Sat, July 13

Data Assetization in China: A New Frontier?

Introduction to Data Assetization in China

Recently, Hengyang City released an easily overlooked announcement, declaring the sale of government data resources and smart city franchise rights, valued at 1.802 billion yuan. Specifically, this refers to the franchise rights of data resources generated by the completion of smart city projects or other government-funded constructions. In other words, local governments can now earn money by selling data. This is the first case in the nation where public data has been put up for market trading. Some have compared this event to Shenzhen’s first land use right auction 36 years ago, concluding that a new era of data assetization fiscal policy has officially begun. However, the situation seems not so straightforward. On November 15, 2023, Hengyang City issued another announcement to suspend the auction without disclosing specific reasons. An analysis by Southern Metropolis Daily suggests that the public nature of the data, and the monetization of public resources through the market without clear policy decisions, might be one of the reasons for the halt. Regardless of whether the first attempt is successful, this is a significant event with great exploratory significance.

Historical Context and Evolution Data Finance

Let’s discuss the origins and development of what is called “data-driven fiscal policy.” At the end of 1987, Shenzhen publicly auctioned a piece of land for the first time, pioneering the idea of urban expansion based on land as a credit foundation. Although the tax-sharing reform in 1994 significantly reduced the proportion of local tax revenue, it left land income to local governments. The housing system reform in 1998, known as the Housing Reform, established the commodification of housing and the pillar industry status of real estate. In 2003, the year of the SARS outbreak, to prevent improper operations in the land market, authorities introduced the land bidding, auction, and listing system, which established rules through bidding, auctioning, and listing. These series of events developed and grew over nearly 20 years, from the initial trials in 1987 to the establishment of a regulatory framework in 2003, profoundly affecting the destinies of thousands of cities and billions of people. Therefore, it is important to recognize that forming a significant scale in data-driven fiscal policy requires time and process, and one should not have high expectations in the short term.

Historical Context and Evolution of Land Finance

Focus is often placed solely on the fiscal revenue generated from land auctions, which includes deed tax, land value-added tax, property tax, cultivated land occupation tax, and urban land use tax. However, this is merely the superficial aspect. By injecting land into local financing platforms to activate funds, it’s possible to provide financing support for urban construction, using land as collateral to secure debt income. This process involves infusing capital into the land, leveraging it as collateral to drive urban construction, enhancing land value, and then repaying debts through land sales.

In this context, local urban investment companies use land as collateral to borrow from banks. According to estimates from Galaxy Securities, the overall interest-bearing debt scale of urban investment companies is approximately 70 trillion yuan. Given such a massive scale of land concession revenue, is it an overemphasis? Supported by finance, it acts like a kind of spectacular magic, turning land into a credit amplifier and further evolving into a driving force for urban development. The frenzied promotion of infrastructure construction, such as high-speed railway stations, schools, hospitals, highways, heating, natural gas pipelines, and communication base stations, does not emerge out of thin air.

Will Data Assetization Take Over Land Finance?

However, the land finance model has a weak link, which is the need for developers to purchase land. If there is a problem with this segment, causing off-plan projects to halt and residents to stop buying properties, it could lead to a fall in house and land prices, making it impossible to achieve the debt-financing goal of rolling over old debts with new loans. Recent statistics on land concession revenue show that from January to October this year, land concession revenue amounted to 2.8629 trillion yuan, a 26% decrease compared to the same period in 2022, and a 48% decrease compared to the same period in 2021. After deducting the amount of land acquired by urban investment from January to October, the concession revenue was 1.8737 trillion yuan, a 6% decrease from 2020 and a 56% decrease from the same period in 2021. Assuming the year-over-year growth rate of the total concession revenue from November to December 2023 remains the same as from January to October, the total concession revenue for 2023 would be approximately 4.8 trillion yuan. This figure represents a significant decline from the 8.7 trillion yuan in 2021.

In this field of study, two experts are recommended: Zhao Yanjing and Luo Zhiheng. Their articles can be found online. The current situation is quite clear, with land concession revenue possibly shrinking by more than 50%. Many regions in central and western China are beginning to cut extrabudgetary staff, and issues such as unpaid wages for teachers and doctors, as well as halted public transport, are not uncommon. Life must continue, cities need to function, debts must be repaid, and expenditures on official duties need stabilization. The real estate sector is unlikely to recover in the short term and may never fully recover. What can we rely on next? The ability to create buzzwords online is very strong, such as this year’s popular term “equity finance,” which may make Hefei one of the most potential venture capital cities. The spread of online literature is very wide, and this model sounds attractive. The so-called equity finance refers to local governments solving the financing problems of venture enterprises without directly providing fiscal subsidies, thus the government-led fund model has emerged. Typical cases include Hefei’s venture capital model, the previous day’s support for Vanke, the Shenzhen state-owned enterprise investment model, and the Suzhou Industrial Park model that has been replicated nationwide. This model has always existed.

The Fast Pace of Data Assetization Process

Luo Zhiheng’s article suggests that the market discussion on equity finance aims to express the transition from attracting investment through land to using government-guided funds to reshape the tax base. This idea appears promising, but a close examination of projects raises questions about whether these funds might be squandered. Either the investment direction is unclear and thus hesitated, or the actual benefits are too low to compare with land sale revenues. Therefore, data-driven fiscal policy seems more reliable. Of course, this term was also created online. First, the land market underwent a lengthy process including market entry, the confirmation of housing commodification, and the establishment of a bidding and auction system, whereas the institutional framework for the data market has progressed rapidly. Here is a timeline: in December 2022, the Data 20 provisions were issued; on August 23, 2023, data was recognized as an asset on the books; a symposium was held on October 25, 2023; on November 9, 2023, public data for digital development was discussed with pricing set under government guidance for paid use; on November 10, 2023, Beijing proposed exploring a data rights division system. On the same day, Hengyang City auctioned off the franchise rights for public data. However, an announcement was made on November 15, halting the measure to observe potential subsequent movements. Even if someone were to bid, only state-owned enterprises would be eligible to participate in the auction.

Data, the Fifth Major Factor of Production in China

Data has now become the fifth major factor of production, alongside land, labour, and technology. In essence, data elements are equivalent to state-owned property rights, emission rights, and forest rights. Currently, some small cities in central and western regions are experiencing pay cuts and unpaid wages, and many local scenic parking spots, mineral resources, and even public unit catering franchise rights have been transferred. Resource development has entered a bottleneck phase. However, years of implementing digital government have accumulated a vast amount of public data, which is important to note as being publicly owned, not privately owned. It has even been pointed out that civil servants can easily transfer jobs, as their expertise is in computing. Cities are moving towards digital transformation.

For example, numerous city surveillance cameras are used to monitor public safety, speed measurement, and record traffic violations. If these data are fully utilized, it is possible to identify which neighbourhoods have high foot traffic, which commercial areas are growing, which roads are suitable for opening autonomous vehicle stores, and how public services are distributed. Additionally, large-scale data is used to train AI model algorithms, perfectly aligning with corporate needs. This is just about a camera, but the accumulated application data such as population, environmental, air quality, meteorological, medical, tax, social security, and logistics data are very rich. If a city’s accumulated data were to be franchised and then packaged for refinancing as an asset, research into current practices has shown that Chengdu and Hainan represent two typical profit distribution models. Chengdu uses a benefit reciprocation model under a state-owned asset operation scheme, while Hainan employs a revenue-sharing model under a franchise system. The assetization of data means it can stimulate GDP growth, and local finances can be bolstered through data, franchise revenue, and data-backed financing to achieve credit derivation. Simultaneously, a new industry, that of data developers, will emerge. Since this is a public data operation platform, its nature should be similar to that of current city investment platforms, and it will not be privatized. According to estimates by Northeast Securities, assuming a 10% annual return on a three-year operating right, and using Hengyang’s 2022 GDP to extrapolate, the national market scale for public data authorization operations is estimated to be around 1 trillion yuan for all 293 prefecture-level cities in the country.

Future Prospects on Data Assetization in China

Of course, securities companies are always optimistic. When it comes to digital calculations, they always create detailed blueprints, which sound very intriguing. Currently, systems for data evaluation, pricing, revenue distribution, and refinancing frameworks have yet to be established. While some believe that discussing the concept of data Assetization fiscal policy is still too grandiose and it has never been officially mentioned, the less emotionally intelligent opinion suggests that this reflects a lack of export trade and manufacturing technology. Conversely, the more emotionally intelligent view sees this as an exploration to break free from reliance on real estate, representing a highly symbolic attempt.