Contradictions tower over China's urbanisation push

PUBLISHED : Monday, 29 July, 2013, 12:00am
UPDATED : Monday, 29 July, 2013, 6:04am

Samsung's US$7 billion semiconductor plant sitting on land spanning 9.4 square kilometres in the southwest of China's ancient capital of Xian is a gleaming example of the inherent contradictions in Premier Li Keqiang's new urbanisation drive.

The single biggest inbound investment on the mainland, the Samsung plant helps move manufacturing know-how up the value chain in the highly competitive technology sector where the government says it must succeed to boost productivity and make the most of long-term economic growth potential.

At the same time, the plant reinforces a national dependence on investment spending that runs at levels that worry the International Monetary Fund - and is likely to do so for years to come while it remains the principal route to career progression for Communist Party officials in local governments across the country.

"Local governments have no choice but to repeat the old path of urbanisation to expand local economies rapidly and aggressively" if the current evaluation and stimulation system is not changed, Hua Sheng, a noted economist and president of Beijing Yanjing Overseas Chinese University, told the South China Morning Post.

President Xi Jinping has said the performance of local officials should not be judged simply on gross domestic product numbers, but given the lack of concrete details on what else to measure, optimism for an overhaul of the system is held in check.

Right now, the more investment spending local governments do, the more GDP rises and every official knows that beating the centrally dictated GDP target has been the sure-fire way to promotion for years.

With projects such as Samsung's flash memory plant and carmaker BYD's expansion of its production capacity at its Xian facility, the Xian government aims to accelerate local economic growth to 12.5 per cent this year from 11.8 per cent last year, far exceeding the national target of a 7.5 per cent growth this year.

The competition to lure investment dollars is intense.

Equally intense is the social change - and potential for widespread discontent - looming in the coming decade.

Analysts say China's current growth model is on course to create a new urban consumer class of hundreds of millions of people largely priced out of city-centre property, restricted from education and healthcare services by a rigid household registration scheme and increasingly unable to make ends meet working in jobs in inefficient industries that add to a glut of excess manufacturing capacity in everything from cement and steel to textiles and plastics.

That's a problem for Li, who has vowed to make migrant workers - who number around 260 million - full-fledged city dwellers as part of his planned economic restructuring efforts to shift growth from export-led investment to domestically driven consumption.

Cooling growth - which eased to a one-year low of 7.5 per cent in the second quarter from 7.7 per cent in the first three months of the year - in theory makes the reform task easier as it reduces the risk of a spike in prices while structural changes are under way. But a slower growth implies a more fragile outlook for jobs. Li has made repeated attempts in recent weeks to guide public perception on Beijing's tolerance for slower growth, promising stability against a variety of economic variables.

After the leak last week of a supposed transcript of a speech he gave earlier this month to economists and industrialists, investors now believe Li's bottom line for growth is 7.5 per cent this year and 7 per cent in the long run.

Ratings agency Fitch says the muted package of fiscal and administrative economic measures unveiled last week by the State Council reinforce the view that the leadership is serious about reforming its growth model.

Li Tie, a senior official at the nation's top economic planning agency, is not so sure that local officials have really got the message. He used two Chinese proverbs to describe a prevailing misunderstanding among local officials of the latest urbanisation push.

"Urbanisation has been treated by many as 'adding flowers to the brocade' for the rich. But instead it should be viewed as 'sending charcoal in snowy weather' to the poor," said Li, the director-general of the China Centre for Urban Development under the National Development and Reform Commission.

He was alluding to the practices in which local governments use urbanisation as an excuse to launch new industrial projects, claiming this will beautify cities with broader roads and bigger skyscrapers - moves that only benefit those who already earn decent wages.

"In many well-developed cities, it remains hard for migrant workers to find shelters to shield themselves from wind and rain," Li Tie told mayors and local housing officials who attended a forum held in Xian this month.

China aims to boost the share of urban residents in the population to about 70 per cent over the next one or two decades from 52.6 per cent last year.

A farmer who spent about 6,000 yuan last year would spend twice that if he lived in a county and three times that amount if he was in a higher-tier city, according to Ma Jiantang, director of the National Bureau of Statistics.

Such a strategy, if successful, will spur huge demand from new city residents while they buy houses, furniture and cars, offsetting the fast-shrinking export competitiveness in the country that has seen the population get older and labour costs keep rising. Exports fell for the first time in 17 months in June.

At the same time, the transformation looks urgent also because unrestricted investment growth in the past decade has caused excess capacity in various industries and accumulated high debt at local levels.

"Cities' blind expansion is like spreading out big pancakes - one day when local fiscal capabilities get too stretched, the bubble might burst," warned Li Tie.

While the process of urbanisation is "extremely challenging", without it the economy would be "on a road to ruin", said Hua.

The difficulty for the transformation is partly reflected in Beijing's multiple delays in launching its urbanisation guidelines this year.

An official familiar with the situation told the Post that a few ministries - the NDRC, the housing and urban-rural development ministry, and Ministry of Finance - have been asked by the top leaders to launch a fresh round of research into the urbanisation issue and submit their specific proposals in two months.

A plan drafted earlier by the NDRC after a year-long study that proposed building a cluster of cities to drive new investments failed to go through as some experts argued that it did not sufficiently address social and environmental concerns, the official said.

"My estimate is that a clear urbanisation plan might be rolled out near the end of this year," he said.