What Is a Geocoin?

Zhou Qiren, a professor at the China Center for Economic Research at Peking University, put forward the concept of "local currency" for the first time in his blog post "The transfer of land by the government is another currency creation with Chinese characteristics".

Turkey

Under China's current land system, government land supply is similar to currency injection. First, compared to the huge market value of saleable construction land, the direct cost of government land acquisition is very small, which is very similar to the principle of issuing "low-cost, high-par value" currency. Second, the 'earth coin' itself has the function of wealth storage.

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Zhou Qiren

The government and state-owned enterprises have strong credit capabilities, which is a reality of the Chinese economy. Everyone knows that commercial banks (and other financial institutions) continuously lending are an important part of "currency creation." Looking at it this way, to understand the full picture of China's currency supply and demand, it is necessary to explore the monetary consequences of government and state-owned enterprise investment activities.

Today, whether it is the central government or the local block, whether it is a state-owned enterprise or a local state-owned enterprise, to borrow from a commercial bank, the first condition is capital. The stronger the capital, the larger the loan size that can be borrowed. This means that the self-owned capital of the government and state-owned enterprises constitute the "fulcrum" of leveraged bank loans, which is a condition for enlarging loans and currency flows.

At first glance, this looks no different from ordinary people. Ordinary resident households can buy a house and car if they cannot pay in full with cash, or borrow from a commercial bank. The car price is 100,000, you pay 60,000 first, and the rest pays the principal and interest monthly. The 60,000 is the fulcrum of 40,000 that you borrow. With a house price of 1 million, you have a down payment of 300,000, and you have leveraged the bank's 700,000 with 300,000. With the fulcrum of credit, loans can take place. As for the strength of leverage-the asset-liability ratio-that is determined by the competitive situation of commercial banks under regulatory policies. The previous column mentioned that the asset-liability ratio of the Chinese government and state-owned enterprises is generally relatively high, because in the eyes of our banking system, the risks of government and state-owned projects are relatively low.

The fulcrum of household borrowing usually comes from past savings. Even the "down payment" that our family and friends helped us together generally comes from their savings. Returning to the most microscopic personal behavior, monthly income of 10,000, expenditure of 9,000, the savings of 1,000, the accumulation of less and more, constitutes the borrowed capital to buy cars and houses. Simply put, the "surplus" of personal and household income minus expenses is the basis for future borrowing.

The fulcrum of government and state-owned enterprise loans, of course, also comes from the surplus of revenue and expenditure. For example, in 2010, the annual profits of state-owned enterprises were as high as more than 1 trillion yuan. Except for 10% of which was turned over to the finances, most of the rest were used for investment according to public statements issued by the head of the SASAC. According to the power case we have mentioned, the investment of central enterprises can be very high, and leverage is extremely strong, but as far as its fulcrum is concerned, it can also come from its operating surplus.

However, the government and state-owned enterprises have been able to realize their own capital for borrowing. There are other sources besides their surpluses. The biggest piece of this is the "land finance" that is raging in public opinion and highly concerned by the society-the government's net income formed by transferring state-owned land and expropriating farmers' collective land to the market. In this regard, I first point out two points: First, the scope of revenue from "land finance" is not limited to the government, but also includes state-owned enterprises, because the state-owned land used by state-owned enterprises is either newly occupied or newly allocated or newly acquired. They have also entered the channel for the appreciation of land assets. Second, land finance is not all local, because local land transfer revenues must be shared with the central government, and under the capital of the central ministries and commissions, such as the Ministry of Railways, Land assets are no small places.

Land proceeds are government-owned asset returns. There is nothing special about the government's own assets. Governments more or less own assets and more or less enjoy asset returns. As for the position of government assets in total social assets, it is determined by history, tradition and legal framework. Anyway, government assets are large in quantity, good in quality, and high in return. In my opinion, the special place in China is not that the government owns assets, or even that the government owns more assets, but in the existing legal framework that has formed history and has not been reformed, the government can use land expropriation in a wide area beyond public welfare purposes. The right to turn peasant collective land into state-owned land, and then realize the cash realization of this part of the land assets in the already developed state-owned land market.

This set of knowledge is a long story, and I am afraid to finish this currency series and find another opportunity to discuss with interested readers. As a reminder, when people call the problem "land finance", they may overlook the more significant and sensitive impact of land problems on the macro economy. An observable phenomenon is that the implementation of the right to land acquisition not only turns a piece of non-governmental assets into assets of the government and state-owned enterprises, but also becomes a fulcrum for government and state-owned enterprises to borrow money. .

Speaking of which, the above-mentioned knowledge originated from a survey in 2004. That year, I just completed the research report on the right to transfer of agricultural land that I started when I visited Yale Law School the previous year. The center also held a special seminar, and colleagues encouraged to continue. Just then, "macro overheating" made a comeback. Liu He of the Central Finance and Economics Leading Group Office asked the center teacher to do some research and provide some analysis. So I went to Kunshan, Ningbo, Changzhou, Wuhu, Bengbu and Changsha with some colleagues and classmates such as Lu Feng and looked to the west and asked. After returning, he digested the survey results and discussed Song Guoqing, who had a macro view every day, and finally formed a research report, which was sent to Liu He for submission. What I feel most deeply is that during the investigation, I watched the "Tieben Incident" in Changzhou, and talked with Dai Guofang who had been jailed for 4 hours at the local first detention center. In hindsight, without that experience, I would not have the same level of interest in so-called macroeconomic issues as today.

The main gain of that survey was the recognition that "land finance" has a greater macro impact. I do nt remember that our report was published, and times have changed today. I may wish to quote a few paragraphs written 7 years ago to readers. "The survey found that under the current land system in China, the supply of construction land is an important condition for the formation of total social investment. Generally speaking, the increase in construction land directly increases the private capital of institutions and individuals, thereby increasing the cost of investment. Then, after the evaluation and mortgage of the land, the credit of these institutions and individuals was expanded, and more bank credit was mobilized as the total social investment. In turn, the decrease in the supply of construction land also had a contractionary impact on the scale of credit. We call this economic process "financing for land".

After the description, it is our understanding: "Under China's current land system, government land supply is similar to currency injection. First, compared to the huge market value of saleable construction land, the direct cost of government land acquisition is very small, which is actually" low ". The principle of "cost, high denomination" currency is very similar. Second, the "earth coin" itself has the function of wealth storage. Under the expectation of high inflation, the "earth coin" wealth storage function is even better than currency. Third, the supply In the economic process of local financing, 'earn coins' can be used as collateral for borrowing, thereby mobilizing bank deposits as investments. "

Then point to the characteristics of China's money supply. "In China, parallel to the currency issuance right, there is also a unique government land supply right. Although people are not used to examining the government land supply and currency issuance side by side, in terms of practical experience, the acceleration of urbanization has promoted national economic growth The role and power of the "earth coin" has long been manifested. The basic pattern we have observed is as follows: During the expansion of the economy, the central government, while implementing an active fiscal policy and loosening money, actually loosened the "earth root" substantially. That is, to significantly expand the scale of land acquisition and approval, and to close the tendency of local governments to issue 'earth coins' under competitive pressure; during the period of economic austerity, the central government tightened its money and used 'freezing land grants' 'Centralized land approval rights' and other measures have actually tightened the total size of land supply across the country. "

The "earth coins" and "earth roots" here, as opposed to money and money, are intended to draw attention to the currency movement under a specific institutional structure. Unexpectedly, the word "earth root" spread back to the "ground root" that is still in use today. However, in terms of policy choices, we did not approve at that time-today we still do not approve-to achieve "macro-control" by controlling land supply through administrative orders. The reasons for this need to be discussed separately.