Lan Xiaohuan explores the future of land, data, public assets, SOEs, and opening-up in China
Bestselling Fudan professor says everybody is groping in unchartered territory.
Lan Xiaohuan, a Professor of Economics at Fudan University with a Ph.D. from the University of Virginia, is a bestselling author in China on the country's economic models and the government-market dynamics. Excerpts from the translation of his book, 《置身事内：中国政府与经济发展》 (in English: How China Works: An Introduction to China's State-led Economic Development) have been featured in The East is Read and Pekingnology repeatedly.
Beijing Cultural Review 文化纵横, an increasingly visible Chinese magazine focused on intellectual discussions, on October 7 re-published its interview with Lan initially published in March 2022.
The wide-ranging interview still reads wild to me. It is translated below with the consent of the magazine and Lan, who haven’t viewed the translations. - Zichen
（illustrated by Zhang Jing)
专访兰小欢: 影响中国经济要点很多, 先从收入增长谈起
Interview with Lan Xiaohuan: There Are Many Key Factors Affecting China's Economy, Let Me Start with Income Growth
Beijing Cultural Review: In your book How China Works: An Introduction to China's State-led Economic Development, you offered a highly insightful and comprehensive analysis of the role played by the Chinese government, particularly local governments, in driving economic development over the past few decades, as well as the impact of their involvement. You have told a very different story from mainstream economic theories. How is it that the whole structure of your book diverges so significantly from mainstream economics?
Lan Xiaohuan:
This is quite natural. The more you travel around China, the more you'll realize how fundamentally different it is from the United States, whether in terms of economy, politics, or society. Anyone with practical experience, rather than relying solely on books, can see that China will never become the United States—they are genetically different. It's like comparing an eagle to a tiger: both have their unique strengths and weaknesses, but one will never become the other. The two countries are simply distinct by nature.
The formation of this framework started quite early. In 2017 and 2018, I spent two years traveling across China, working as a consultant for local governments on investment attraction. Our approach was to bring large enterprises to Hubei through equity investment—not by directly investing in enterprises, but by investing in other investors. Given the substantial investment amounts, I had the opportunity to interact with top-tier investors, entrepreneurs, and major projects, while also engaging extensively with local governments and various government departments. These two years completely reshaped my worldview.
Previously, as a scholar, government departments would often give me only superficial information, providing brief overviews of the basic situation—information that, nonetheless, was still new and useful to an academic. However, as a contractual party to investment, the dynamic changed entirely. I conducted due diligence, held in-depth discussions with various departments, and dealt with substantial financial data. In the end, you come to understand how things truly operate.
So, the worldview presented in this book was essentially developed during those two years. Although its content remains academic, the perspective it offers has shifted away from Western economic theories. When I later designed a course at Fudan University for advanced students, my goal was to provide insight into the world beyond the academic ivory tower. After teaching the course for two years, the pandemic hit, and that's when I wrote this book.
The greatest merit of this book is that it offers a new perspective on the world. You'll come to realize that there is more than one way of governance. The Chinese government is so deeply involved in economic development. While it strongly supports businesses and may exhibit some corporate-like characteristics, it is fundamentally not a business—it's simply highly engaged. This engagement pattern has proven effective, as the results in terms of economic growth are remarkable. If you travel around the world, you'll see that this truly is an economic miracle.
Beijing Cultural Review: What is the most risky local government behavior you have observed?
Lan Xiaohuan:
There are two types of risks: one is risk specific to a given region, and the other is the risk faced from local governing officials. For officials, if they follow the rules, the risk is relatively low. The main uncertainty is whether they can accomplish something: if they succeed, they are rewarded; if not, as long as there are no major mistakes or corruption, the consequences are minor—at worst, they won't get promoted.
risk specific to a given region, however, often isn't the officials' fault. Some regions simply lack the conditions necessary for development. In coastal areas like Guangdong, where conditions and resources are more favorable, development can progress as long as the rules are followed.
There's no magic in development methods. Even in the much-discussed case of Hefei in recent years, there's only so much the government has done. Local officials across regions often exchange ideas and learn from one another, particularly those within the same province, as they frequently meet at provincial meetings. Policies and practices for attracting investment are nearly standardized—every region understands them. The real issue is that some areas lack the necessary resources for development, which has little to do with whether officials understand the proper methods for driving growth.
Beijing Cultural Review: What should be done in those places where development is more difficult?
Lan Xiaohuan:
It's not a question of either development or no development. In regions where development is difficult, the local economies don't collapse—they just can't sustain a large economic scale. If a region can't support a population of one million, can't it at least support 200,000?
For example, in China's three northeastern provinces (Liaoning, Jilin, and Heilongjiang), the population has been declining—by 11 million in the last 10 years—but per capita GDP has actually increased because there are fewer people sharing the economic gains. Those who remain are not necessarily worse off on average. Life in smaller places can be quite comfortable for the locals. The government continues to invest in these areas, ensuring that the necessary infrastructure is in place. About 80% of central government transfer payments go to the central and western regions, as well as the Northeast. Those in East China should not feel disadvantaged either, as Western China has long been sending human and natural resources to support the East.
Beijing Cultural Review: How China Works highlights some of the more successful aspects of Chinese government involvement in driving economic development over the past few decades, such as local government financing vehicles (LGFVs), land sales, and competition among local governments to attract investment. However, in recent years, with shifts in both domestic and international conditions, coupled with the evident slowdown in China's economic growth, many believe that the previous growth model—fueled by exports, urbanization, and infrastructure investment—may have reached its limits. As a result, there is growing consensus that future economic growth must be driven by internal demand and innovation. This likely means that the traditional role of local governments in economic development will also need to evolve.
So, how should different levels of government adjust their roles in future economic development? During this transition, what challenges might they face, and what key issues should they focus on?
Lan Xiaohuan:
The term "transition" is retrospective. In reality, the world is in a constant state of change. Those who are hands-on in practice naturally prefer to stick with what they've always done, but that is becoming increasingly difficult. For example, land sales and LGFVs used to function very well—the framework was established, and the business models were well-defined, although people are realizing that this model is no longer sustainable. However, those in practice don't immediately shift direction; they always explore within the existing framework. This is what we call the process of transition.
Perhaps in 10 or 20 years, people will look back and identify an economic transition in China around 2015 or 2016. But today, the economy is still largely propelled by the inertia of the old model, even though it's clear to everyone that moving forward is becoming more challenging. This isn't just about local governments—the old economic development model relies on the real estate sector, which can no longer maintain its momentum. So now, everyone is exploring uncharted territory.
On a broader level, expanding internal demand and achieving technological progress involves more than just their transitions. Expanding internal demand, at its core, must address low household incomes, meaning making people richer. This goes beyond mere policy implementation and requires comprehensive changes to the economic structure and income distribution mechanisms. The government's primary focus likely won’t be on doubling the income of those already earning over 100,000 yuan, but on significantly increasing the incomes of those in lower income brackets—from 20,000–30,000 yuan to 50,000–60,000 yuan. There may be different policy approaches for each group: one for the lowest 50% of income earners, another for the middle 40%, and yet another strategy for the top 10%.
For most people, it ultimately comes down to income growth. This includes ensuring that people in smaller towns, particularly in the northwest and northeast, see their incomes rise. Without new sources of income, wages in these areas will remain stagnant no matter what individuals do, leading people to migrate to larger cities like Beijing, Shanghai, or provincial capitals in search of better opportunities.
However, such migration involves various policy challenges. Reforming the household registration (hukou) system would be essential, along with ensuring access to social security benefits such as pension, medical insurance, unemployment insurance, maternity insurance, work injury insurance, and the housing provident fund. It would also be important to ensure that hometowns do not fall into decay, as caring for elderly family members left behind remains a major concern.
Current policies are taking a two-pronged approach. First, household registration reforms have been accelerated. Since 2020, many provincial capitals have removed household registration barriers—where education or points-based systems were once required, cities like Nanchang and Jinan now have virtually no restrictions. Only a few megacities continue to impose limits. Second, there is a strong focus on improving underdeveloped areas through rural revitalization efforts, ensuring that those who can't migrate still enjoy a better quality of life, while those who choose to leave can do so without worries. The outcomes of these efforts still remain to be seen, but I believe the efforts are in the right direction.
During the transition, a critical point is to ensure that the old model does not collapse abruptly and to avoid radical reforms that could trigger risks such as debt crises. Some local governments have faced financial difficulties during the transition. So what can be done?
Of course, the central government could provide essential support, but local governments also need to make better use of their assets. Land sales and LGFVs are no longer as effective as they once were, but local governments possess more than just land—they also hold state-owned enterprises (SOEs). Over the past few years, reforms aimed at mixed ownership of SOEs have progressed rapidly. Previously, land was the ideal mortgage asset—once leveled, it could be used as collateral for loans. SOEs, on the other hand, are more complex due to their operational nature and the range of intricate procedures involved, which has led to slow progress in their reform over the years. Recently, though, the pace has picked up. The goal is to make SOEs more efficient and divest bad assets. Accumulated assets must now be capitalized and standardized to improve their liquidity.
In recent years, new initiatives have been introduced, such as creating two platforms—state-owned assets investment and state-owned assets operation platforms—between the State-owned Assets Supervision and Administration Commission (SASAC) and SOEs. Previously, SASAC directly managed SOEs, but now it oversees these platforms, which manage the SOEs using modern governance practices like boards of directors. However, the effectiveness of these reforms likely varies significantly across different regions.
Additionally, there have been numerous mergers and restructurings among provincial SOEs. Over the past two to three years, many local governments have merged and restructured their LGFVs. In the past, a single local government might have operated several LGFVs to facilitate borrowing: those for infrastructure and transportation were called transportation investment platforms, those for industrial parks and housing were construction investment platforms, and others for cultural and tourism projects were culture and tourism investment platforms. These platforms are now being consolidated into larger entities, where stronger financial resources support weaker ones, creating larger asset pools that can leverage more capital.
In summary, different regions are exploring different solutions. The central-government-run SOEs are formulating their own strategies. Local SOEs are also trying customized approaches.
Researchers studying SOEs are currently debating whether SASAC is doing a self-reform. Traditionally, SOEs were managed by umbrella corporate groups, with SASAC overseeing these groups. The ongoing SOE reform aims to transform these corporate groups into asset operation platforms—specifically, state-owned assets investment and state-owned assets operation platforms. Under this model, SASAC would evaluate these platforms, rather than directly managing or assessing the SOEs themselves.
However, the timeline for this reform and its potential effectiveness remains uncertain. Running a business is highly complex, and it is unlikely that significant results will be seen within just a few years. Although some progress has been made in recent years, overall implementation will be gradual, as this reform addresses a fundamental question: What should be the role of public assets in this country? This is a profound issue, and while SOE reform efforts suggest the government is already contemplating it, reforms can only proceed one step at a time.
Beijing Cultural Review: Could you elaborate further on the issue of what role public assets should take in China?
Lan Xiaohuan:
When analyzing public assets, focusing solely on their share in the national economy is unnecessary. Of course, it's possible to calculate the share of public assets among all enterprises, but this method significantly underestimates their true scale.
Stripping away appearances, economics identifies four main factors of production: land, labor, capital, and data. In China, mines and land are publicly owned. A large portion of the stock market and financial system is controlled by the Ministry of Finance—China's fiscal and financial systems are deeply intertwined, which is completely different from the West. Although labor is, for sure, not publicly owned, the four essential factors that transform human beings into productive forces—housing, education, healthcare, and pensions—are closely linked to state ownership. In China, education, healthcare, and pensions are all primarily provided by public institutions, not to mention the state-owned land used for housing. In other words, a comprehensive economic analysis should not only consider the quantity of assets but also examine the attributes and mechanisms behind each factor of production.
Data is set to become the most critical production resource in the future, and China has the potential to become the "Saudi Arabia of data," as data will serve as the foundational input for future technologies. The current situation, where major online platforms treat data as fully private property, isolated and unshared, is bound to come to an end. Ultimately, data must be integrated because only through full connectivity can its true scale effects and network effects be realized. In recent years, the Chinese government has implemented strong regulations on internet platforms, much of which has focused on data security and combating data monopolies.
How the socialist economic system with Chinese characteristics is evaluated will partly depend on how the world evolves in the future. What is absolutely clear today is that the capitalist market economy and free-market ideology, which dominated the past 40 years, have lost much of their former appeal. Even the United States has undergone significant self-reflection. The future economic model will be entirely determined by the level of productivity achieved.
This new wave of productivity growth and technological progress could potentially replace many jobs, so the ultimate economic question may become one of distribution: as more people find themselves without work, they may need to rely on the government's universal basic income (UBI) for survival. This future may arrive sooner than expected. Concepts like UBI, once regarded with disbelief when first introduced in the 1980s, have gained serious attention from many countries in recent years.
Additionally, the implementation of UBI requires a practical solution. Digital currency offers such a solution, eliminating the need for intermediary institutions such as bank accounts or social security contributions. Each individual could hold a digital RMB account, enabling the central bank to transfer funds directly. In fact, China has been one of the earliest major countries to explore digital currency.
Beijing Cultural Review: You mentioned that data has recently become a new factor of production. Indeed, over the past decade, the Chinese government's involvement in internet development has been limited. Looking ahead, if the government wants to take control of the data factor, how should it balance its regulatory objectives with the need to maintain enterprise vitality and economic efficiency?
Lan Xiaohuan:
Data can no longer be regulated under the same mindset as before. Once data becomes fully interconnected, the way of businesses, the goals of government regulation, and regulatory efficiency could fundamentally change due to new technologies. While the future remains uncertain, one thing is clear: it won't be like the past. The eventual model might involve taxing robots, AI, and algorithms to support displaced workers, or perhaps robots and data will be nationalized. Both approaches are based on the same principle—achieving redistribution.
With the great expansion of productivity, the most significant issue is no longer the incentive mechanism. In the past, social security and welfare systems were designed as incentives to prevent laziness, as society couldn't afford to support large numbers of non-working individuals. In the future, the basic principle of public policy will be redistribution, and the concept of laziness will disappear because the production process won't involve human labor.
This marks a profound shift. During this technological and social transformation, national systems that can be sustained without collapsing will have a significant advantage. Countries capable of managing data and algorithms, addressing unemployment, and possessing a philosophical, institutional, and technological foundation for redistribution can navigate this social transition with less instability. On this basis, some Western scholars have suggested that China may hold an institutional advantage in the 21st-century technological revolution, and I think it makes sense.
Beijing Cultural Review: This is indeed a long-term vision. In the short term, since the end of 2020, China has stepped up its regulation of internet companies. Initially, many supported this approach, as there was growing frustration with the expansion of these platforms and their pervasive influence on daily life. However, over time, concerns have emerged among economists and political scientists that over-regulation could undermine the international competitiveness of Chinese internet companies. Do you share these concerns?
Lan Xiaohuan:
I believe the issue of regulating tech and internet companies may have outgrown the current academic frameworks. Some still view these companies as typical businesses, focusing on operational and incentive-related issues, but that might not address the core problem. From a data perspective, if China wants to become the "Saudi Arabia of data," it must become more aware of data as a public resource. Developing a regulatory model for these companies will require trial and error, involving continuous interaction between the government and enterprises. It may start with strict controls, and as negative consequences arise, a more balanced approach will evolve, with adjustments from the government and enterprises.
One thing is certain: the "wild growth" of the past decade is over. Recently, the National Development and Reform Commission (NDRC) released the Notice on Soliciting Public Opinions on "Basic Data Systems", offering a bundle of perspectives on building basic data systems. I highly recommend everyone take a look—it's very interesting.
Beijing Cultural Review: Based on the reports and documents released by the Chinese government in recent years, besides data, what adjustments and reforms will be made to the other three factors of production?
Lan Xiaohuan:
Let's take land, which is already under government control. The next step for the government is to focus on more efficient land utilization. One recent attempt was the cross-provincial trading of construction land quotas.
In regions like northwest China, where much of the population has relocated, there's less need for big land quotas. In contrast, cities like Shanghai may have land available but lack quotas for land for new construction. This has led to cross-provincial transactions of construction land quotas—say, Shanghai purchases 30,000 mu of construction land quotas from Yunnan. With these quotas, Shanghai can develop an additional 30,000 mu of construction land, while Yunnan must develop 30,000 mu of arable land.
The current process for these transactions is that the buying local government applies for quotas from the State Council. Once approved, the buyer transfers funds to the national treasury, which then allocates the money to the selling local government. The funds will be primarily used for poverty alleviation and farmland preservation.
At present, not all regions are allowed to sell land quotas. Under existing regulations, only deeply impoverished regions are eligible, including the Tibet Autonomous Region, Tibetan-inhabited areas of Gansu, Qinghai, Sichuan, and Yunnan, the four prefectures of southern Xinjiang (Aksu, Kizilsu, Kashgar, and Hotan), the Liangshan Yi Autonomous Prefecture in Sichuan, Nujiang Lisu Autonomous Prefecture in Yunnan, and Linxia Prefecture in Gansu.
The reform approach for all four factors of production—such as land and household registration—aims to facilitate the nationwide flow of land and labor, essentially marketizing these factors. Although ownership of these factors remains unchanged, the goal is to enable them to move in a more market-oriented manner. Marketization cannot exist without flow—for people to have market value, they must be able to move freely. Similarly, many assets in China are currently stagnant and not circulating, but once state-owned assets are transformed into standardized capital, they can circulate within the market. The same principle applies to data: previously, data across different internet platforms was siloed, but now platforms are required to unblock external links.
In summary, China's reform approach balances the state's guiding role with the promotion of marketization, as has been the case with its past reforms. Initially, China marketized specific products, using a dual-track system (planned and market economy) to develop gradually. As the product market became more competitive and pricing became market-driven, reforms extended to the factor markets and property rights.
Product market competition enhanced efficiency, thanks to international and domestic competition across regions. As the product market opened up to pricing and competition, it became clear that SOEs struggled to compete with private and foreign companies, both in terms of quality and pricing, especially in export markets. To boost efficiency, SOE ownership reforms became necessary, including the introduction of corporate and shareholding systems. This gradual, incremental reform process reflects China's unique experience. In contrast, the Soviet Union's reforms prioritized property rights without first addressing product markets, which led to economic collapse and oligarchic exploitation.
China has also undertaken significant property rights reforms at a later stage, especially by separating ownership from usage rights. In areas like land, the state retains ownership but has promoted the marketization and liquidity of usage rights.
Beijing Cultural Review: Besides the data factor market and SOEs mentioned above, what other issues in domestic reform have you been focusing on lately?
Lan Xiaohuan:
I am also focusing on various changes in the financial market, as well as fiscal and public services reforms in education, healthcare, pensions, and housing. One policy trial promoted during the 14th Five-Year Plan period (2021-2025) is the development of long-term apartment rentals, set to redirect a significant portion of new real estate investment toward rental housing.
The sustainability of this model is uncertain. It requires financial tools like Real Estate Investment Trusts (REITs), which generate long-term returns from rental income. However, given the high leverage and financing costs currently burdening the real estate industry, it is not feasible for developers to build properties, hold them long-term, and rent them out, as the returns would be too slow. This remains the case even though development costs for long-term rental apartments may currently be lower, as these projects can be built on rural village collectively-owned construction land. Also, financing from banks for such developments is not subject to the same credit restrictions as those for houses built for sale.
The biggest challenge in China's housing reform is avoiding a house price collapse while advancing changes. With much of the middle class's wealth tied to property, a significant drop in house prices cannot be allowed. Since the 2018 statement "Houses are for living in, not for speculation," China has been exploring various policy tools. In the future, housing may primarily serve as a means to provide housing services, which is why initiatives like long-term apartment rentals are being introduced.
Relying on real estate as a primary income source is problematic, as it exacerbates generational divides. If housing prices continue to rise, existing homeowners will benefit, but young people will find it increasingly difficult to afford homes, leading them to "lie flat." These young people, however, represent China's future—they are well-educated and the future middle class—so the government must consider their long-term interests.
It's worth noting that in China, family relationships are especially close, which means that household balance sheets are interconnected across family members and generations, unlike in the U.S. In China, significant financial flows exist between family members and across generations. This must be considered when analyzing issues related to social security, economic equality, and intergenerational equity in the country.
Having said all that, I don't have specific suggestions for the recent domestic reforms in China. I'm simply curious—curious about what the government is thinking, what actions it will take, and what the outcomes will be. I don't make predictions, and I'm in no rush. I'll wait patiently, observe the results, and learn from my observations.
Beijing Cultural Review: Do you think there will be major fiscal and taxation reforms similar to the tax-sharing reform in 1994?
Lan Xiaohuan:
Currently, local governments in China lack a major, stable source of tax revenue, and this must change in the future to ensure that they can fund essential public services like education, healthcare, and pensions—areas that still face funding gaps. With land sales no longer providing adequate revenue, local governments must be allowed a sustainable income source.
A well-designed local tax system should also be tailored to regional conditions, applying different approaches in different areas. Take property taxes: some regions might tax all housing at a relatively low rate, while others could exempt the first home but impose higher rates on second and third properties. Another option could be a progressive tax system, where the rate for the first house is low but increases substantially for additional properties.
Beijing Cultural Review: Over the past few decades, China's economic rise has been driven not only by government involvement but also by its accession into the WTO and entry into the global market. However, with the rise of protectionism in Western countries and the U.S.-China trade tensions, the external conditions that once fueled China's economic boom have changed. What challenges will these changes present for the Chinese government's role in the economy?
Lan Xiaohuan:
The first point is that whoever shuts their doors first will also be the first to suffer. If the U.S. isolates itself, it will pay. Economies of scale are more powerful than technological advantages, meaning that, in the end, there will be only one global market, not two. Those attempting to divide the market will be the first to suffer—just as the Soviet Union collapsed due to its isolation.
Market containment might sometimes succeed, but technological containment can never. If technological containment could work, the British Empire might still rule the world, and countries like Germany, the U.S., and Japan would never have risen. Catching up in technology is only a matter of time because you can't block science. What the latecomers lack is simply the practical know-how. Everyone in the industry well understands the science of chip design. The difficulty lies in execution—latecomers simply haven't had enough time or enough exposure to failure and mistakes to close the gap.
If the West wishes to decouple its market from the rest of the world, it would face an extremely difficult task fundamentally different from the decoupling of the Soviet Union. The Soviet Union could isolate itself from the international market because it was driven by an extreme political ideology that abhorred capitalists, allowing the country to forbid capitalists from pursuing profits. However, this is impossible for capitalist countries, where politics serve the interests of capitalists. The lifeline of capital lies not in technology but in the market. Isolating Russia's market is feasible for its relatively small economic scale, but isolating China's market, with its vast size, raises the question: how feasible is this for the United States?
Second, China has consistently maintained an open stance. Despite frictions, the message over the past three years has been clear: China's doors remain open and will only open wider.
Third, the world has 8 billion people—it's crucial not to focus only on the 1 billion people in Europe, North America, Japan, and South Korea, who enjoy higher living standards than China. Beyond them, there are 5 to 6 billion people whose living conditions are less favorable. Do they not have demand? These populations represent future drivers of economic growth. Whoever isolates themselves from this vast global market will inevitably face decline.
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