Urbanisation drive raises new worries

Beijing's plan may have sparked a rally in the stock market, but analysts warn asset bubbles and excessive investments could re-emerge

PUBLISHED : Wednesday, 23 January, 2013, 12:00am
UPDATED : Wednesday, 23 January, 2013, 3:55am

Beijing's urbanisation pledge has fuelled a surge in the mainland stock market since late last year.

Shares of companies in the property, cement and steel sectors have posted decent gains despite some volatilities, creating bullish sentiment as the country's new leaders prepare to tackle difficult reforms ahead.

But the optimism has brewed new risks, with some potentially becoming new obstacles to the urbanisation plan being drafted by premier-in-waiting Li Keqiang. Among them, observers are warning about the re-emergence of asset bubbles and excessive investments.

More people are now queuing up at property agencies after staying on the sidelines for months amid Beijing's tightening grip on the once booming market. They hope Li's urbanisation push will see building of more homes and infrastructure over the next decade.

Expectations of rising demand and looser property curbs have pushed up real estate prices in the past few months.

According to the Centaline Group, 54 major cities saw 104,800 new home contracts signed in the first 13 days of this month, double that of a year earlier. Prices of new homes rose in 54 of 70 major cities tracked by the statistics bureau last month, compared with November.

Such a reaction, however, might not be desired by Li, who is likely to table his blueprint for urbanisation at the annual legislative meeting in March.

Rising property prices could be disastrous for migrant workers wanting to own a home in cities and towns, a precondition for them to eventually enjoy more of the benefits of health care and education that their urban counterparts can access.

Analysts also raised concern that Li's urbanisation plan might be misunderstood and used by local governments to kick off massive infrastructure investments.

Bank of America Merrill Lynch has said that in the second half of this year Beijing "may have to curb an investment boom by new local governments in the name of urbanisation".

And that was when problems such as shadow banking, government debt, overinvestment and property bubbles were expected to regain prominence, it said.

While urbanisation will require more investment in infrastructure, the structure of investment will change, as well as the method of financing, analysts say.

Instead of focusing on building highways and bridges that have already attracted excessive investment, local authorities should think more about adding underdeveloped urban facilities such as light rail, sewage systems and subways. These are areas they have been reluctant to pour money into as they do not generate sound returns.

The government also needs to direct more funds to social welfare services, including education and health care.

Much of the funding will have to come from the central government or through treasury bond issuance, some believe.

Standard Chartered Bank economist Stephen Green said corporate and government balance sheets were highly leveraged already, probably at 206 per cent of gross domestic product last year.

That would be the highest ever, he said.

"It is highly likely that Beijing will need to recapitalise the banking system in the next five years" as loan quality had deteriorated because of massive infrastructure project lending during the 2008-10 stimulus and after the economic downturn in 2011-12, Green said.

Li Zuojun, at the State Council's Development Research Centre, expressed similar concerns about what he called "a misconception to interpret urbanisation as equivalent to major investment and property development".

"Repeating the old ways of development would just create new bubbles and cause more danger to the economy," Li Zuojun said.

The new urbanisation must instead focus on addressing people's problems, he said.

The mainland's headline urbanisation rate rose to 51 per cent in 2011 from 36 per cent in 2000. But among about 230 million newly urban citizens in the period, most of them were migrants who did not have an urban residence registration, or hukou, and were hence excluded from urban social welfare networks.

According to Li Zuojun, Beijing urgently needs to relax controls on hukou. The government must also reform the land system to let farmers sell land based on market prices rather than at huge discount to local authorities.

"China's current land system has been the major gridlock for its future urbanisation," Bank of America Merrill Lynch said.

Only about 11,000 square kilometres, or 0.1 per cent of the nation's area, has been allocated as residential land for an urban population of 691 million, or 51 per cent of the country's total, according to a report issued by the bank.

In comparison, 92,000 square kilometres had been set aside to house the country's 657 million rural residents, the report said.

"If urbanisation simply means pushing farmers to cities after grabbing their land, it could only lead to more slums in urban areas and more social unrest in rural areas," the bank's analysts said.

Farmers must be granted full property rights on their land, especially the right to freely sell on the market, they said.