The China Dream: The Role of China’s Urbanisation and the Rise of an Independent Class of Citizen

In 1980, at the beginning of China’s economic reform and 30 years after the Communist Party implemented the country’s rapid industrialization, China’s urban population stood at 200m people. By the end of 2011, this number had grown to over 700m. Between these two dates lies the largest and fastest social movement in history, in which the country’s urbanisation rate increased from less than 20% to over 50%. China today has the world’s largest urban population by far, with over 170 cities with populations above 1m, of which seven have populations above 10m. Moreover, this demographic trend is still on-going. In the next phase, nearly 70% of China’s population is expected to live in urban areas by 2025, bringing it on par with countries like Germany and Italy. And in the third phase, China will move to 80% in line with the urbanisation rates of Japan, the US, France and the UK. To make just the next shift a successful one, China, having built out the world’s largest urban infrastructure, will need to create housing, employment, security and services for an additional 250m urban residents within the next 12 years. However, the China of the 1980s had a rural population that felt privileged to have the opportunity to move to the cities while today’s population increasingly expects this as a right. Moreover, a large section of this urban population made their own choice to move to urban centres and, because of their decision they have fallen outside of the state’s social benefits net, are the new independent China. Understanding this shift in the mind-set of the Chinese people is key to understanding the economic, social and political changes that will accompany the next phase of urbanisation.

Managing China’s continuing urbanisation appears to be one of the cornerstones of Premier Li Keqiang’s first administration. Having reportedly rejected the National Development and Reform Commission’s US$6.5 trillion urbanisation plan earlier this year , reportedly over concerns that the proposed plan would trigger another spending binge that pushes up government debt levels, Premier Li has repeatedly spoken of the importance of urbanisation as “the key to unlocking China’s domestic demand” and as a “huge engine” for China’s economic growth. In China, as in other countries, economic growth and urbanisation have gone hand in hand. However, in most countries, urbanisation is a result rather than a cause of growth while in China’s top down development model urbanisation has been a key driver of economic growth. China’s massive fixed asset investments in the past decades have not only increased agricultural productivity and freed up rural populations, they have also created the urban infrastructures that have absorbed these excess populations. Moreover, urbanisation has pushed up land prices and resulted in real estate investment becoming one of the largest contributors to the Chinese economy, contributing 13% of GDP in 2011. Accordingly, for China, managing urbanisation is indeed a core issue for the country’s continued economic development and growth, and it is no surprise that the country’s Five Year Plan’s include growing urbanisation rate targets among the key economic development metrics to be worked towards. More fundamentally, managing urbanization is key to the political stability of the country too.

Key Urbanisation Challenges

Given the direct causality between urbanisation and economic growth, China’s current model of urbanisation has directly contributed to many of the issues facing the economy today. As China seeks to rebalance its development model and transition to a developed economy, it will need to address the core issues created or exacerbated by China’s urbanisation model to date.

The Key Physical Challenges in Managing Urban Change

1. Environmental Issues. China’s environmental issues, of which pollution is one of the most pressing ones, are widely recognised and well understood today, and while pollution is not exclusively an urban problem, China’s cities are among the key contributors to the country’s pollution problem, as well as being areas of high pollution themselves. China today is home to 16 of the 20 most polluted cities in the world. China’s cities have been built for speed and scale rather than efficiency and its for speed and scale rather than efficiency and its buildings on average require twice as much energy to heat and/or cool as comparable buildings in the US or Europe , creating the need for additional power plants (mainly coal fired) to be built nearby, creating significant incremental air pollution to that produced by automobiles. World class public transportation (Beijing and Shanghai already have the world’s third and fourth largest metro systems in the world) and wider roads have not been able to adequately address these issues, particularly as car ownership in China continues to increase. Further, in addition to air pollution, China’s cities are a key source of waste production and a large consumer of scarce water resources by nature of their poor planning. While China’s leaders have recognised many of these environmental problems and taken initial corrective measures, implementation remains the key challenge, with for example, 95% of new buildings constructed in the country, currently not meeting the government’s energy efficiency regulations.
2. Need for Land Reform. The growth of China’s cities is additionally hampered by the current system of land rights, in which rural land is communally owned and leased by individuals for farming. As cities grow and expand into rural areas, local governments rezone farmland for urban development, providing additional space for cities to grow and in theory providing rural inhabitants with attractive compensation for the sale of their increasingly valuable land. In practice, local governments finance their budgets by acquiring rural land at below market value, rezoning it, and selling it on to developers for a significant profit. Land sales by local government in 2012 totalled US$230bn, representing over 10% of their total income. With the estimated compensation paid to farmers as low as 2% of the land’s market value, China land sale system exacerbates the negative impact of the hukou system, with rural inhabitants being forced to give up their land for little compensation and subsequently resettle in cities without receiving urban benefits, thereby losing out on both sides of the rural-urban transition. It is therefore unsurprising that conflicts over land accounted for 65% of the 187,000 mass conflicts in China in 2010. The combination of land rights and the hukou system are among the key drivers of China’s rising income inequality, with average urban incomes nearly 3.5x higher than rural ones. Addressing these issues is clearly critical not only for China’s urbanisation but also for continued social stability.
3. Financing Additional Housing. Following decades of rapid investment, local governments don't have the money to further build out cities. With development to date largely financed through bank debt, local government debt in China is estimated at up to 20 trillion yuan (US$3.3 trillion), or almost 40% of GDP, following the massive economic stimulus program enacted to counter the global financial crisis in 2008 and subsequent lending designed to counter the country’s recent overall macro-economic slowdown. The build-out of China’s cities, particularly “China’s government needs to find a way to finance and build appropriate housing for up to 400m current and expected urban inhabitants in the next 12 years”housing, is increasingly dependent on private developers. However, there is a huge mismatch between land development, property prices and housing need. China’s urban boom has created one of the history’s largest house price bubbles, with average housing costs in Beijing at more than 10x the average annual household income. Today, over 100m urban inhabitants, particularly migrant workers, live in housing units built by former farmers whose villages have been encompassed by growing cities. As increasingly valuable land is rezoned and transferred to developers, these focus on building middle class and luxury housing, creating a net loss of housing space that pushes lower income inhabitants to the outskirts of the city, where the development cycle starts anew. China’s government needs to find a way to finance and build appropriate housing for up to 400m current and expected urban inhabitants in the next 12 years, which implies building housing not only where it is actually required (rather than in empty “ghost” cities) but also creating a development model that creates profitable opportunities for the private real estate developers and investors required to finance the build-out.

The Challenge from the People in Mass Urban Change

1. Creating New and Meaningful Urban Employment. While agricultural productivity gains and rural land development are creating the population and the space for continued urbanisation, the government will need to ensure sufficient volume and quality employment to meet the expectations of the urban migrants. China will also need to direct migration flows to high growth areas with urban labour markets that can absorb excess workers. However, China’s current growing mega-cities with high costs of living and increasing space restrictions are not ideally suited for the labour intensive manufacturing that has employed past generations of urban migrants. Moreover, the country’s leaders increasingly see cities as the key drivers of the country’s shift to consumption led growth rather than the past formula of industrialisation. This in turn requires increasing levels of disposable incomes its cities, rather than the creation of more entry level lower income jobs. China’s ongoing urbanisation therefore faces a dual challenge of simultaneously growing to absorb new urban populations and transforming their existing populations into high value consumers, with one requiring a low cost of living to execute and other triggering increasing costs of living.
2. Integration of the Growing “Independent Class”. China’s urbanization has created a large class of citizens living outside of the state system in every major urban centre. The roots of the issue lie in China’s hukou system. In China, the provision of basic welfare services is tied to a citizen’s hukou, or registered residency status, which in turn is tied to an individual’s registered household. Official employment, education, “China’s urbanisation to date has led to the development of a large rural migrant underclass of c.300 million outside of the systems of rewards and benefits controlled by the country’s ruling Communist Party.”residency status and any other government service are only provided to citizens in the location that matches their hukou, with little or no ability for migrants to obtain urban hukous when they move to cities. This system has in the past provided cities with a cheap source of migrant labour (for whom they do not need to provide basic services), and enabled rapid growth without needing to scale expensive facilities such as hospitals and schools. In Shanghai, for example, the demand for primary schooling outstrips supply by a factor of three. The increased cost of living this creates for migrant workers decreases the attractiveness “The new China could well be defined by the will of this new independent class of citizen rather than the physical engineering of its urban infrastructure.” of living in high cost cities, with many large eastern cities now experiencing labor shortages. To date, this class has been willing to forego their basic right to state support in search of economic opportunity, however, with the cost of living rising and the population ageing, it is clear that cities will need to raise the level of benefits provided to continue to attract labour and talent. China’s cities today are unable to finance the cost of providing urban level benefits even to their existing populations. There are an estimated 300 million urban residents not receiving services on account of their rural hukous in China today: providing benefits to these people would cost an additional 3.8% of GDP every year. Adding and effectively integrating an additional 250m urban residents over the next decade will clearly require a fundamental reform of this system. While this class of citizen is not the same as India’s slum population (See The Sign of the Times, “Transforming India’s Slums”, October 2013 ), it shares some important characteristics with that group: living outside of the state system of benefits, providing a significant portion of entry level jobs and intensive labour, willing to work in the system at rates that undercut the next level in the economic ladder, enterprising and hard-working, and most importantly, economically and socially independent of the state, and thereby independent of the ruling Communist Party. The new China could well be defined by the will of this new independent class of citizen rather than the physical engineering of its urban infrastructure.

China’s Shifting Urbanisation Priorities: A Blueprint

China’s urbanisation and industrialisation in many ways is following a well-understood path, first trodden by Western Europe and the US in the 19th century and subsequently by Japan and the Asian Tigers in the 20th. Urbanisation in these countries has seen the rise of world cities such as New York, Paris and Tokyo. China’s tier one cities (Shanghai, Beijing, Guangzhou) are widely seen as aspirants to this league. However, the sheer scale of China’s urbanisation will force its planners to focus their attention on transforming the increasing number of tier two, three and four cities which will witness the strongest growth in the next 20 years. Further, given the advances in information technology, environmental technology, energy, material sciences and transportation, it is unlikely that China’s cities of the future will seek to emulate the blueprints (both literally and figuratively) laid down by the previous waves of urbanisation. China’s urban planners today have the unique opportunity to develop the template for urban living in the 21st century, which will not only create cities that complete the country’s industrialization but also provide a testing ground for the validation and commercialization of new technologies and models of habitation. Doing so will require a massive departure in focus for China’s urban planners from the previous growth model, requiring the government to effect fundamental changes across six dimensions of urbanisation policy.

The Issue: Unsustainable First Wave. China’s urbanisation to date has been focused on building out cities and infrastructure as fast as possible, both to absorb the waves of rural immigration and to maintain high rates of investment (and therefore economic growth). This has been a great success. However, the quality of both planning and building suffered as a result and today many of China’s cities face dysfunctional urban sprawl and pre-mature urban decay, with 20 year old buildings appearing ready to begin (and in some cases actually) tumbling down.

The Challenge: From Speed to Sustainability. In the next wave of urbanisation, China will need to focus on the sustainability of its urban environments, both in terms of the quality of the infrastructure as well as in the quality of the design. Urban planners will need to significantly improve the environmental footprint of China’s cities, reducing water usage, energy consumption and carbon emissions. This will require among “Some 80 percent of Chinese cities are unable to achieve a balance between economic growth, resource efficiency, and sustainable development” other things the introduction and use of smart materials, new models of power generation, integrated recycling technologies and improved urban transport systems. Implementing all of these technologies will likely radically alter the face of urban environments, with fewer ultra-high rise buildings, increased mixed usage development and widespread car-free zones, among other features. Creating the sustainable cities of tomorrow today does not require fundamental technological innovation, it requires the innovative application and integration of well-established and validated technologies on a massive scale, a model that China is well familiar with, having successfully followed it for the past 20 years with regards to industrialisation. Given the experience of the last 20 years, it will no doubt require a new wave of foreign businesses to help China grow who, given their compatriots' lessons learnt, may well require new commitments, new incentives and new protections for their intellectual property and capital.

The Issue: Risk of Mass Instability from Demand-Supply Gap. China’s current urbanisation strategy is focused on absorbing (and in many cases) attracting rural migrants into cities, thereby supporting infrastructure build out and fixed asset investment. Actually keeping China’s growing urban populations in the cities and, moreover, keeping them happy requires more than simply creating living space, however. Failure to deliver on the rising imbalances caused by growing urban populations without a massive increase in basic services will lead to significant deterioration in the quality of life for urban inhabitants – regardless of their hukou status – and threaten social stability in the long run.

The Challenge: Delivering Increased Quality of Life. While the first generation of urban settlers are happy to have a job, their children expect quality of life. If China’s cities are to support personal and social development, they will need to be oriented to enabling people to focus on family, community alongside material advancement, wealth creation and so will ultimately allow the enjoyment of urban lifestyles. This requires a fundamental rethink of the delivery and financing of basic urban services, including primary and secondary schooling, hospitals and health services, government services, care for the elderly retirement homes, and other services. Successfully executing the above will require “China’s cities, with their much denser and technologically networked populations, have the potential to be tinderboxes for disorder on a scale not witnessed since the protests of Tiananmen Square in 1989”not only building (significantly) more of the same, but rethinking the delivery of these services as well, for example through the adoption of e-government services or a reform of the urban healthcare system, where large hospitals continue to serve as the primary point of care for all healthcare needs. Changing the models of education, health and the bureaucracy involved is clearly a tall order that will require massive buy-in across municipal, provincial and even central governments. However, failing to deliver on urban level services creates an unhappy citizen and ultimately one that is willing to act against the government programme. While the majority of China’s civil unrest has historically occurred in the countryside, China’s cities, with their much denser and technologically networked populations, have the potential to be tinderboxes for disorder on a scale not witnessed since the protests of Tiananmen Square in 1989, an event that continues to shape China’s domestic policy even today.

The Issue: Urban Development Building Unsustainable Scale. Today, well over 20m people live in each of the metropolitan areas of Shanghai, Beijing and Chongqing, and it is clear that these cities cannot continue to grow at the same rate indefinitely. Even if the ensuing logistical, geographical and environmental problems of continued mega-city growth could be successfully addressed, the sheer scale of China’s urbanisation implies that simply scaling large cities will not be sufficient to integrate the onslaught of rural migrants expected to arrive there during the next decade.

The Challenge: From MegaCities to MegaTowns. China’s next wave of urbanisation needs to focus on developing smaller cities and towns that effectively, economically and socially, integrate rural environments; much like medieval European market towns served as an economic and political focal point for the surrounding agricultural countryside. By developing strong urban-rural linkages facilitating the flow of people, good services and capital, China can significantly increase the economic performance and the quality of life for both regions. Properly managed, the per-urban zone connecting the two regions becomes the foundation linking multi-centric metropolitan areas with green infrastructure and advanced transport links. This will require the creation of mega-towns and villages that positively impact the nature of rural urban flows, partially absorbing and in some cases reversing the otherwise one way flow into cities. However, improperly managed the per-urban zone becomes an expanding belt of suburban sprawl surrounding an overcrowded city core. Further, the peri-urban zone will also need to fulfil the tourism and leisure needs of urban populations. Chinese cities have no equivalent to a Central Park and public spaces are generally overcrowded. With increasing urban wealth and mobility the transition zone will become an increasingly important destination for leisure spending and China’s urban planners will need to develop land accordingly.

The Issue: Fragmented Growth, Fragmented Loyalty. China’s commitment to developing its central and western region is clear. Indeed, balanced geographic growth was identified as a key priority over a decade ago with the enactment of policies such as the “Open Up the West Program” and the “Rise of Central China Plan”, which poured billions of renminbi into infrastructure investments in the regions. However, these regions have failed to close the gap with the richer regions on China’s eastern seaboard. The GDP per capita of the southwestern provinces of Guizhou and Yunnan, collectively home to over 80m people, is less than a third of the GDP per capita enjoyed by Jiangsu or Zhejiang, the provinces at the mouth of Yangtze River. Places like the former or the marginally better off provinces of Anhui Henan and Sichuan (home to a total 230m people) are the leading sources of China’s future rural migrant populations and therefore need to be at the forefront of the country’s urbanisation planning. This will require much more than infrastructure investment.

The Challenge: From East to West. Successful urbanisation strategies in Western and Central China require significant industrial and economic planning and investment, in addition to more traditional urban planning. To do this, city planners will need to attract large industries to ring the major urban centres. From the perspective of development strategy, the country has the case study of having built a number of world-class industry hubs in cities on its eastern seaboard, with many cities host to multiple industry clusters. Multi-cluster cities in central China are few and far between, however, while in western China, even single industry urban hubs remain the exception, rather than the rule. Although cities such as Wuhan and Chongqing in central China have already built large industrial bases (in fact, both cities are vying to be the “Detroit of China” for their large automotive industries), China’s leaders will need to develop much more focused and faster industry cluster strategies to push industrialization and urbanisation into its middle and western regions.

The Issue: China Remains the Workshop of the World. As the US shale gas discovery heralds a new age of repatriation of certain industries to the US, the best case might well be that China retains its status as the workshop of the world. This is clearly not good enough given the aspirations of China. China’s envisaged “smart cities” of the future will be smart not only because of their technology and communications infrastructure but because of the intelligence and creativity of their inhabitants. As China transitions to a fully developed and more balanced economy it will need to leverage and continue to nurture its urban middle class. The growing middle class is not only the main engine of the desired rebalancing to more consumption, it also provides the educated creative classes that will innovate the high value goods and services develop new technologies and even entire industries. China’s next wave of planning will need to fully unlock the potential of its human capital, implying not only the creation of high value jobs in technology sectors but also high end education, healthcare and welfare policies to ensure the continuing flow of talent to these sectors.

The Challenge: Shift from Industrial to Knowledge Economy. Previous efforts by China to build knowledge industries have, unsurprisingly, focused largely on fixed asset infrastructure: Shanghai’s Zhangjiang Hi-Tech Park has been dubbed China’s Silicon Valley but in reality has been largely a real-estate play that provided favourable rental and local tax terms to “high-tech” companies. Creating a true competitor to Silicon Valley requires much more: the coordinated integration of “soft” infrastructure including government research facilities, universities and higher education, and banking and finance, alongside more traditional urban planning that creates attractive spaces for work and living as well as the build-out of smart infrastructure. More fundamentally, however, nurturing and attracting creative talent over the long term will require not only coordinated planning and management but an open society that embraces the free exchange of information. Failing to provide the freedom to information and ideas – no matter how radical – is a natural limiter on development past a certain point; a point that China is already at.

Issue: A New Independent Class Grows that Challenges the State. China’s urbanisation to date has led to the development of a large rural migrant underclass outside of the systems of rewards and benefits controlled by the country’s ruling Communist Party. The party has enjoyed absolute control over the country’s governance for “Unlike imperial China, which derived legitimacy from the “Mandate of Heaven”, or modern democracies, which derive legitimacy from regular popular elections, the CCP has needed to establish legitimacy from other sources.” over 64 years, making it the longest standing political party in power globally today. However, the CCP’s ability to remain in power is largely dependent on fulfilling the implied social contract upon which its continuing legitimacy rests. Unlike imperial China, where legitimacy was derived from the “Mandate of Heaven”, or modern democracies, which derive legitimacy from regular popular elections, the CCP has needed to establish legitimacy from other sources. Originally seeking to legitimise its rule from revolutionary and Marxist ideology, China’s rulers have since implemented economic reforms, shifted to legitimacy based on delivering economic growth and competent government while maintaining social harmony, thereby providing a better life for all citizens. However, the creation of an urban class without state benefits in a system of increasing wealth inequality has created an independent group of people with fragmented loyalty to the state or ruling party and with the potential to call in question the CCP’s continued legitimacy, thereby creating the risk for considerable political instability. On the flip side, this new breed of citizen is a great asset since it is one that is self-dependent and enterprising.

The Challenge: Creating Partners for On-going Development. While previous generations of Chinese have willingly forfeited their political voice in exchange for the care provided by a paternalistic communist state, the current generation, including both migrant workers and young urban professionals, expects the continuing delivery of economic opportunities and are less likely to trade freedom of expression for this right. While China will certainly need to provide adequate social services to its citizens overall, the country’s smart, independent and ambitious urban class are self-starters who require no state hand-outs to be successful, instead looking to the provision of a transparent and level playing field free of corruption within which to make rational economic decisions and to take risks. If managed properly, China’s ambitious urban class can be partners for the necessary economic transformation currently underway, acting as entrepreneurs, innovators and business leaders. If managed improperly, this class could represent a major threat to the country’s social stability and the communist party’s continued political legitimacy. Successful management will require a continued systematic and widespread crackdown on government corruption, a further roll-back of state economic activity to create opportunities for the private sector and further liberalization of the financial sector to enable capital allocation via market mechanisms rather than political policy.

Conclusion: Starting the Next Wave of Urbanisation

Within the next few weeks, Premier Li Keqiang is expected to announce the roadmap for China’s "new type of urbanisation." It will doubtless contain a number of headline grabbing mega-scale infrastructure projects such as the linking of nine major cities in Guangdong into a single city of more than 40m. The development plan for China’s 170 smaller cities will be an important test of the credibility of the overall plan. Given the long-term perspective typically taken by the Chinese Communist Party and the clarity of the issues the country is currently facing, it would be very surprising if the new urbanisation plan did not seek to address, in some form or another, the six transitions laid out above. The devil, as always, is in the detail and how the grand vision is translated into specific actions at the local level will determine the ultimate success or failure of the plan. This will require the alignment of incentives with the local government officials who will be responsible for implementing the country’s urbanisation plan on the ground. China has published environmental goals in its five year plans for many years but has failed to translate these into concrete performance targets by which local officials were measured. Accordingly, the environmental targets in the country’s five year plans were consistently missed. Only recently have government officials been held accountable for local environmental outcomes, with a significant increase in protection measures subsequently ensuing. Successful urbanisation will require a similar alignment of incentives between national targets and local government accountability.

More importantly perhaps, the list above of the six strategic shifts for the next wave of urbanisation demonstrate that China’s urbanisation challenges are closely tied to its broader economic, social and political challenges and cannot be answered by simple urban planning, no matter how well thought out or executed. Stated more precisely, urbanisation is chiefly an economic phenomenon with significant social and therefore political implications and an effective urbanisation strategy will need to be comprehensively tied into development initiatives across these three fields. “China’s urbanisation challenges are closely tied to its broader economic, social and political challenges and cannot be answered by simple urban planning, no matter how well thought out or executed”Among the list of the six challenges above, the first four can largely be met by traditional urbanisation strategies, determining where to build, how to build, what to build and for whom to build. The last two however tie more deeply into the shifting underlying economic strategies and priorities of China and the ensuing social development models it needs to adopt to deliver continued growth and stability. Economic reform, political transparency, endorsing openness and freedom, market mechanisms and economic liberalism are all critical elements of this continued growth and as the Sign of the Times has explored frequently and cannot be addressed in isolation. As China’s leaders prepare for the upcoming Third Plenum of the 18th Party Congress, which many observers expect will be a landmark event in China’s economic reforms as well as the platform for announcing the country’s revised urbanisation blue-print, they will also need to give analytic and creative energy to the interconnectedness of China’s challenges.

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