Liu Zhi

Director, Peking University–Lincoln Institute Center for Urban Development and Land Policy

China’s urbanization has entered a stage of high-quality development, raising a critical question: when outlining visions for urban development, should planners estimate economic costs? The answer is an unambiguous yes, because planning implementation is constrained by fiscal capacity. Plans formulated without accounting for fiscal constraints lack rationality and will generate numerous adverse consequences for delivery and long-term urban growth. Nevertheless, over the past two decades of rapid urbanization, China’s urban planning practice has long neglected municipal fiscal constraints. Many cities have drawn overly optimistic plans that trigger excessive, hasty land development, resulting in vacant cities and ghost towns, unsustainable municipal finances, and severe waste of land and capital resources.

The disconnect between planning and fiscal governance stems from institutional arrangements. Under the tax-sharing system, local general public fiscal revenue is mostly allocated to routine public expenditures for local government operations. Meanwhile, investment in land development and infrastructure guided by urban planning relies chiefly on land transfer fees and land-collateralized debt financing. General public fiscal revenue and expenditure are managed separately from government fund revenue and expenditure dominated by land transfer proceeds. Their linkage rests on an optimistic underlying assumption: planning drives investment, investment fuels urban economic growth, and growth generates higher general public fiscal revenue. Yet what if investments fail to deliver expected returns? Urban planning departments lack rigorous procedures to address such contingencies.

In the era of high-quality development, the separation between planning and fiscal management can no longer persist. The core mission of high-quality development is to elevate the quality and efficiency of economic and social progress. Urban construction must shift away from the previous extensive, cost-disregarding high-speed growth model toward a sophisticated high-quality development model that prioritizes efficiency and equity. This requires planners not only to draft long-term urban visions but also to conduct thorough economic accounting and assess how benefits generated by urban development are distributed across different population groups.

Municipal fiscal budgeting systems are gradually improving. Fiscal departments previously only produced annual budgets, but in recent years, under the guidance of the State Council, they have collaborated with functional departments to compile three-year medium-term fiscal frameworks. If fiscal authorities further extend such frameworks to five years, they can align with the five-year short-term construction plans within the urban planning system. Planning departments will then be able to formulate more realistic and implementable short-term construction plans with full consideration of medium-term fiscal constraints.

Urban planning in China is largely delivered through investment projects. A vital link is missing in the pipeline from master planning to project delivery: economic appraisal of investment projects. Economic appraisal evaluates the overall economic costs and benefits of an investment from the perspective of the entire national economy, calculating whether the project generates net gains for the national economy. This differs from financial appraisal, which assesses the financial costs and revenues of project investment, construction and operation from the standpoint of a single investor (government or enterprise) to judge financial viability for that entity.

All cities operate under capital constraints. Capital carries opportunity cost because it can be allocated to competing uses. When multiple investment options exist, limited funds ought to be directed toward initiatives yielding the highest economic returns. Without mandatory economic appraisal, however, many cities prioritize securing financing and fiscal backing to push projects forward. This practice risks premature or over-scaled implementation, whereby massive economic inputs fail to yield reasonable returns, squandering public capital.

The core of project economic appraisal is cost-benefit analysis. It supports optimized project design, facilitates selection of implementation schemes with optimal combined economic, social and environmental benefits, quantifies the probability of various risks during construction and operation as well as their adverse impacts on project feasibility and resilience, and enables pre-emptive risk mitigation planning. This vital task ought to be undertaken by professionally trained planners and established as a standard new component of urban planning practice in China.

Published in City Planning Review, Issue 12, 2023, Academic Dialogue Column of the Annual Conference