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Chinese Cities’ Four Modernizations

WASHINGTON, DC – Among the most significant developments driving China’s economic growth and rising living standards is the shift from a rural, agricultural society to a modern, urban one. With almost 700 million Chinese – more than half of the population – already living in cities, the centrality of urbanization to China’s future is indisputable. But exactly how the trend will develop remains far from certain.

At last November’s Third Plenum of the 18th Central Committee of the Communist Party, China’s top leadership laid out one path forward. The meeting’s communiqué and the subsequent road map for reform offer a glimpse into how China’s leaders anticipate the country’s urban development, including the role that public policy will play in guiding the trend.

So far, China has largely taken a “Field of Dreams” approach to urbanization: “Build it, and they will come.” Indeed, over the last 30 years, massive public investment and economic liberalization spurred rapid urban growth in coastal provinces. And now China’s leaders are increasingly taking that strategy inland, making critical investments in physical and human capital.

But the effectiveness of these investments will depend on the sequence and rate of their implementation, and on how skillfully they are adapted to each locality’s distinct resources, needs, and aspirations. Four interrelated issues must be addressed.

For starters, Chinese infrastructure investment has led to enormous gains in construction-related industries and employment, while boosting local GDP considerably. Given that local officials’ career prospects depend on maintaining high growth rates, the emphasis on infrastructure development is likely to continue, despite sustainability concerns stemming from the massive consumption of water, energy, and land that such investment entails.

But China cannot afford to ignore its deepening environmental crisis. Especially in China’s massive interior, rapid urbanization requires high output from steel mills, chemical refineries, and coal-fired electricity plants, leading to the dangerously high levels of air pollution that have become synonymous with Chinese-style development.

Ever-worsening air quality has forced China’s government to begin focusing on cleaning up local particulate pollution and building a low-carbon economy. To this end, China’s National Development and Reform Commission has issued its first-ever blueprint for adapting to climate change.

Moreover, since January, the authorities have required 15,000 factories, including state-owned enterprises, to disclose official data on airborne emissions and water discharge. And the government has pledged to spend $280 billion on measures to reduce air pollution over the next five years. To boost these policies’ effectiveness, sustainability metrics should be factored into local leaders’ performance evaluations. This is easier said than done in a country where, for more than 30 years, living standards have been seen in more narrowly economic terms.

The second major issue facing China during the urbanization process is the conflict between rural landowners and local governments – a highly combustible dynamic. Forced demolitions have already sparked thousands of isolated protests. If this is allowed to continue, public outrage will intensify, generating social instability and undermining economic aspirations.

Fortunately, some progress is being made in this area as well. Sichuan province’s deputy party secretary, Li Chuncheng – known as “Li Chaicheng,” or “Li destroys the city” – was recently arrested on corruption charges for his brazen expropriation of farmers. Then again, the mayor of Datong in Shanxi province, Geng Yanbo – nicknamed “Geng Chaichai,” or “Geng destroys and destroys” – has yet to be held accountable for similarly venal behavior.

A more promising development is that, according to the Third Plenum road map, farmers must receive a fair share of the profits from land-value appreciation, and will be entitled to transfer their land or use it as collateral. Future policy could allow sales directly to developers, rather than via local governments, ensuring fairer compensation for rural citizens, but also less revenue for local governments to spend on construction.

The third issue that must be addressed is migration. For three decades, China underwent massive internal migration to the coastal areas of Guangdong, Zhejiang, Jiangsu, and Shanghai, where export-oriented factories awaited the low-cost labor that enabled them to fuel China’s GDP growth – and a much-touted reduction in global poverty. At the same time, however, the migrants strained local governments’ capacity to provide adequate housing, health care, and education.

The key role of migration in China’s economic development is reflected in the Third Plenum’s road map, which is most explicit in addressing hukou – the household registration system that restricts access to social services to one’s place of origin. Under the new plan, rural migrants settling in smaller towns and cities will gain access to services like health care and education, and the government will gradually relax hukou restrictions in medium-size cities. These efforts, it is hoped, will ease the burden on larger cities like Beijing and Shanghai, which are already overwhelmed with migrants.

The final major issue affecting the urbanization process – stressed in the Third Plenum communiqué – is how to finance infrastructure and human services. As it stands, local governments foot most of the bill. But, given that few local governments have the authority to levy their own taxes, they have largely turned to real-estate development to generate revenue.

The problem is that the elaborate credit systems that they have created to underwrite infrastructure or property development – so-called “local-government financing vehicles” – undermine more sustainable borrowing and lending, while weakening state-owned banks’ balance sheets. The Chinese government estimates that as much as one-third of a total of $3 trillion in local-government debt will not be repaid, forcing the central government to cover the costs.

In order to make local-government borrowing more transparent and accountable, the Third Plenum calls for streamlining the distribution of revenue between the central and local governments, increasing transfer payments to cities, and allowing local authorities to issue municipal bonds independently. Here, the challenge lies in implementation.

It is highly likely that this new phase of urbanization will yield diverse results across China. How leaders address infrastructure investment, land rights, migration, and financing will help to determine the sustainability of the fundamental transformation that lies ahead.