accumulate but where land and labour costs are higher. Shaxi’s economic development level is higher than other towns in Taicang city; its per capita GDP exceeds the average levels of both Suzhou and Shanghai. Recently, Shaxi has experienced the gradual decline of its traditionally dominant industry—textiles, but also the incubation and expansion of new industries, such as new materials and biomedicine (Fig. 13).
Fig. 12

Comparison between the per capita GDP Of Shaxi town, Taicang City, Suzhou, and Shanghai.

Data Source Shaxi town and other cities’ statistical yearbooks

Fig. 13

Changes in the industrial structure of Shaxi 2010–2014.

Data Source Shaxi town statistical yearbook (2010−2014)

Policy development in China often involves designating pilot projects, which sometimes include granting local government units more authority. A successful pilot project will usually be continued and expanded and often replicated elsewhere. If a pilot project fails it just fades away and is not replicated.

To promote the reform of urban and rural integration systems and mechanisms, Jiangsu province has designated 20 economically developed towns to carry out pilot projects to reform their administrative systems. These pilot projects are intended to address towns’ problems of large responsibilities, limited power, weak functioning, and low efficiency. The pilot towns have received different degrees of county-level power to deal with industrial development, planning and construction, project investment, production safety, environmental protection, market supervision, social security, and livelihood. Jiangsu province also decentralized parts of its executive power, administrative oversight, and approval authority in accordance with each town’s specific situation, to simplify the administrative system and improve the town’s efficiency. The pilot project has significantly expanded Shaxi’s administrative approval authority, but has not expanded its fiscal power as much.

3.2 Income and Expenditure Structure and Infrastructure Fund Circulation for Construction and Service Provision

Broadly speaking, Infrastructure can be divided into two main kinds: economic (development) infrastructure and social infrastructure (Hirschman 1958). From an economic perspective, the distinction between the two kinds of infrastructure is whether the short-term production function6 changes directly. Externalities from changing economic infrastructure will have a larger short-term effect on the economic production sector than investing in social infrastructure. But, in the long run, investment in social infrastructure may have a greater impact.

Shaxi has self-financed most economic development infrastructure investment (Fig. 14). Its general public budgetary revenue covers most construction expenses, and basic social service infrastructure such building schools and paying teachers’ salaries. The construction and servicing of economic development infrastructure, with large economic externalities, has been funded primarily by the government’s financing platform. The government relies on urban investment and urban construction companies to borrow money to finance development. Credit for the financing platform has come mainly from land, including cash flow from land transfers and expected earnings from land assets. Shaxi is fortunate to have an advantageous location and strong economic development potential. It already has a solid economic base, but the government hopes to attract more investment—to promote industry and urbanization through infrastructure construction and better public services—to ensure rising land values and higher land transfer fees. Figure 14 illustrates Shaxi town’s income and expenditure structuring and main capital flows for infrastructure construction and services.
Fig. 14

Shaxi town’s income and expenditure structure and main infrastructure construction and service capital flows.

Source Suzhou Division of China Development Band, and Tongji University, 2016

3.2.1 Funds for Infrastructure Construction and Public Services

In 2015, Shaxi town’s comprehensive financial resources totalled approximately 485 million Yuan (over US$60 million). They came from four main sources: retained taxes, transfer payments from higher level governments, operating income from collectively-owned assets operated by town government which belong to the town, and land transfers. The Shaxi government retained taxes worth 280 million Yuan (US$40 million) in 2015, 25% of the total tax revenue (Fig. 15). According to China’s inter-governmental tax sharing rules, 28 categories of taxes are shared among different government levels. For example, a local government may retain all of the service sector business taxes collected. But local governments may keep only 25% of the value added taxes from manufacturing, which is Shaxi’s main tax source. So despite having a robust economy, Shaxi only receives a quarter of the tax revenue it generates from this source.
Fig. 15

Shaxi town’s 2015 tax structure 2015 (1.2 billion Yuan, US$0.15 billion).

Source SDCCB and TU, 2016

In China, transfer payments, especially general transfer payments, are reserved for places with comparatively greater need. Higher-level governments also make fixed transfer payments for special interest projects. Since Shaxi has a strong economy it receives only a small general transfer payment. But since it has a number of special interest projects, it often receives substantial transfer payments for special interest projects. In 2015 it received 20 million Yuan (US$2.8 million) as a general transfer payment, and 80 million Yuan (US$11.5 million) in fixed transfer payments for agricultural infrastructure and renovation of traditional villages (Fig. 16), which were of particular interest to higher levels of government for protecting basic farmland and traditional space. In 2015, Shaxi’s land transfer fee was 105 million Yuan (US$16.2 million) (Fig. 16). In addition to its four main revenue sources, Shaxi obtained a small amount of operating income from collective assets.
Fig. 16

Shaxi’s retained tax, transfer payments, land funds income, and financing platform loan in 2015.

Source Suzhou Division of China Development Band, and Tongji University, 2016

A pie chart showing Shaxi’s general public budget expenditures (Fig. 17) shows that the main expenditures in 2015 totalled 360 million Yuan (about US$52 million). Therefore, its total fiscal power in 2015—485 million Yuan (about US$70 million)—was more than adequate to cover the general public budget outlays. Among these, basic education consumed the biggest share—40% of general public budget expenditures. More than half of the education budget was paid to retired teachers. The remaining expenditures on agriculture, forestry and water, and medical and government operations accounted for about 20% each.
Fig. 17

Structure of Shaxi’s basic infrastructure and public services in 2015 (0.36 billion Yuan, or US$0.054 billion).

Source Suzhou Division of China Development Band, and Tongji University, 2016

Some of Shaxi’s basic public expenditures are covered by transfer payments from Jiangsu province, Suzhou city, Taicang city, or combinations of two or three of these sources either as unrestricted general transfer payments or special transfer payments which must be spent for a specific purpose. Some general transfer payments come from Jiangsu province and some from Suzhou city and Taicang city. Most special transfer payments come from Jiangsu province, and a small proportion comes from Taicang city. The provincial special transfer payment was for construction of agricultural and educational infrastructure. The transfer payment from Taicang was for medical care, including endowment insurance and serious illness insurance.

3.2.2 Sources of Funds for the Construction and Operation of Economic Infrastructure

Economic infrastructure spending in Shaxi in 2015 has been used for three main purposes. The first was infrastructure for construction of an industrial park. The second was for building more concentrated new settlements and relocating farmers there. The town promotes the integration of urban and rural infrastructure through three main policies7—“three-concentrations”; “three-replacements”; and “four-matchmaking”—to facilitate the centralized reconstruction of scattered arable land, industrial land, and homestead land. The third main purpose is for urban environmental construction and protection. Most funds for these three types of infrastructure come from land development finances and government finances. Land finance refers to income from land transfers, associated tax revenue, and revenue from banks secured by land mortgages.

Two main financing methods characterize Shaxi’s financing platform: (i) working capital loans secured by mortgages on land and government credit; and (ii) project financing for specific construction projects, where the government usually becomes a shareholder with funds or a mortgage. Capital is also attracted from other sources. In 2015 the income from Shaxi Town’s land transfer funds was 105 million Yuan (over US$15.1 million). New loans from Shaxi’s financing platform amounted to 600 million Yuan (approximately US$754.4 million) (Fig. 18), double the 300 million Yuan from tax and transfer payments.
Fig. 18

Shaxi’s 2015 financing platform loans and total remaining loans in 2015

Source Suzhou Division of China Development Band, and Tongji University, 2016.

Shaxi’s revenue structure is different from town-level governments in China’s central and western provinces. For example, in Hubei Province’s general budget revenue and expenditures, higher-level government transfer payments are the province’s largest source of budgetary income, and non-tax land transfer revenue is significantly lower than tax revenue and transfer payments (Fig. 19). Since town governments in provinces such as Hubei, Anhui, and other provinces in central China do not have the capacity of self-financing, local government finance generally relies on the “county management of township budget” model, where counties make budgetary decisions and town governments lack financial autonomy.
Fig. 19

Composition of general budgetary income and expenditures of township governments in Hubei Province (2010).

Data Source Hubei Province’s Towns’ Statistical Data (2010)

Although economic infrastructure investment may promote short-term economic growth, short-term construction investment in many economic infrastructure construction projects is significantly higher than the income generated in the short term, so balanced income and expenditures usually must be achieved in a multi-year development cycle. Shaxi’s response has been to establish financing platforms with different companies for different construction projects, but to pool revenue from multiple projects. The government coordinates financing companies in a platform for financing and ensuring loan repayment. The government-coordinated financing platforms have both advantages and drawbacks. A major advantage is that government coordination is a form of risk pooling that can effectively overcome the financial risks of individual projects, helping make infrastructure planning and construction possible. In Shaxi, some projects are risky and it may take a long time for them to return a profit. For example, renovation of an ancient town will bring little or no direct income in the short term but may be a wise project to improve a town’s overall environment in the long term. Such a long-term project may obtain financing through a financing platform that gets short-term returns from other projects, which become profitable much sooner. A drawback to multiple platforms funding multiple projects is that debt can be transferred between platforms and debt risk may be hidden. In recent years, funds raised through financing platforms in Shaxi Town have expanded rapidly. The loan balance has grown from 170 million Yuan (about US$25 million) in 2010 to 2.8 billion Yuan (US$403 million) in 2015 (Suzhou Division of China Development Band, and Tongji University 2016).

3.3 Fund Operation for Specific Projects

3.3.1 Social Infrastructure

Taking education services, medical services, agriculture and forestry facilities as three important social infrastructure projects, this section introduces Shaxi Town’s detailed investment and financing mechanisms.

Education Services: As Shaxi is a traditional town which places great emphasis on education,both the quantity and quality of education infrastructure in Shaxi Town is already excellent. Shaxi’s No.1 Middle School, in particular, enjoys a high reputation in Taicang city. At present, Shaxi has six kindergartens, five public primary schools, one private primary school (Fig. 20), one primary and secondary mixed school (Fig. 21), two junior high schools, and one high school. Shaxi plans to build five new kindergartens at a total cost of 200 million Yuan during the period of the Thirteenth Five-Year Plan (2016−2020). In contrast to educational infrastructure construction jointly funded by Taicang city and Shaxi town before 2011, town-level education subsidies after 2011 are allocated to Taicang’s municipal department of finance, and town-level education and construction funds are approved by Taicang city. After being approved, the Shaxi city department of finance allocates the full amount of all education subsidies.
Fig. 20

Primary School in Shaxi Town.

Source Suzhou Division of China Development Band, and Tongji University, 2016

Fig. 21

Secondary School in Shaxi Town

Source Suzhou Division of China Development Band, and Tongji University, 2016

Medical Services: Shaxi Town’s department of finance provides most of the funding for medical services. For example, the Shaxi People’s Hospital (Fig. 22) cost 280 million Yuan to construct, of which 80 million Yuan was from higher levels of government and 200 million came from Shaxi’s own resources. In addition, each village and residential community in Shaxi Town now has a medical clinic (Fig. 23). Villages themselves bear the expenses for building their medical clinics using the villages’ collective asset income, with doctors visiting from the Shaxi Town People’s Hospital.
Fig. 22

Shaxi town people’s hospital.

Source Suzhou Division of China Development Band, and Tongji University, 2016

Fig. 23

Rural Medical Clinic in Shaxi Town.

Source Suzhou Division of China Development Band, and Tongji University, 2016

Agriculture, forestry, water facilities, and rural construction: Most funding of Shaxi Town for agriculture, forestry, water facilities and rural construction comes from transfer payments from higher-level governments. Shaxi town can apply for special funds from Suzhou’s Kangju Village (Healthy living Village) program established specifically to improve residential infrastructure and the exteriors of rural houses, and to the Jiangsu provincial government and the Suzhou city government “Beautiful Villages” programme. (China’s “Beautiful Village” programme is discussed in the chapter in this book by Zou et al. 2019.) In 2015, Shaxi built four Kangju rural projects at a total cost of 10.74 million Yuan (US$1.3 million).

3.3.2 Economic Infrastructure and Public Services

Three important economic infrastructure projects in Shaxi in 2015 included building concentrated new settlements, constructing an industrial park and urban environmental construction improvements.

Relocating farmers and replacing land with social security entitlements: Shaxi’s original villages were mostly located along streams flowing into the Yangtze River. Most villages were small with scattered layouts. Relocating farmers from these villages into more concentrated settlements frees up arable land, and makes it easier and less costly to provide education, health, and other social services to the residents. Arable and urban land may be exchanged in the process of relocation and centralized resettlement, so that there may be a net increase in total arable land—sometimes in larger continuous plots that are better for modern agriculture. Farmers are free to choose whether to move to new concentrated settlements or not, and they are also free to choose among a different kinds of new communities. In exchange, farmers in the relocated communities must give up part or all of their homestead land, and they can choose whether to give up their use rights in farmland in exchange for cash compensation of discounted (even free) housing. With reforms that emphasize transparency and the rule of law, the town government now offers compensation in accordance with established standards. Farmers who move to new communities can retain 220 m2 of homestead land in their former village to use or rent.

The Shaxi town government is responsible for building community infrastructure in the new communities. Farmers can build their own houses in the new communities, but must conform to uniform standards. Town governments pay an average of 200,000−248,000 Yuan (US$29,000 to $36,000) towards community infrastructure constructed for each household. When old houses are demolished, the town government offers households between 350,000 and 380,000 Yuan (US$50,000–$55,000) in compensation, which will usually cover most or all of the expense of a new house. In addition, the town government provides an average of 300,000 Yuan (US$43,000) per household to farmers who give up the use rights in arable land in exchange for their social insurance. When constructing residential buildings, financing platform companies provide funds, including compensation for lost land, construction of new community facilities, and social security for landless peasants.

The 2016 Tongji University and China Construction Bank Shaxi Town Survey (Suzhou Division of China Development Band, and Tongji University 2016) found that most farmers in Shaxi prefer to move to new communities. But the survey also found that farmers generally expect rural land and property assets to which they hold use rights to appreciate. Most believe relinquishing some or all of their existing use rights to rural land will promote appreciation of their family assets if compensation is high enough or they are able to retain some valuable use rights that they expect to appreciate as well as receiving significant compensation to use towards a new house. Given this set of conditions and expectations, to implement the relocation of peasant households, the town government must bear a large expenditure averaging about 900,000 Yuan (248,000 Yuan for infrastructure + 350,000 Yuan in compensation for the old house + 300,000 Yuan for social insurance (US$130,000) per household.

Shaxi’s economic infrastructure investment is significantly higher than social infrastructure investment and cannot be balanced by short-term tax revenue growth. The coordinated financing platforms are needed to make the infrastructure projects feasible. Shaxi Town has promoted centralized living for farmers and environmental improvement in two main ways. First, relocating farmers from scattered rural houses (Fig. 24) to newly built centralized communities (Fig. 25). Of the 16,200 households in Shaxi Town, 5,000 now live in centralized communities. Of the 5,000, 4,500 are divided into 15 concentrated residential communities. The other 500 households have moved to communities in apartment buildings (Fig. 26). The remaining 11,200 households are still living in their historic villages. Some of the remaining residents will be relocated in the future if their homes are demolished; others will remain if their houses are retained and restored with the evaluation of historic villages by town and city governments. Some village residents—particularly older people or residents living in houses or villages they particularly value subjectively—have chosen not to move, and may never move, regardless of the opportunity to move into larger, more modern, better serviced housing.
Fig. 24

Scattered rural houses.

Source Suzhou Division of China Development Band, and Tongji University, 2016

Fig. 25

New concentrated communities.

Source Suzhou Division of China Development Band, and Tongji University, 2016

Fig. 26

New apartment buildings.

Source Suzhou Division of China Development Band, and Tongji University, 2016

For town government, denser housing in communities large enough to achieve economies of scale and savings in providing water, electricity, waste disposal, and other infrastructure and education, health, job training and other social services can allow them to provide a better quality of life at lower cost. Resettlement may also free up new arable land (Figs. 27 and 28) and increase the government’s claim on limited land development quotas so they can develop more land. These are the most important reasons why the town has economic incentives to promote such projects.
Fig. 27

Former village land in large scale agricultural operation.

Source Suzhou Division of China Development Band, and Tongji University, 2016

Fig. 28

A large parcel of arable land after farmers were relocated.

Source Suzhou Division of China Development Band, and Tongji University, 2016

Industrial parks and tourist areas: Funds for building industrial parks (Fig. 29) and scenic spots for tourists in the ancient town (Fig. 30) are raised through financing platform companies and city investment companies. The government is the main body involved in the financing platform. The State Development Bank has provided many loans. Although short-term direct income from the development of scenic spots in the ancient town is modest, their development and construction is expected to improve the overall development level of Shaxi by shaping the cultural image of the town.
Fig. 29

Industrial Park in Shaxi.

Source Xu Chen

Fig. 30

Suzhou traditional architecture in tourist area in Shaxi.

Source Xu Chen

4 Contradictions Between the Planning and Construction of Infrastructure and Operation of Investment and Financing in Small Towns

Shaxi is representative of towns in the developed areas of Eastern China, characterized by a high level of economic development and financial strength. Shaxi’s overall planning targets, standards, and the speed of infrastructure planning and construction have exceeded their fiscal capacity. This suggests that high development levels in China also bring steep debt, which increases pressure on the land finance system. In this sub-section, we analyse distinct contradictions between the planning, construction and investment of infrastructure.

4.1 High Debt Risk from Reliance on Land for Investment

Investment funds for financing infrastructure construction in Shaxi town are generated from the financing platforms mainly by mortgaging land assets. Investment and financing mechanisms are highly dependent on land credit. Currently, the funds that Shaxi can obtain directly from land transfers to repay debts are still limited. With the rapid growth of local governments’ scale of financing liabilities at all levels, the central and provincial governments strictly constrain the quota of construction land to control risk. The right of land approval in Shaxi has been transferred from the Suzhou municipal government to the provincial government. In recent years, Shaxi has directly obtained approximately 100 million to 200 million Yuan each year from land transfers. Land transfers can repay only a small part of debt principal; most of the debt must be repaid through financing platforms, which involves raising new funds to pay off old debt. To a great extent, project funding must rely on land mortgages, which can be bought or leased by industrial and commercial land users and real estate developers. The ratio of debt to GDP in Shaxi Town was 23% in 2014 (Suzhou Division of China Development Band, and Tongji University 2016)—not excessive by the international standard of the Maastricht Treaty approved by the European Community in 1992. Shaxi’s government debt risk is low,8 but, because the town government constantly borrows money to pay off old debt with newly raised funds, Shaxi’s liquidity debt service ratio9 has exceeded the 10% standard international alert level for a long time, so debt risks cannot be ignored. If the growth rate of Shaxi Town’s financing fund is always greater than the income produced by infrastructures projects, its financing mechanism will not be sustainable in the long run. This is a problem that both Shaxi and other village governments in Suzhou city and throughout China are facing. Both land transfers and land credits are likely to decline in the future, so opportunities to raise funds will likely decrease. Therefore, government programmes to promote the transformation of industry and strengthen the real economy to expand financing sources in the public budget is a good strategy. However, the transformation of industries structure is hard to achieve in a short term.

4.2 The Township Government’s Credit Rating and Infrastructure Construction Financing

In general township governments’ credit ratings in China are low, and financing matchmaking cannot be completed directly with policy-oriented financial institutions, which is leading to financing difficulties. Moreover, township governments’ financing costs are significantly higher than those of higher-level governments. This has created a situation in which what are intended to be short-term loans are in fact used for a long time. Short-term project investment is significantly higher than corresponding income. Therefore, raising infrastructure construction funds is difficult and costly. The share of non-governmental financing for infrastructure is small. Although Shaxi town raises some funds in the form of projects, the participants are mostly governments of Taicang city or Suzhou city and state-owned enterprises. In general, towns are facing more severe difficulty in investment and financing for infrastructure construction than counties and cities. Funds are more difficult to obtain, the cycle for use of funds often does not match the construction cycle, and the sources of funds are severely limited.

4.3 Structural Distortion of Transfer Payments for Infrastructure Planning and Construction and the “Flypaper Effect”

In general, transfer payments are currently operated in a special transfer payment mode. That restricts the overall expenditure and allocation power of the village and town governments and leads to structural distortion of infrastructure planning and construction. Local cadres in local governments are evaluated largely in terms of short-term results. As a result, government officials have much less incentive to promote the construction of social infrastructure which will not produce measurable results in the short term than economic infrastructure where they can demonstrate success quickly. However, pressure to over-invest in projects with a measurable short-term payback is partly offset by the so-called “flypaper effect” (Hines and Thaler, 1995). The flypaper effect is the finding that money sticks where it hits, similar to the way flies stick to flypaper. When higher level governments make transfer payments, lower level governments tend to use them for their intended purpose rather than simply substituting them for own source revenue or spending the money according to their own priorities. For example, as education funding comes from Jiangsu Province, township governments apply for as much education funding as possible to build more schools. Even if the level of education in a town like Shaxi is high, they still have a strong incentive to apply for the construction of new schools. Otherwise, these funds would not be distributed or would be allocated to other towns where funds are needed. This helps keep investment in economic development project with short-term payoff and longer-term social investment in balance. In contrast, small towns lack incentives to improve medical infrastructure, because they need to bear most of the costs to construct medical facilities on their own.

5 How Infrastructure Construction Investment and Financing for Small Towns in China Can Be Improved

Thus far, this chapter has described how infrastructure construction investment and financing for small towns in China works. Like cities and counties, small towns in developed regions rely primarily on self-financing to promote infrastructure. The difference is that town governments face more financing difficulties, since township governments’ credit ratings are usually lower than cities and counties while their financing costs are usually significantly higher. Also, the orientation of investment and restrictions on the use of funds are likely leading to structural distortion in the planning and development of towns’ infrastructure. This section discusses our recommendations for improvement of this situation. Problems in infrastructure planning, construction, investment, and financing reflect the high speed of development in China today. They include excessive reliance on land finance, increasing difficulty in financing, and structural distortion of infrastructure. The healthy development of small towns in China depends on reform to change the concept of planning and the mode of development.

5.1 Recommendations for Combining Incremental Expansion and Inventory Optimization for Infrastructure Planning and Supply

China’s rate of GDP growth has slowed down and it appears unlikely that it will return to the very high rates that prevailed for thirty years from the early 1980s. Small towns’ planning and construction can no longer expect such rapid economic growth. The overall economic development level of Shaxi Town is already high, and its level of urbanization has reached 60%. Relaxation of restrictions in the system of land ownership and transfer have promoted industrialization and urbanization with funds obtained rapidly through land financing. At present, Shaxi Town is burdened by high debt, and market demand and operating income growth appear likely to be waning. Given this uncertainty, and the likelihood of resources poverty challenge (Dahiya 2012a, b), we believe small towns in developed areas of China like Shaxi should lay more emphasis on the reallocation and optimization of existing resources. In national urbanization, as regional urban agglomeration progresses, industrial parks in some small towns are inevitably shrinking. Where this is occurring, small towns should better manage their built-up space and adjust their functional layouts and infrastructure configuration. Small towns’ environment can be improved through urban renovation and ecological restoration. The improvement of a towns’ space structure could promote the development of industry and economic growth. It might switch their financial resources from the revenue of land transactions to tax revenues resulting from the local economic growth.

5.2 Recommendations for Institutional Reform to Further Rationalize the Relationship Between the Government and the Market

China has a market socialist economy that relies both on government and markets to meet its needs. Another important area for reform is to adjust the relationships between government and the market. The dilemma of infrastructure investment and financing small towns face reflects flaws in existing finance and taxation systems. Constrained by the Budget Law of the People’s Republic of China (1994) and other laws and regulations, China’s local governments do not have bond-financing channels adopted by developed countries to finance infrastructure construction. Funds for urbanization are provided by local financing platforms. Financing is particularly difficult for small towns because they obtain the least government financing of any level of government in China. As a result, they are dependent on the support of higher-level governments for financing authority and transfer payments. Their infrastructure supply structure is prone to distortion. These problems can only be solved as a result of a wider range of institutional changes, including rationalizing the state-market relationship so as to avoid distortions caused by excessive government influence on the market. We believe that government decentralization should be adjusted, and village and town governments’ fiscal and routine powers should be rebalanced where necessary. Matching fiscal and administrative power will help local governments to rationally allocate their fiscal revenues and avoid the structural distortion of infrastructure supply.

We believe that local governments should be given more power to generate adequate own-source revenue. Based on international experience (UN-Habitat and ESCAP, 2015), a goal of fiscal reform should be to expand the tax collection power of governments at lower levels, and shift responsibility for the construction of some social infrastructure from lower-level governments to the higher-level governments. Reform of the transfer payment system should generally make lower-level governments responsibility for local decision-making. Government at every level should have reasonable and stable income sufficient to achieve the responsibilities assigned to it. We also believe that China’s land system should also be reformed. For both residents with hukou and migrants, education, medical care, housing, and the supply of other basic services are closely related to land transfer and capitalization. If the current land system—which requires constant land conversion as a main revenue source—does not change, funding for social services will be not sustainable.

Market-oriented financing channels should be diversified. Shaxi’s experience reflects the high cost of supplying infrastructure for urbanization when financing channels are limited and interest rates high. Like many towns in China, the cost of supplying infrastructure has significantly exceeded the town’s financial capacity based on the existing tax finance system. International experience shows that private non-governmental funds can be used for infrastructure construction and it is possible to develop diversified financing channels within the market-oriented model (Pollitt 2002).

For village and town governments, two critical reforms can make a large difference. First, we believe that the authorities of policy-oriented financial institutions should be redefined so that policy-oriented financial support is more widely available to village and town governments. For a long period of time, the policy-oriented financial institutions, such as China Development Bank and Agricultural Development Bank of China, have been providing financial support (loans) to fewer infrastructure development projects at the village and town level compared to higher order cities and towns. Instead, they provide a major support for the national medium- and long-term development strategy. For example, China Development Bank offers supports for the Expressway Projects and the Western Development Strategy, and Agricultural development Bank of China supports agricultural industrialization and agricultural infrastructure construction. As a result, villages and towns have limited access to the policy-oriented financial and institutional support. We believe that policy-oriented financial institutions could play a more important role in town development if they provide more opportunities for village and town level infrastructure projects. Second, local governments’ financing space should be expanded, including the establishment of a multi-level bond market so that small towns can directly raise funds.

While some of the reforms discussed above apply only to Shaxi town and other reforms apply just to China, the Shaxi Town case study offers important lessons for other developing countries which face many of the same problems as China. Ameliorating living conditions in towns and villages as well as cities, equitably and inclusively, is a challenge for all developing countries, just as modernizing agriculture and developing industry are common objectives. Balancing government and market approaches, appropriate decentralization, provision of multiple funding sources, spatial equity, careful consideration of risk, and control of debt will benefit any developing country. Shaxi has had both successes and failures, which can inform policymakers and planners elsewhere.

Footnotes

  1. 1.

    Zhou (2006) measurement method: gross gap = local income—local expenditure, net shortfall = local income—local expenditure + subsidized income from higher-level governments.

  2. 2.

    Tao R et al. (2009), Chen and Zhao (2016) analysed the behaviour preference of local governments before the 1994 reform of tax sharing system.

  3. 3.

    Local governments’ behavioural strategies in China are formed in the institutional environment with no property tax. Due to the high cost of implementation of the property tax system, the Chinese government implemented the one-time land transfer system instead of the property tax system. Industrial and commercial land users and real estate developers pay entire land leasing fees for 40−70 years—a one-time land-transfer fee paid to local governments. Land transfer fees are divided and calculated as part of individual real estate purchasing expenses. So in the period of land using (40−70 years), the user pays no property taxes.

  4. 4.

    According to the yardstick of per capita GDP, China’s economically developed provinces are all located on the southeast coast region.

  5. 5.

    Hukou is China’s system of household registration. It allows the government to control and regulate internal migration, especially rural-to-urban migration, and control the infrastructures and services supply for a selected group of population.

  6. 6.

    The construction and growth of economic infrastructure are particularly important in the short term; successful social infrastructure improves the long-term utility function of the residents. The social infrastructure production function may not change in the short run; however, in the long run, it should lead to growth through more productive human capital and more disposable income.

  7. 7.

    “Three concentrations” means that industries are concentrated in designated planning areas, farmers are concentrated in communities, and agricultural land is consolidated into larger parcels, optimizing urban, industrial, agricultural, residential, ecological, and hydrographic planning and layout. “Three-replacements” means replacing cooperative stocks of land shares with contracted land, replacing commercial houses with homestead land, and replacing shares with collective assets. This is intended to optimize allocation of urban and rural resources. “Four-matchmaking” refers to matching urban and rural infrastructure, urban and rural public services, urban and rural social security, and urban and rural social management to integrate urban and rural environments/economies. (Suzhou Division of China Development Band, and Tongji University 2016.)

  8. 8.

    The Maastricht Treaty approved in 1992 for measuring government risk, only feels an alert is necessary when total government debt reaches 60% of GDP.

  9. 9.

    The liquidity insolvency index is the ratio of debt service payments to fiscal revenue. The international alert level is 10%.

Notes

Acknowledgements

This research was funded by the National Natural Science Foundation of China (Programme No. 51708117), the Fujian Federal of Social Science Circles (Programme No. FJ2017B021), and Fujian University of Technology (Programme No. GY-Z17006). The authors also thank the team members of a research project titled “Research on the Vision and Models of Integrated Urban and Rural Development in Suzhou during the Thirteenth Five-Year Plan”, supported by the Suzhou Division of the China Development Bank and Tongji University (Dr. Chen Chen, Chenghao Fang, Su Xu, and others).

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Copyright information

© Springer Nature Singapore Pte Ltd. 2020

Authors and Affiliations

  1. 1.School of Architecture and Urban PlanningFujian University of TechnologyFuzhouChina
  2. 2.Department of Urban PlanningCollege of Architecture and Urban Planning (CAUP), Tongji UniversityShanghaiChina
  3. 3.Tongji UniversityShanghaiChina

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