The New Normal in China’s Cities

HONG KONG – For decades, rapid urbanization in China created clusters of knowledge, manufacturing, and distribution in areas that benefited from well-established connections to the global economy. But that growth model has reached its end. With the share of people living in cities rising to 53% in 2013, from 20% in 1981, China is shifting to a “new normal.” According to President Xi Jinping, the aim is to ensure annual economic growth of around 7%, driven by new opportunities in value-added manufacturing, information technologies, and modernized agricultural production.

In moving toward this goal, however, China will face difficult balance-sheet adjustments that cannot easily be managed by conventional fiscal and monetary policies. A new Deutsche Bank study reports that, last year, China’s 300 cities faced a 37% drop in their land-sale revenues – a major setback, given that land sales accounted for 35% of total local-government revenues. Such revenues had risen at an average annual rate of 24% from 2009 to 2013.

Moreover, annual consumer and producer inflation dropped to 1.5% and -3.3%, respectively, last December, owing partly to the sharp decline in world oil prices. China now faces deflation and an inhospitable external economic environment, and its urban centers are struggling with the complex interaction of solvency, liquidity, and structural issues.

But some cities are better equipped than others to weather these challenges. China’s first- and second-tier cities are very wealthy, benefiting from high property values and the continuous inflow of talent, capital, companies, and investment projects. Despite a property-market slowdown, Beijing’s recent land auction concluded with record-breaking prices of about CN¥38,000 ($6,200) per square meter.