Book Notes & Recommendation by Lucas | How China Works, by Xiaohuan Lan

Without understanding of Chinese government, then it’s impossible to understand China’s economy.


Without understanding of China’s politics, then it’s impossible to understand China’s economy. Starting from the last year of the ominous China’s economy, I also got much more interested in macroeconomics, or, I got interested in for the first time in my life. Of course, I think English helps a lot in terms of cultivating my interest, which I don’t have to read about written in a monotonous CCP’s language.

This is a book showing several important periods of transition and development, terminologies of the Party and the economics, historical background and factors, logics of how it develops and works, etc. Although the PRC’s economics and politics are closely associated, this book focuses more on economic sides. So, whether your political spectrum is more pro-CCP, neutral, or pro-democracy, this book is beneficial for everyone who wants to know and understand China’s economy about where should and would it go. In fact, if you take closer to think about its publication date and the contents written in the book, you can see the author even “predicted” the future to some degree, which requires you to know clearly about the current situation.

It also takes time to read, considering its terminologies, background and complexity. If I could borrow a word from Mandarin to describe its category, I would use “通识”, stands for liberal education in English. If there’s no other book surprises me this year, I think this will be my “The Book in 2024”. Anyway, hope you enjoy it.


The following is extracted from the book that I think they’re interesting, combined with some other materials I researched.

条块关系& 四套班子

The departments’ relationship can be called “vertical strips and horizontal blocks” relationships, namely, “条块关系”, in the China’s unique political structures consisted by the “four teams”, namely, “四套班子” : party committees, administrative government, the National People’s Congress and the Chinese People’s Political Consultative Conference.

The “four teams” structure is replicated at each level of the government, with a few notable exceptions. For example, the central government has the Ministry of Finance, the provincial government likewise has a finance department and the city and county government has a finance bureau.

Most local government departments have to accept dual leadership from both stripes and blocks. As an example, a county-level education bureau needs to accept the leadership of both the city education bureau vertically and the leadership of the county-level party committee and county government horizontally. In this example, the “strip” means the higher department and the block means the party committee and the government in the same level.

属地管理 & Externality

The geographical scope and authority of China’s local government is determined by administrative districts, and the extent of local power is bound together with the administrative district in question (属地管理).

Division of Administrative Districts

Factors: Languages, population

Areas of population inflow can merge counties and establish districts to expand the city, however areas of population outflow rarely abolish administrative districts, preferring instead to merge facilities to save cost (e.g., merging two schools together).

Regions located at the boundary of administrative districts tend to be underdeveloped. This phenomena, known as “三不管地带” roughly translated as “anarchic regions”, can also be explained using the framework of scale effects and boundaries of public goods. Interestingly, such problems are also existed in the ROC era, moreover, these anarchic regions provided a fertile space for the Communist party during the revolutionary period(1921-1949). Such phenomenons were demonstrate on roads a few decades, but this is limited to roads and expressways invested by the provincial government, not national roads and railways. Now, traffic is not a major problem. Some provinces choose to locate factories and businesses that have a high level of water pollution on downstream provincial borders, in doing so the pollution released mainly affects the downstream province and the average level of pollution in the polluting province may actually decrease.

To solve the anarchic regions problem, the best way to manage the cross-district externalities is to appoint a supervisor with authority to coordinate and make decisions. This is why strips and blocks systems are needed.


According to the most recent regulations on the handling of government and party documents issued by the State Council in 2012 (which I will refer to here as “the regulations”), there are 15 types of official document. These include “Decisions” and “Orders” which must be strictly implemented by lower levels, those that can be handled relatively flexibly, such as “Opinions” and “Notices”, as well as those which have less information content such as “Letters” and “Minutes”.


Before the firm moves in, the local government will make some initial investments in the area, including providing electricity, transport links, heating, ventilation, supplying water, drainage and communication networks, and the land must be leveled as well. (a process known in Chinese as “七通一平” which translates to “7 openings and 1 leveling”).


Local governments can also provide tax incentives or subsidies for certain businesses. Examples may include tax credit for research and development or subsidies on export. One common tax incentive involves businesses paying no corporate income tax for the first three years of operation and paying half the rate for years 3 to 6 (known as the “three tax-free and three half-tax” or “三免三减半”).

The reasons why land finance became such prominent, namely, the surging price of houses

However, in 1998, two significant changes occurred, and the true value of urban land began to emerge. The first change is that government and state-owned enterprises (SOEs) stopped building housing for their workers, and instead paid money to the workers in the form of a housing subsidy. The era of commercial housing and real estate development therefore started in earnest. From 1997 to 2002, the average annual growth rate of newly constructed residential areas reached 26%, and the absolute number increased 4x in 5 years. The second change is that the implementation of the revised “Land Administration Law of the People’s Republic of China” which stipulated that rural land could only be used for non-agricultural construction purposes if it is first transferred to state-owned land, thereby giving city governments a monopoly over urban land construction.

Land Finance & Debt & Snowball

The real power of “land finance” is not the high sales value of land use rights, but its ability to use land as collateral to mobilize capital markets and leverage up more funds for investment. It snowballs in size, leading to more and more investment, but also more and more debt for local governments, which has become a significant problem for China’s economy in recent years.

LGFVs(Local Government Financing Vehicles)

aka. 地方政府融资平台

However, the official name of these vehicles does not contain the word “financing”, rather most of them use words such as “investment and development” or “construction”, which emphasizes the company’s role in investment rather than financing. So in China, these vehicles are also collectively referred to as Urban Investment Corporations (城投公司).

To use some Chinese terminology, a piece of “raw land” (生地) that has been marked for development, can turn into “ripe land” (熟地) ready for development, only after the land is leveled and cleaned up.

Government industrial Guidance Funds / Private Equity Funds

Local governments cannot borrow directly from banks, therefore urban investment corporations act as financing vehicles. Similarly, governments cannot make direct equity investments in capital markets, therefore it is necessary to set up a company to operate and manage the guidance fund.

These fund managing companies fall into 3 broad categories. The first group are wholly state-owned enterprises, such as Beijing Yizhuang State Investment, an investor in BOE. The second group are mixed-ownership companies, such as Shenzhen Capital Group Co. Ltd., which is entrusted to manage the huge Shenzhen Guidance Fund. The largest shareholder of this company is the Shenzhen city government, but it only holds a 28% share. The third category is more like CFLD discussed in the previous chapter. Guidance funds in small cities are small in scale, and local governments have neither the resources nor the expertise to establish special management companies for them, so they simply entrust the funds to private companies, such as Prosperity Investment Group.

Shadow Banking 影子银行

The bank may therefore create a so-called wealth management product that attracts household savings at a rate of 5%, entrusting the money to a trust company. Then the trust company lends the money to the real estate company. In this so-called bank-trust cooperation, the wealth management product created by the bank is not recorded as bank deposits, and the money entrusted to the trust company is not recorded as bank loans, so the entire transaction is not recorded in the balance sheet of the bank and is therefore not subject to bank regulations. This is a form of shadow banking.

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ts, tssblog's owner, a.k.a. Lucas
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