China's war on pollution started here in this small county, what does it mean for China's future?
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It has been half a year since we last updated our popular China City series. In this series, we try to blend the micro with the macro, and the personal with the structural. So far, we have recounted the stories of one of China’s richest towns, one of most ordinary cities, and young people’s “Utopia City”.
Today’s piece is a travelogue about a trip I took during the national day holiday this month, to the idyllic Anji County 安吉县.
I have always wanted to visit Anji, a 2.5-hour drive west of Shanghai. Although there are numerous great travel options within the 3-hour radius of Shanghai, since many of my friends have suggested Anji, I figured maybe I should try it this time.
Before I went there, this was as much as I knew about Anji:
Anji is a county of the Huzhou Prefecture, located at the northwestern corner of Zhejiang Province, bordering Jiangsu Province to the north and Anhui Province to the west.
It’s an ideal place for digital nomads. One of my friends even moved his team, (including the families) from Shanghai to Anji for some time, and they seemed to like it very much.
Back in 2005, when Xi Jinping was the Party General Secretary of Zhejiang, on a visit to Anji, he proposed the “Two Mountains“ theory. A decade later, that theory was put into the top-level policy document for the first time and became the banner of China’s war to fight pollution, a campaign that exceeded many people’s imagination in its speedy results. (We also mentioned this in the Shengze article)
Because of Anji’s importance in Xi’s political legacy, I imagined the place to be heavily developed with lots of state subsidies, and might even have problems of over-development. The place may also be too crowded with tourists, especially during the time of the year when the whole nation is on the move. So I was not super enthusiastic about this trip.
What I witnessed though totally exceeded my expectations.
B&B, camping, and coffee
We drove from Shanghai to Anji at night. We didn’t book accommodation until the last minute. This would be the pattern for the next few days. Every day we would not make plans and would not book hotels or B&Bs until the last minute. We wandered around Anji, like a real nomad.
The first thing that impressed me was both the breadth and the depth of Anji's tourism infrastructure. For our style of travel, we can always find something to do, and despite a golden week with many, many tourists (it was reported a total influx of about 5 times its population came to Anji during that week), we can always find a decent place to spend the night.
The first night, we spent at a B&B, on a bamboo-covered hilltop. In the morning, we woke up to magnificent bamboo hills and the refreshing fragrance of Osmanthus.
The Osmanthus tree in the yard is among the tallest ones I have ever seen.
“When I was a small kid, this old tree was already here“, said the owner of the B&B, a young guy in his early 30s whose 2 kids also ran around.
“This is great. Is this your family property? Do you and your kids live in this B&B now?“ I asked.
“Oh no. We work and live in Hangzhou. Not far from here. It’s the golden week holiday, so we came down to help our mother. She used to work in Hangzhou as well. After she retired, we renovated our old home and turned it into this.“
“So this is your 宅基地?”(Zhaijidi, rural housing land. There will be more discussion on this in later sections.)
“Yes. Yes.” said the young owner.
Every night, we would switch to a new lodging. There was another much bigger B&B overlooking a mountain stream. There was even one section of the stream that they had built an elevated floor so that people could not only wade through its shallow water but could even enjoy coffee or tea inside the stream on the chairs provided by the B&B operator.
We also ended up in an artfully designed, 12-room bedroom hotel, hidden inside a water reservoir. When we checked in, we needed to show our ID and register with the reservoir guards. But once we finish those procedures, we have everything to ourselves. It was a whole new world inside. We even took a morning stroll inside the reservoir after breakfast.
What also amazed me was the effort that Anji put into attracting young visitors. Two key words: camping and coffee.
There are simply so many camping sites, a feature that Anji is apparently famous for. Some are free open spaces, some are paid with upgraded facilities. Many families came here exclusively for the camping experience. We didn’t have any camping equipment, but just observing what everyone else was doing was already fascinating. Later I found Zhejiang Province has this “100 villages, 10,000 tents” campaign, and Anji is obviously a spearhead for it.
The proliferation of camping sites as well as local B&Bs made us never anxious about not having a place to stay for a good night’s sleep.
And then we also got those lovely coffee shops. There are well-designed coffee shops everywhere, on the hills, on the lakes, by the camping sites. We literally spent two afternoons just sitting, chilling, and doing nothing in one of these coffee shops:
Overall, I was relieved to see that despite Anji’s political significance in China’s current economic and political ideology, I didn’t see a strong fingerprint of state design (apart from beautifully built village roads, of course). Instead, I saw mostly spontaneous, market-oriented, and consumer-centered services and facilities, where people and nature, the urban and the rural co-exist in great harmony. If this is what the “Two Mountains Theory” will eventually look like, I am all for it.
The economy and its hidden worries
With such a good travel experience, I can’t help but wonder how the economy of Anji is doing. Specifically, as we are living through the toughest economic downturn in decades, what lessons can we draw from Anji for China’s collective future?
I did some small digging about Anji’s statistics. When I looked at Anji’s 2023 government report, one thing immediately caught my attention. Although total GDP grew at 5.1%, the “tertiary industry” (meaning service industry) grew at 8.9%, much higher than the national growth rate of 5.8% for the comparable metric.
Anji’s recent growth rate is also quite noteworthy. For example, in Q1 of 2024, Anji’s grew at a whopping 16.9% year-over-year, while the growth rates for all other counties or districts of Huzhou hovers around the 6.5% range. Amazingly, Anji alone singlehandedly made Huzhou grow at close to 8% for that quarter, ranking among the top of the whole Zhejiang Province. Even discounting some one-time effect, for first half of 2024, Anji’s GDP growth still ranked at the top in Huzhou.
If we take into account the booming domestic tourism industry in China nationwide and Anji’s strong tourism sector, this result shouldn’t be that surprising.
All these great economic results seem also to have generated solid improvements in people’s livelihoods. So far I have commented on Anji’s nice tourism facilities, but if we just look at regular neighborhoods in Anji, look at what houses local residents live in and what cars they drive, I sometimes have the feeling that I am visiting some villages in Japan, not the usual China’s countryside that I was used to more than a decade ago. (Granted, virtually all of Zhejiang’s villages now look like this. But Anji still stands out to me in its exquisite beauty.)
But looking through all of these, a conversation keeps bugging my mind. A few months ago, when I commented on China’s upcoming fiscal reform in my personal newsletter
, I recounted some interesting words spoken to me by a local official from Anji tasked with investment promotion. I can now tell you, that same local official came from Anji.I will call him Mr. J.
At the time, I asked Mr. J why he even tried to attract businesses, many of which are manufacturing businesses, to Anji. Why not double down on Anji’s tourism industry instead? This is what I wrote then:
He said, well, tourism looks nice, but we (the government) have no revenues from it. In fact, with more congested traffic and higher security concerns, it’s only about expenditures.
I checked on Anji’s public finances and tried to figure out what Mr. J meant. If we look at the tax revenues of Anji in 2023 (not including land sales), value-added-tax revenue (VAT) is the largest source at 2.59 billion RMB growing at 53%. Corporate income tax was at 771 million RMB, down 27.4% YoY, and personal income tax was at 687 million RMB, down 28%.
The amazing growth of VAT was due to some one-time Covid-induced effect and was the same nationwide (42.3% nationally for the same metric). But the decline of corporate and personal income taxes was appalling. (Land sale revenue, a major part of non-tax revenue, was also down significantly in line with national trend.)
These 3 main tax revenues accounted for 2/3 of Anji’s tax revenues. Conspicuously missing from this picture is the impact of the tourism industry. Of course, tourism also contributed to VAT and income taxes, but to a much smaller degree than other industries. I doubt the B&B owner with the beautiful Osmanthus tree ever paid any income taxes for his business.
So, Mr. J is right. The tourism sector is great for the people of Anji, making a great life for ordinary residents. But its contribution to public finances is very weak. Despite a booming tourism sector, Anji, like most local governments in China, faces a dire fiscal situation. No wonder, when you go to Anji’s government’s website, a lot of news announcements are touting how well they have attracted manufacturing businesses over there.
However, because the government in China shoulders so much responsibility for providing public goods such as education and healthcare, and the government sector is also a huge limb of our economy, this situation is not sustainable.
Fundamentally, it also doesn’t make sense. Why can’t all major sectors of the economy benefit from a booming industry at the same time?
Anji might be a lucky case, where you can have “rich people” with “poor governments”. But for a majority of cities and counties in China, what can be the solution?
What does Anji signify for China’s future?
I will start with a major assertion here: China’s GDP will double in around 15 years, and the rough trajectory of this growth will be about lower-tier regions catching up to the first tier.
Anji’s per capita GDP, despite its high growth rate, was ~15000 USD. Not too bad, and slightly higher than the national average, but it still has a great room to catch up to the level of ~30000 USD of Shanghai, where many of the tourists to Anji came from. And the fast-growing GDP of Anji, on the back of its strong tourism sector, gives me confidence that such a “spill-over” effect is no wishful thinking.
And it’s not just a spillover of consumer spending and tourism, but manufacturing as well. We have long documented a long-term trend of the manufacturing sector moving ever inland, bringing more jobs into those regions.
If the income of most of China’s cities catches up with a much higher proportion of Beijing and Shanghai’s GDP (themselves are moving targets), there you will have a doubling of national GDP.
What can ensure such a wonderful outcome actually happens? Certainly, a growth of total factor productivity (aka new-quality productive forces) is crucial, but to make the gap between low and high-tier cities smaller, I can think of 2 things: 1) free flow of production factors and 2) giving local governments skin in the game, both of which were also addressed in July’s 3rd Plenum.
Among production factors, land is crucial. Remember the “zhaijidi” I mentioned above? At the moment, villagers like the young man and his mother can turn this family homestead into a cash-generating holiday business, but the place itself can’t be put onto the market outside their own village. This article written by CPPCC’s official newspaper summarized quite well what is at stake:
The Third Plenary Session of the 20th CPC Central Committee proposed "establishing a unified urban-rural construction land market." In reality, due to the lack of market-based allocation mechanisms for rural land resources, the unified urban-rural land transaction market faces multiple institutional barriers. This has become a major constraint in revitalizing rural land resources and increasing property-based income for farmers…
Legally grant farmers complete rights over their residential land usage. Studies show that if market-based transfers were implemented, the annual market value of residential land transfers would total approximately 4.4 trillion yuan. The statistical recording and registration of farmers' residential land should be further improved. The ownership rights should be separated from usage rights of residential land. Farmers should be legally granted usufructuary property rights over their residential land usage, giving them complete rights of possession, use, income generation, transfer, mortgage, and inheritance. Restrictions on the transfer of farmers' housing should be relaxed, and the current semi-commercialized state where transfers are limited to within-village transactions should be changed as soon as possible.
Another even more crucial factor of production is people, both as labor as well as consumers. The (in)famous Hukou (household registration) system has been standing in the way of the free flow of people. Here, to understand where China is going, we can just re-iterate the relevant clauses from the 3rd Plenum decision:
We will implement the systems for allowing people to obtain household registration and access basic public services in their place of permanent residence. We will push to see that eligible people who have moved to cities from rural areas enjoy the same rights as registered local residents with regard to social insurance, housing support, and access to compulsory education for their children living with them. The process of granting permanent urban residency to these people will also be accelerated.
We will see to it that all restrictions preventing people from accessing social security in the places where they work but do not hold permanent residency are lifted and that policies for transferring social security accounts are improved.
A tectonic change like the free flow of production factors inevitably demands a new question: how do you incentivize China’s underfunded and heavily indebted local governments to bring out such a change, especially when they have historically seen people as a burden for expenditures, as a factor of production, but not as a source of wealth in themselves?
This is a crucial question for China and its importance can never be under-rated. China’s government sector occupies a much more central role than in other economies. Within that government sector, the great majority of the powers and responsibilities actually reside within local governments, with counties (the administrative level of Anji) as the ultimate cell units that builds up the entire system.
If local governments like Anji are not on board with this new vision, if they can’t benefit from this free flow of people, and if they can’t focus on providing goods and services to attract even more people, this vision will not come into reality.
Such is the importance of fiscal reform we have stressed again and again. It is not just about some single big fiscal package to subsidize consumers, but deep structural reform that gives local governments skin in the game (such as consumption tax reform), so we won’t have a situation where Anji’s public finances become emptied just while its tourism is ever booming.
This skin the game is necessary for China’s local governments to turn from a production-driven one to a more balanced model between production and consumption, and I am confident the 5-year reform program set by the 3rd Plenum would lay the foundation for the growth in the next 1-2 decades.