China Urbanization to Hit Roadblocks Amid Local Opposition

China’s plan to encourage hundreds of millions of rural residents to settle in cities to boost growth faces opposition from local governments, according to Li Tie, an official with the nation’s top economic planning agency.

Officials, researchers and company executives highlighted challenges at an urbanization forum in Beijing on Aug. 10. They cited the strain on local-government finances, the dangers of overbuilding and the cost of scrapping the hukou, or residence permit, system that denies migrants the welfare, health and education benefits of city dwellers.

Premier Li Keqiang has championed urbanization as a “huge engine” for growth as he seeks to shift the world’s second-largest economy toward a model that relies on consumption rather than investment and exports. As policy makers draft plans for the new leadership’s reform agenda ahead of a key Communist Party meeting later this year, Li is grappling with vested interests that could stymie some of his plans.

“Nobody wants such a big group of migrants to be their neighbors and share their so-called civilized space. This is a conflict of interest,” Li, director-general of the China Center for Urban Development under the National Development and Reform Commission, said at the forum. “We are facing rejection from the hearts of so many mayors and city elites who have enough ability to influence decision making.”

Stocks Climb

The Shanghai Composite Index rose 1.3 percent as of 12:06 p.m. local time today amid optimism that government measures will arrest an economic slowdown.

The South China Morning Post reported today that Agricultural Bank of China signed an agreement with the Shanghai city government for a 250 billion yuan ($41 billion) loan that will help to fund developments including a free-trade zone and a Disneyland. Nomura Holdings Inc. cited the reported deal as a sign of the government’s willingness to support growth.

Li Keqiang is banking on more than 260 million migrant workers and their families becoming permanent urban residents to boost consumption and sustain growth at his bottom line of 7 percent a year, as the government restructures an economy that’s expanded at an average 10.2 percent a year over the last two decades.

Gross domestic product may rise 7.5 percent this year, according to the median estimate in a Bloomberg News survey of 55 economists last month, the least in 23 years. The World Bank estimates annual GDP growth will slow to an average 7 percent in the five years through 2020 and 5.9 percent through 2025.

Boosting Consumption

Speaking at his first news conference after becoming premier in March, Li said, “Urbanization will usher in a huge amount of consumption and investment demand, increase job opportunities, create wealth for farmers, and bring benefits to the people.”

HSBC Holdings Plc estimated in an October report that the movement of 10 million rural residents to become urban residents every year for the next 20-30 years would create more than 100 billion yuan ($16.3 billion) a year in additional consumer spending.

Policy makers, planners and government advisers are drafting proposals on how to implement Li’s urbanization vision that will be presented to the Communist Party’s top leaders at a meeting later this year. The event, known as the third plenum, may decide on economic and social reforms after a once-a-decade leadership transition that was completed in March.

“Urbanization isn’t only about changing people’s residency, it’s about their overall development and an improvement in the quality of their lives,” Li Lianzhong, head of the economy bureau at the Policy Research Center of the Communist Party Central Committee, said at the Aug. 10 forum. Ending the hukou system and replacing it with identity cards will signal the “victory of reforms,” he said.

Welfare Costs

One of the thorniest issues facing policy makers is who pays for urbanization - the cost of the physical infrastructure and the recurring annual spending on providing millions of new urbanites with health care, welfare and education services.

In a report last month, HSBC estimated the total fiscal cost for local and central governments on public housing and children’s education would be 6.24 trillion yuan for 260 million migrant workers in cities, equivalent to 53 percent of China’s national fiscal revenue in 2012.

Local authorities are barred from directly selling bonds or borrowing from banks and can’t run budget deficits. To raise money to fund spending they set up thousands of financing vehicles, racking up debts that Fitch Ratings Ltd. said in April increase risks to the country’s financial stability.

Too Expensive

Mao Daqing, executive vice president of China Vanke Co., the biggest developer by market value traded on the country’s stock exchanges, told the forum some local governments may be hard pressed to pay for urbanization.

Taking Beijing as an example, Mao said that assuming 700,000 people moved into the city each year, it could cost the local government at least an extra 77 billion yuan a year in urbanization-related spending, equivalent to doubling its annual land sales or a 25 percent increase in tax revenue.

“This is totally beyond the affordability of a local government, Beijing can’t afford it,” Mao said. He also questioned whether China needs more cities when most migration has been to the 70 biggest conurbations.

“These big cities interest people because they have more job opportunities, education opportunities and medical resources,” Mao said. “Those other 610 cities can’t attract people even though they already exist,” he said, adding “it indicates some of those 610 cities have problems or can’t survive.”

Urban Shift

More people lived in China’s towns and cities than in rural areas for the first time in the country’s history in 2011, government data show, with 691 million living in urban areas compared with 657 million in the countryside. The urbanization rate will rise to about two-thirds by 2030, meaning about 13 million more people will move to cities every year, the World Bank estimates.

While the urbanization ratio includes small towns, they often have worse living conditions, infrastructure and public services, Zhao Hui, director of the Village and Town Construction Department at the Ministry of Housing and Urban-Rural Development, said at the forum.

The country needs to do a better job of establishing smaller conurbations as these tend to cost less to develop, are more energy efficient and environment-friendly, and hence more supportive of sustainable development, Zhao said.

Separately, a deputy director of the China Center for Urban Development, Qiao Runling, warned that reckless expansion of cities in China has left many of them empty, the official Xinhua News Agency reported Aug. 10.

“China now has an oversupply of cities, given the number of new urban districts that we have,” the report quoted Qiao as saying at a forum held in southern Jiangxi province last week. The issue is especially serious in small and medium-sized cities in central and western regions, Qiao said.

— With assistance by Hu Shen, and Daryl Loo

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