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Wednesday, September 16, 2020
The Possibility of the Economic Deterioration of China's Border Regions
Chan Kung

China is known for its vast border regions, as noted by the American scholar Owen Lattimore, renowned for his systematic studies on the Chinese border regions. Based on well-known historical reasons, it is an indisputable fact that the economy of China's border regions is relatively underdeveloped. Although China has already launched the "Western Development" strategy as early as the 1990s, the final result is yet to be satisfactory. Although the hard indicators of the frontier economy have improved to a certain extent, this growth relies heavily on transfer payments from the central government. There is a huge structural gap between the economies of the border areas (mainly Tibet, Xinjiang, Inner Mongolia, and the southwestern region) and the southeastern coastal areas of China. Both the scale of fiscal revenue and the per capita fiscal contribution of the western ethnic regions are lower than the national average. Looking at the gap with reference to 1998 data, among the five ethnic minority autonomous regions, the Tibet Autonomous Region, which had the smallest fiscal revenue, was only RMB 364 million, far below the national average of RMB 16.077 billion. Xinjiang, with the highest per capita fiscal revenue, was RMB 374.30, and Tibet, which was the lowest, was RMB 144.44, a difference of RMB 35.91 and RMB 265.77 from the national average of RMB 410.21, or 63.85% and 8.04% respectively. In 2019. The general revenue budget of local finance in Xinjiang was RMB 157.7 billion, Tibet was RMB 22.2 billion, and Beijing was RMB 581.7 billion. The gap is still very obvious. In terms of per capita, China's national fiscal revenue in 2019 was about RMB 19 trillion, and if divided equally according to the 1.5 billion population, the per capita fiscal contribution to the country was around RMB 13,000. In contrast, according to the estimates of the 2010 census, Tibet's population in 2019 is estimated to be around 3 million people, while Xinjiang's is around 21.8 million people. It has been estimated that in 2019, Tibet's per capita fiscal contribution was RMB 740, and Xinjiang's was around RMB 7,200. Therefore, from the perspective of the extent of the fiscal gap, although China has emphasized economic growth for years, the actual fiscal gap in border areas shows an increasing trend.

Obviously, even taking into account the state's preferential fiscal policies for the border areas, the excessively low fiscal revenue still shows the obvious problem of uncoordinated economic development, which not only restricts the development of social welfare undertakings in the border areas, but also makes the education level of the ethnic minority areas relatively backward. It also contributes to the severe shortage of social public goods supply, and restricts economic development. This also means that the government of the border region must rely on a large number of contributions from other places to maintain normal operations. Therefore, the central government's financial support for China's border areas through transfer payments are extremely important for the production and supply of public goods in the border areas and social stability.

Take Tibet as an example. The Tibet Autonomous Region is an important frontier region in China, and it is also an ethnic minority region with distinctive religious characteristics. Developing the economy of the Tibet Autonomous Region is not only beneficial to the stability of the border areas, but also conducive to national unity. In his speech at the Seventh Tibet Work Symposium, President Xi Jinping emphasized that China should "adhere to the strategic thinking that governing the borders is indispensable in governing the country, and stabilizing Tibet is essential in governing the borders". He also emphasizes that the central government of China and the whole country support Tibet, and this has been the consistent policy of the Chinese Communist Party central that should be seriously adhered to, in order to create a new situation for aiding Tibet. Under this long-term guiding ideology, in order to support the development of Tibet, the state has provided Tibet with a large amount of transfer payments, which has become an important feature of Tibet's economy.

Tibet Autonomous Region General Public Budget Revenue and Central Government Subsidy (100 Million Yuan)

2015

2016

2017

2018

2019

General public budget revenue

1604.85

1730.86

1998.64

2294.46

2496.7

Central government subsidy

1331.17

1351.91

1501.71

1732.58

1901.2

The proportion of central government subsidy

83%

78%

75%

75.5%

76%

Source: The implementation of the budget of the Tibet Autonomous Region over the years, Tibet Autonomous Regional Department of Finance.

As can be seen from the chart above, in terms of direct transfer payments, the central government has given considerable support to Tibet, which has become the absolute bearer and the main pillar of Tibet's finances. From 2015 to 2019, in the general public budget revenue of the entire Tibet, the central government subsidies accounted for 75% to 83%. Most prominently, the central government's annual subsidy has exceeded Tibet's GDP that year, showing the state of Tibet's net negative growth relative to the whole country. Judging from the data in 2019, Tibet achieved a gross regional product (GRP) of RMB 169.782 billion. The central government subsidy to Tibet that year was RMB 190.12 billion. The central government fund exceeded Tibet's GDP by about RMB 20.3 billion that year.

Obviously, as the central government's financial support for the Tibetan economy increases, and is driven by large-scale central transfer payments, the Tibetan economy has achieved relatively stable development. In 2019, when the national economic growth slowed, Tibet still achieved year-on-year growth of 8.1% (of course, this is due to the low starting point of Tibet), which is a relatively fast growth rate in the country. In the first half of 2020, when the COVID-19 pandemic raged across the country, Tibet was minimally affected, with a GRP of RMB 83.838 billion, an increase of 5.1% year-on-year, leading the country in all provinces and regions, and 1.8 percentage points higher than the second-ranked Xinjiang (3.3% growth rate).

In addition to the strong central fiscal transfer payment, the whole country also has strong support for Tibet in many other aspects. This part of the funds is not included in the total scale of the central fiscal transfer payment, but has become a relatively rigid payment for the local finance. For example, there is a huge number of cadres in aid to Tibet across the country, and there are many projects as well. Based on incomplete statistics, the total number of aid cadres across the country remains at more than 2,000. Many professional and technical jobs in Tibet are basically done by cadres with professional knowledge and development experience, where they form a lot of support for the work in Tibet.

In terms of finance, the central government has also provided all-round support to Tibet. In addition to fiscal transfer payments, the bank's preferential lending to Tibet is very obvious. In addition to guaranteeing the scale of loans, the interest rate of loan subsidies is also very low, which is basically the lowest level in the country. In addition, the Tibet Autonomous Region also has special preferential treatment for companies to get listed, where companies can get listed faster. According to some cadres who aided Tibet, from the perspective of Tibet's financial sector, including the amount of funds received and various financial preferential policies, Tibet even looks like a financial center in western China. For example, when measured by the proportion of loans in GDP, Tibet has a very high proportion. Comparing the number of listed companies under the same GDP scale, those in Tibet has a very huge number. In addition, the issuance of financial licenses in Tibet is relatively complete. Tibet's financial activities are something that are hard to imagine in Inland China.

The situation is similar in terms of aid to Tibet. In terms of major transportation projects, the state has initiated the construction of the second railway to Tibet—the Sichuan-Tibet Railway. After the completion of this southern railway, the connection between Tibet and Sichuan will be more convenient, which will bring about economic and social development in Tibet. All of this reflects the central government's strong support for Tibet in many aspects, which has enabled Tibet to perform well in terms of economic growth and in poverty alleviation.

It is worth noting that the central government's strong support for Tibet is the same in other border regions of China, but it is more prominent in Tibet. The economy of China's border regions relies heavily on the support of the Chinese central government in terms of funds and policies in an extreme mode, which has the appearance of a sort of "foster economy".

Xinjiang, for instance, is also highly dependent on transfer payments from the central government. Generally, transfer payments account for 60%-70%; the central government alone pays RMB 400 billion to Xinjiang every year. This scale is definitely not a small number. As a major country in the world, China's military expenditure has just broken through the trillion thresholds, and the total amount of transfer payments from the central government has exceeded RMB 8 trillion, which is equivalent to eight times the military expenditure. Moreover, the growth rate of central transfer payments is also very fast. The growth rate in 2020 is as high as 12.8%, which means that 70% of the entire fiscal and public budget revenue of the country is given to border areas.

While the central government's transfer payment is reasonable, this in fact is a process of resource redistribution. The central government's fiscal revenue mainly relies on the economic benefits created by the eastern coastal provinces, and then transfers them to the underdeveloped border regions. This is a reasonable allocation of resources. However, from the perspective of risk analysis, China's border regions are about to face major risks, which is also an objective reality. Because China's border region economy is not an economic model with endogenous power, once the main financial contributors, namely China's southeast coastal provinces, are exhausted, the socio-economic situation in China's border regions will immediately deteriorate.

The reality is that, such a critical situation is not something that will happen in the future, but it is already happening.

In 2018, among the 31 provinces in China, only 6 provinces and 1 city are actually making money, and the local finances in other regions are all in deficit. By 2020, due to the impact of the COVID-19 pandemic, geopolitics, and other factors, the economic situation has further deteriorated. Only Shanghai has a positive fiscal balance, and all other regions are negative. In fact, in 2018, there were already rumors of a trillion-dollar fiscal deficit, but today the situation will only get worse.

From a data analysis point of view, Guangdong has always been the most important contributor of central fiscal revenue. However, from January to June this year, Guangdong Province's full-caliber fiscal and tax revenue (includes the part handed over to the central government) was RMB 1,413.2 billion, a decrease of 11.5% from RMB 1,5976 billion of the same period in 2019. In addition, Guangdong's public fiscal expenditure in the first half of this year was RMB 823.7 billion, compared with RMB 900.2 billion in the same period in 2019, a drop of 8.5%. The contribution value of Guangdong's finance in the first half of 2020 was: RMB 1.4132 billion full-caliber income – RMB 823.7 billion expenditure = RMB 589.5 billion; contribution value in the first half of 2019: RMB 1,597.6 billion – RMB 900.2 billion = RMB 697.4 billion. In other words, the contribution made by Guangdong Province to the national finance in the first half of this year decreased by a full RMB 107.9 billion compared with the same period last year, a decrease of 15.5%.

It should be noted that Shenzhen is not included in the data above, because Shenzhen is a city under separate planning in China, and its fiscal revenue and expenditure data are not included in the statistics of Guangdong Province, so it is also necessary to calculate the situation in Shenzhen separately.

The fiscal contribution of Shenzhen in the first half of 2020 was: RMB 439.3 billion full - caliber tax revenue – RMB 197.9 billion public fiscal expenditure = RMB 241.4 billion. The contribution in the first half of 2019 was: RMB 469.6 billion – RMB 230.3 billion = RMB 239.3 billion. In comparison, although Shenzhen's revenue this year has also shrunk, from RMB 469.6 billion in the first half of 2019 to RMB 439.3 billion in the first half of this year, a drop of 6.5%, but at the same time, it has greatly reduced its own financial expenditure from the first half of last year. The expenditure of RMB 230.3 billion in the first half of this year was sharply compressed to RMB 197.9 billion in the first half of this year, a drop of 14.1%, far exceeding the 8.5% shrinkage level of fiscal expenditure in Guangdong Province. Therefore, the scale of Shenzhen's fiscal contribution to the central government has been roughly balanced, with a slight increase. From this perspective, the economic work of the Shenzhen Municipal Government is undoubtedly quite successful. As long as it does a good job in reducing its own financial expenditures, the "tight days" can go on.

Interestingly, if the figures for Guangdong and Shenzhen were combined, the entire Guangdong region contributed RMB 830.9 billion to the country's budget in the first half of this year. Given that that Guangdong has 11.521 million permanent residents, this equates to a financial contribution of RMB 7,212 to the central government budget from every Guangdong's resident in the first half of this year. That's more than any other region on China's southeastern coast, including Shanghai, Zhejiang and Jiangsu.

In contrast, the fiscal contribution of Jiangsu province in the first half of 2020 was RMB 117.5 billion (the calculation process will not be repeated here), and RMB 186.6 billion for the first half of 2019. In addition, Jiangsu province's fiscal revenue shrank by 7.3% in the first half of this year, while its fiscal expenditure bucked the trend and rose 1.2%. On a combined basis, the value of Jiangsu province's fiscal contribution fell sharply by 37.0%. With a permanent resident population of 80.69 million, Jiangsu province's budget contribution was RMB 2,312 per capita in the first half of 2019 and RMB 1,456 per capita in the first half of 2020.

Finally, let us take a look at Zhejiang province. In the first half of 2020, Zhejiang province's full-caliber fiscal revenue was RMB 925.7 billion (including the planned independent city of Ningbo). Compared with its public expenditure of RMB 580.1 billion in the first half of 2020, its contribution to the central government budget was RMB 345.6 billion. The budget contribution figures for the first half of 2019 are: RMB 970.4 billion full-caliber fiscal revenue - RMB 601.9 billion public expenditure = RMB 368.5 billion. It appears like Zhejiang province's fiscal contribution was roughly flat this year, with a very low drop of 6.2%. With a permanent resident population of 58.5 million, Zhejiang province's per capita budget contribution was RMB 6,299 in the first half of 2019 and RMB 5,907 in the first half of this year.

Per Capita Contributions of 3 Eastern Provinces to the Central Government Budget (Yuan)

Guangdong

Jiangsu

Zhejiang

2019.1-6

8130

2312

6299

2020.1-6

7212

1456

5907

Therefore, taking into account the financial situation of the three major provinces along the southeastern coast and considering the special economic situation in 2020, it is quite thought-provoking and meaningful that the per capita contribution of Guangdong to the central government budget in the first six months of this year amounted to RMB 7,212. Guangdong's per capita disposable income in the first half of the year was RMB 20,774, and in fact, Jiangsu and Zhejiang have similar per capita disposable incomes, which were basically around RMB 20,000 in the first half of the year as well. According to these figures, this amounts to every Guangdong people contributing a quarter of their income to the central government budget, which in turn transfers the vast majority of the surplus to China's border regions. The current situation can then be summed up as follows: the central government budget's "east-to-west" model of transfer payments is difficult to continue, or difficult to continue to grow; while the economically developed provinces along the eastern coast are overwhelmed by the burden, and are in a state of exhaustion.

More importantly, the Chinese economy is not on a benign upward trajectory. The unstable geographical environment has exacerbated the pressure for reform, and there is still a long way to go to establish a true dual-circulation. From a pessimistic point of view, it may be difficult for China's economy to regain the momentum it enjoyed during the "golden decade" in the next 5 to 10 years. The first consideration of each province, city, or even smaller administrative division, is to ensure their own healthy development and to achieve their own stability. Under these circumstances, it is more or less unrealistic and overwhelming to ask the economically developed eastern coastal areas to shoulder the burden of China's entire economy as it has in the past.

A more challenging development is that, on the one hand, the economy of the developed southeast coastal areas is facing difficulties, with their fiscal potential at its peak and falling. On the other hand, China's border regions, for a number of reasons, continue to have financial needs that seem difficult to restrain. Many projects are in progress and require a subsequent infusion of funds. The social needs caused by various reasons and construction goals continue to expand, and it is generally expected that it will be difficult for China's border regions to achieve a major economic and industrial breakthrough and transformation in a short period of time. The supply and cost of public goods in China's border regions will continue to soar, and the burden that the developed regions have to bear because of this will only become heavier.

The result of all this is a simple and clear prediction - the situation on China's border regions is undergoing a dramatic change, and it is very likely that there will be a sharp turn for the worse in the near future. While we are optimistic about the situation in China's border regions today, we should also pay close attention to the risk of such a "sharp turn", otherwise there will be an unpredictable and dangerous prospect in China's border regions.

(Author's note: The data and information used in this article are based on those found online. Some economists have made contributions to this article. ANBOUND researcher Tony Pan has also made important contribtions.)
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