The Purpose of Migration is to Pursue Happiness

China is a country with a lot of people, but it is also one of the countries in the world with the highest land scarcity. The measure of land scarcity is not based on how much land a country has, but on the livable land. Although China occupies an area of 9.6 million square kilometers, the really livable area and the arable land are not plentiful. The per capita livable area of China is only one third of the world average, so the relationship between the human being and the land in China is relatively tense.

An important policy reason leading to the polarization, as revealed in the recent round of skyrocketing land and housing prices, is China’s urbanization strategy.

So what is our vision? We hope that people leaving rural areas to relocate in small cities would make them a place where they live and work in peace and contentment. We do not complicate the happiness function. The most basic purpose of a young people’s migration is to find a better, more interesting job with a higher salary. However, in reality, many industries and enterprises have not gone to small cities. Instead, enterprises in small cities are moving to big cities.

Normal State of Big Cities: Traffic Congestion

Why do enterprises move to big cities?

Originally, in a western push, China expected to move industries from the coastal areas to some parts of the inland areas in order to develop small towns there. However, these industries went to big inland cities where a large number of people were concentrated. With enterprises failing to move to small cities, people were unwilling to move there. Small cities cannot offer so much employment. Nor can they offer so much income. Therefore, people flock to big cities, instead.

We need to study the basic logic of urbanization. Why is there urbanization? Why are the rural people moving to the urban area? At the beginning, township industry was a feature of the rural area. Later, many township industries were moved into cities. Industries cannot develop well in the scattered villages due to the lack of the aggregation effect, a kind of scale effect.

When township enterprises were developed in the rural area, each town or village developed industries. But the costs for repairing roads, electrifying enterprises, and setting up phone lines were very high. By contrast, by setting up a development zone in the vicinity of a city, its infrastructure in such fields as logistics, transport and information is not only cheap, but also more sound and complete. It is a more favorable setting for industrial development since the same investment can support more industries and companies.

The basic definition and logic of urbanization is aggregation. The greater aggregation there is in a city, the more advantages the city will have. Of course, large aggregation may also lead to some negative effects. Nevertheless, through an overall comparison, the final analysis comes down to which one is higher, its income or its cost. World history over the past century has shown that population has become increasingly concentrated in large cities, which have in turn become increasingly developed, and the concentration of big cities in both developing and developed countries has been increasingly high. The United Nations specifically published a report of The Advantages of Big Cities, saying that big cities are more efficient when it comes to pollution governance, because a big city with a certain population size can build a high level sewage treatment plant.

Aggregation of population will bring a lot of things. Industrial aggregation has created jobs and incomes, both of which have attracted more people. Population aggregation also creates new jobs in the service sector, which is the socialization of family life. When you want to eat a meal at a restaurant in the countryside, you may need to walk for about ten kilometers. A lot of people would not love to do so, so restaurants cannot be developed without the scale effect.

Many Creative Activities Can Only Be Found in Big Cities

Population aggregation in cities provides a convenience to people. For instance, they can go to restaurants extremely conveniently. Consequently, the whole family life is socialized, which simultaneously creates more jobs. By the way, washing your hair at home is not included in the measure of GDP. Nor does it generate an income. If you do so in a barbershop or salon, the barber's jobs creates GDP, meaning that you create a job and bring income for someone else, which is the benefit of population aggregation.

Now that well-educated intellectuals and university graduates are willing to live in big cities, which can provide innovative opportunities. This involves an important knowledge spillover of modern economics. Knowledge stocks can generate new knowledge through the collisions of various knowledge stocks. The more the amount of knowledge stocks, the more the amount of the knowledge generated.

From the perspective of a city, the larger the population aggregation, the greater is its ability to provide new opportunities, create new economies, and create new knowledge. Big cities where a lot of people live often have the ability to produce new culture and the so-called fashion, creativity and so on. The reason why many young people choose to live and work in Beijing is that they are fond of the atmosphere formed by a variety of cultural integration and creative activities. After the eruption of the financial crisis in 2008-2009, with the economies in the coastal areas in freefall, about 20 million farmer migrants were laid off and returned to their hometowns to spend the Spring Festival early. But after the Spring Festival, we observed that many people returned to the cities.

Why did people come back even when the economy had not recovered at that time? A young lad said in a survey, “My mobile phone has no signals in the countryside, so I have to come back to a city.” Another girl said that she could not find someone to have her hair made up, so she came back. Young people come back to cities, because they can find work and live a life they like in cities. In short, big cities not only create employment and income, but also have the ability to keep producing fresh things, indicating the law of population migration.

Looking back on the development of China over the years, we find that most of the population migration happened in big cities. Of course, people did not come to China’s first-tier cities (Beijing, Shanghai, Guangzhou and Shenzhen) all of sudden. They came to those cities gradually. Many farmers working in big cities have bought houses in the county seats of their hometown. People living in county seats want to live in a prefecture city. People from prefecture cities desire to buy a house in a provincial capital.

Only after there is a certain size of the population in a big city, can good schools, hospitals and a variety of cultural lives appear there. It is said that a city with a population of less than 10 million cannot afford a Western music-based concert hall. People tend to have a diversified life. A small city cannot afford it. Only a big city can afford it. This is the case the world over. China is no exception. After all, the basic logic of choice of humankind is the same.

However, we are now setting up a limit for big cities; not allowing more people to live permanently in big cities. We have not considered and arranged public goods supply in all aspects, including land supply, in accordance with a city’s size, with more people continuing to enter in the future. Now governments cannot prohibit people to choose where to go, because migration is free. Man-made limits just serve the purpose of controlling resources, but in fact it cannot limit the population migration. You set a limit on a city’s population size as 18 million, but as long as people are willing to come, the limit will soon be exceeded. This is why the polarization has formed in China’s urban area.

Solution: Housing Property Tax

In terms of the demand side, it is unnecessary to implement the purchase limitation strategy. The solution is to levy a tax on housing properties. Housing property tax is inherently stable. The higher the price a housing property is, the higher the tax that will be levied. In the majority of other countries, housing property tax and transaction tax have been implemented, being very effective. The recent case is the 40% fall of housing prices in downtown Singapore after the country levied the above two kinds of taxes. However, we in China have not been able to employ this measure. So far, it is not included in the agenda of the State Council.

Some people say that China's land is state-owned, but the British are the same. There, any piece of land belongs to the British royal family. A house built on the land is for rent. The Crown will levy property tax on land users, house builders, and house users. Others argue that there are obstacles from vested-interest class. There was once such a joke. Leaders gathered to discuss the issue of housing property tax. In the first 15 minutes, they discussed the state tax. Then, when they began to discuss how much tax their own houses will pay, the discussion was quickly stifled.

But these do not constitute an obstacle to the implementation of levying a housing property tax. China's reform experience is that the reform can be implemented in phases. New things are subject to new measures. Old things use old measures. In a 20-year transition period, China can begin to levy the tax on new houses. For old houses, they can be levied as they are sold. The issue of implementing a housing property tax should not be pegged with the anti-corruption issue. New houses shall be subject to new measures; old houses old measures.

There is also a view that housing property tax does not work, that it violates basic common economic sense. The price certainly does work. The reason why the price does not work is that the price is not high enough. The pilots in Shanghai and Chongqing seemed to prove that the housing property tax does not work. Of course, a housing property tax at a rate of less than 1% does not work. If the rate is increased to 3-4%, just like the tax rate in the United States, I believe the effect will be different. China's real estate speculators went to the United States. They thought that houses there would be cheap because of the breakout of the subprime mortgage crisis. After they knew that a housing buyer would pay a tax by 4% of the value of a property, none of them made a purchase. The higher the housing price is, the higher the tax a buyer must pay. Price will play its role. When price does not work, it must not have been set high enough. There are still some factors and reasons, but I think there are ways to overcome them. Nevertheless, now a housing tax cannot be implemented for some time, because objectively it is still not included in the agenda.

How Does China's Urban Polarization Form?

Polarization refers to the flow of people out of cities and the flow of people into cities. In cities with the immigrants highly concentrated, the skyrocketing increases will emerge in all aspects, including the increasingly tight housing supply and demand relations. For example, when researchers studied resource constraints in a particular city six years ago, they proposed a view that the city could only feed eight million people. However, population in the city has now risen to 21 million. A tight supply and demand relationship must inevitably emerge in the city. A series of social and public services, including transport, public security, and social security will become increasingly inadequate.

So, what happened to the property sector in small cities? In 2004-2007, the property sector in China was so hot that China introduced administrative measures to lower the prices. Housing prices in Beijing, Shanghai, Guangzhou and Shenzhen, and other big cities in China as well, fell very badly in 2008. So many small cities and local governments attracted real estate developers to invest. Attracted by the free purchase policy in small cities and discouraged by the purchase limitation strategy implemented in big cities, quite a few real estate enterprises, including some famous ones, went to small cities to obtain land for housing construction. They built some houses in tier 2-4 cities. They expected housing prices there to rise like tier-1 cities, only to find that when the houses were built it was hard to find buyers.

The urban polarization leads to two aftermaths. On the one hand, as a result of the large influx of population, a serious imbalance between supply and demand emerges in big cities. On the other hand, with the continuing outflow of the population, the phenomenon of oversupply and insufficient demand emerges in small cities. It reveals that there are deviations from some urbanization policies, including the current practice. The urban polarization goes against the law of human migration and the laws of urbanization and industrialization, which reflects human behavior. The basic logic of human behavior is to pursue employment and income, and to improve lives. Unfortunately, we always go against it.

China, similar to South Korea and Japan, went through its industrialization fast. It took China half a century to make its industrialization reach more than 80%. The industrialization process is continuing and will be very long. What phenomenon does the fifty years bring? People have come to cities, but the retired have not yet formed.

The first generation of the rich retired is taking shape. What I mean is that they are not extremely rich, but they are at least as rich as the middle class. They would like to buy retirement houses immediately at a low price. Hainan will not usher in its development until the first generation of the rich retired emerges. Currently, this generation has not yet formed.

So at this stage, coupled with China's vast territory, many small cities are not part of a large urban cluster of major cities, so their development will encounter difficulties. Currently, some small cities may disappear with the net loss of their citizens. However, I believe that the majority of such cities do not have the time to develop. It is time for the population to move out, which is also a development in itself. Suppose that the resources are the same. When there were so many people living there, the denominator would be big, indicating a small per capita GDP and per capita income. Population migration has two effects. For an area where more people live, the denominator will increase. For an area where fewer people live, the denominator will decrease, meaning the entire fraction will increase. If the income is the same, it means that the per capita income in the latter area will be higher, or there will be an increase in the per capita income.

First, with the population of small towns decreased, local per capita incomes can be improved. Second, if governments there protect old houses and local ecologies and cultural features, they make preparations for future population inflows.

We should follow the laws of population migration and urbanization. Set aside more land for the development of big cities, including small towns and satellite cities surrounding those big cities.

In this sense, to follow the rules and address hard issues needs to make a lot of adjustments, including (1) simple control of housing prices and implementation of purchase limitation strategy, (2) some most basic and deeper measures, such as establishing property tax, housing property tax, economic systems and economic means, and (3) urbanization development strategy.

The doctoral thesis of well-known sociologist Fei Xiaotong is about the survey of small towns. It is said that two years before his death he told his students that the way of developing small towns might end up with failure in China. At different historical stages, people have different perceptions of different issues. We can see the above issue more clearly today. Housing prices in big cities are soaring. Meanwhile, there are so many housing stocks in small cities. Only several rows of houses have been sold, because almost no one is willing to do so.

First, we need to consider how many jobs a place can create before we develop the property sector there. If there is no job creation, the final outcome of developing the property sector will certainly end up with failure. Then we need to consider the specific location. Is it in the scope of an urban cluster or outside of the urban cluster? Small towns do not mean tier 2-4 cities. They are outside of the urban clusters of major cities.

Second, for the time being we cannot alter the status of food self-sufficiency, but we can improve the floor area ratio in the urban area.

Third, land distribution can be changed; the relationship between big cities and small cities can be changed, which is a complement to our policy strategy. Fourth, we need to further deepen the rural reform. We need to ensure that land can be transferred with land rights such as land ownership, land use rights and so on confirmed. In the premise of urbanization, we need to change as much extra land as possible, especially homesteads, into a part of the urban land supply to ease the issue of the property sector.

The above issues will continue to become worse if the urbanization development strategy does not change, the floor area rate in the urban area does not change, and the rural land system does not change. The regulatory bodies always feel that since demand is too large and supply too small it needs to inhibit demand. The purchase limitation strategy is not to solve the problem through the supply side, but to suppress demand. To suppress demand, especially investment demand, does make sense. However, the community cannot afford high housing prices because people who really need to buy housing cannot afford it, which has affected the people’s livelihood.

The logic of purchase limitation is: only guarantee a limited housing supply to those who need to find a place to live, but not to those who want to invest in housing. Can we stop implementing the purchase limitation strategy? Yes, of course. Purchase limitation is only an administrative means. It is a very harsh administrative means. It can be implemented only in China. No other countries can do so, either. It does not make sense to restrict people with money from buying housing.

(Source: 21st Century Business Herald. Fan Gang, the author, is the Director of National Economic Research Institute, China Reform Foundation, and a member of the Academic Committee of Shanghai Academy)