In the process of urbanization, how can local governments restrain the impulse for blind investment and focus more on stimulating consumption? How should new cities, especially those in remote and unattractive locations, be more scientifically assessed and planned? In recent years, there has been a phenomenon of population outflow from first-tier cities. Will this continue, and how can megacities increase their attractiveness?

In a recent interview with The Paper, Professor Lu Ming, a distinguished professor at Shanghai Jiao Tong University, shared his insights on these issues.

Addressing Local Government Debt and Urban Expansion

Professor Lu stated that the current substantial local government debt is a result of blind expansion in previous years. Respecting the natural laws of regional economic development, he noted, requires acknowledging the objective tendency of economic and population concentration in certain areas. New cities should not be developed in areas experiencing population outflow, and resources should not be directed towards already excessively invested regions, as this would lead to diminishing returns and lower efficiency in economic resource allocation.

Changing Incentives, Assessment Mechanisms, and Tax Structures

Professor Lu pointed out that the incentive and assessment mechanisms, as well as the tax structures of local governments, need to change. He advocated for a gradual shift from a production-based tax structure to one focused on population and consumption. Increasing the weight of the latter would change the current practices of local governments, which heavily subsidize business investments and engage in redundant construction.

Advocating for Reforms in Land and Household Registration Systems

For years, Professor Lu has been a strong proponent of major reforms in land and household registration systems to foster better urban development. Regarding the phenomenon of population outflow from first-tier cities post-pandemic, he believes that, in addition to quickly introducing measures to create a better business environment, these cities should leverage the advantages of their population size, density, and flow. He suggests that first-tier cities could intensify reforms in household registration systems, granting local residency and urban citizen treatment to long-term, stable employees and residents who have consistently contributed to social security.

New City Development and Real Estate Investments

In response to a question about the central economic work conference, which emphasized balancing local government debt and sustaining development, Professor Lu discussed the connection between local government debt and new city development. He advised that new city construction should consider population movement trends, and new cities should only be built in areas with continuous population inflow. Additionally, these new cities should be well connected to central urban areas, with locations near transit stations to facilitate population concentration. In areas with population outflow, new city development should be halted, and for those with mislocated or surplus infrastructure and housing, a contractionary planning and development approach should be adopted.

Addressing Real Estate Risk and Optimizing Local Finance

Regarding the current focus on real estate risks, Professor Lu suggested that for social stability, the primary goal in the real estate sector should still be to complete construction projects. However, he noted that real estate sales are linked to population movement trends. In areas where the population is decreasing and real estate is surplus, debts can potentially be repaid by selling state assets. Debts that have already formed may require higher-level government interventions, such as debt restructuring, extensions, or new loans to repay old ones. To prevent moral hazard, further constraints on local borrowing and reductions in local government spending are necessary, particularly in areas with surplus civil servants and public sector units. Further provision of public services in these areas should be addressed through fiscal transfers from higher levels of government.

Advice for Young Homebuyers

For young homebuyers, Professor Lu recommends considering the purpose of buying a home. The first home usually correlates with employment, so purchasing should occur in the city of employment. In cities with high housing prices and a significant service sector, young buyers need to balance proximity to city centers with affordability. Those who can tolerate longer commutes might consider living farther from city centers, while others might opt for smaller homes or rentals near the city center. For investment properties, the direction of population movement is crucial, as real estate as an investment is directly related to the trend of population growth in an area.

Shifting from Production-Based to Population and Consumption-Based Tax Structures

In line with his long-standing advocacy for continuous reforms in land and household registration systems in China, Professor Lu's views align with the central government's vision of building a unified large market. The current barriers in this process, he believes, are primarily in the household registration system reforms, which have recently accelerated. The next urgent step is to align urban construction land supply with population trends, increasing supply in areas of population inflow and reducing it in areas of outflow.

The focus now is on changing the incentive mechanisms of local governments. Historically, local governments have maximized local GDP growth and tax revenue, often engaging in redundant construction and competitive subsidies. Additionally, China's unique tax system, with value-added tax (VAT) based on production as the main source, has led local governments to prioritize production over consumption and population attraction.

In the long term, altering local governments' incentive mechanisms, assessment mechanisms, and tax structures is essential. Shifting from a production-based to a population and consumption-based tax structure will alter local government behaviors. This reform, however, is a lengthy process.

Recently, central government leaders have been urging local governments to align their actions with the national push towards a unified large market, emphasizing its necessity and urgency. This alignment is crucial, especially as the structural and systemic changes are yet to occur. Encouraging local governments to consider issues from a national perspective aids in promoting the construction of a unified large market.

Provincial governments coordinating their subordinate cities and counties to overcome fragmented investment approaches that hinder market integration and optimal resource allocation are commendable. As central cities and their surrounding areas form metropolitan circles, especially across provincial boundaries, enhanced coordination between provincial governments is necessary. This coordination should break provincial administrative boundaries in planning, land-use allocation, transportation, and infrastructure construction to promote integration.

Advancing People-Centered Urbanization

The recent State Council meeting emphasized the importance of advancing people-centered new urbanization, prioritizing the urbanization of agricultural transfer population, and further deepening household registration system reforms. Professor Lu believes that local governments still have misconceptions about the service sector and consumption, often preferring the development of manufacturing due to its larger enterprise scale, clearer financial and accounting systems, and easier tax collection. However, this overlooks the fact that China's current industrial structure is characterized by excess capacity in manufacturing and a significant deficiency in services. With the future trend of increasing the share of consumption in GDP and the share of service consumption in total consumption, the service sector will become an increasingly important source of tax revenue.

From a job creation perspective, nationwide, manufacturing employment is in decline, with automation replacing many manufacturing jobs. In contrast, the service sector has become the main driver of job creation and is continuously growing. This shift is significant for enhancing people's sense of gain from economic development, as it improves the proportion of labor income in national income. More importantly, as income levels rise, people increasingly value the quality of life. Local governments at all levels should recognize that developing the service sector and service consumption not only retains talent but also contributes to the economic development of both manufacturing and services. Retaining people strengthens the potential for economic development.

Furthermore, many consumer services have productive aspects. Traditional thinking often contrasts consumption with production and services with manufacturing. However, many consumer industries, especially those related to data and platform economies, are technological backbones that enhance the manufacturing sector's research and development, design, and market development, fostering product innovation and market expansion. For instance, the gaming industry, which appears to be purely consumer-oriented, involves a wealth of technology relevant to the future direction of human technological development. Similarly, the medical aesthetics industry is underpinned by biotechnology.

In the modern era, opposing consumption to production and services to manufacturing is an outdated mindset that lags behind the times.

Population Concentration Lags Behind GDP Concentration, Leading to Regional GDP Per Capita Disparities

Regarding the recent phenomenon of population outflow from first-tier cities, Professor Lu believes it is primarily due to the negative economic impact of the pandemic and subsequent control measures. The "scar effect" of the pandemic is not quickly resolved and requires time. The service sector, which has accommodated a large number of external populations, was more affected by the pandemic, leading to population outflow.

As China's economy gradually recovers, with the service sector's recovery becoming more evident compared to manufacturing, population growth will likely resume in first-tier cities as long as they return to a normal economic development trajectory. As long as the economy continues to grow and the proportion of services in the economy increases, the trend of population concentration in large cities and their surrounding metropolitan areas will not fundamentally change.

From the perspective of first-tier cities themselves, measures should be introduced quickly to shed the negative impact and further leverage the advantages of their population scale, density, and flow. Especially under the influence of the digital economy, many offline consumption scenarios have shifted online, leaving gaps in physical spaces that need to be filled. These offline scenarios should be encouraged to transform into contact-based, interactive, and experiential consumption spaces. The proliferation of coffee shops nationwide after the pandemic reflects people's desire for diverse, interactive, and experiential offline scenes. Interpersonal communication is crucial in this context.

In terms of the business environment, large cities have more standardized legal systems and city management rules compared to smaller cities. As they recover, first-tier cities should further capitalize on these advantages to create a favorable business environment and support the development of private enterprises.