Mainland urbanisation drive may increase financial risks, say advisers

Massive investment driven by new strategy could push up local government debt

PUBLISHED : Friday, 08 March, 2013, 12:00am
UPDATED : Friday, 08 March, 2013, 5:15am

Financial risks created if money is thrown around recklessly in the mainland's massive urbanisation drive could pose the biggest threat to the economy, political advisers have warned.

Beijing has vowed to make urbanisation a new driver of growth over the next decade.

The urbanisation strategy has excited investors and pushed up property prices, but the fever has cooled a bit recently after the State Council warned of further tightening of the real estate market.

Government advisers attending the annual session of the Chinese People's Political Consultative Conference in Beijing cautioned that urbanisation was not as easy to achieve as many had imagined.

They warned that massive investment driven by urbanisation could add to risks to the financial system by pushing up local government debt.

"Urbanisation must not repeat old paths," economist Li Yining, a CPPCC delegate, warned yesterday at a press conference held on the sidelines of the meeting.

A mentor to the incoming, premier Li Keqiang , when he was studying for his doctorate at Peking University, Li Yining said that in the past, when "everyone swarmed like bees" to pour money into new projects, they ran the risk of inducing a financial crisis.

The biggest risk lies in the financial sector. If growth comes without efficiency, how can debt be repaid after a boom in credit supply?

"The biggest risk lies in the financial sector," he said. "If growth comes without efficiency, how can debt be repaid after a boom in credit supply?"

He called on the nation's new leaders to seriously consider the problems and advance the urbanisation strategy prudently.

International research agencies, including Standard & Poor's, have sent out similar warnings. S&P analyst Terry Chan issued a report last month, saying that China, among the world's top 32 economies, had "the highest risk of an economic correction, because of low investment productivity over recent years".

Former minister of industry and information technology Li Yizhong said at the press conference that due to excessive investment, the mainland's cement industry had only used 73 per cent of its capacity, while the usage rate of its polysilicon industry stood at just 35 per cent.

Chen Xiwen, director of the Communist Party's Central Rural Work Leading Group, said urbanisation moves made in recent years had depleted energy and resources dramatically, occupied a lot of farmland, caused shortages of water, polluted the environment and intensified traffic congestion.

Apart from developing urban infrastructure and facilities, a more daunting task is to expand urban social welfare networks to more rural migrant workers and revise the household registration system.

The National Development and Reform Commission wants the percentage of mainlanders living in urban areas to rise to 53.37 per cent this year, from 52.3 per cent last year.

Former World Bank chief economist and senior vice-president Justin Lin Yifu said China should avoid "over-urbanisation".

If too many migrant workers flooded into cities, but could not find jobs, they would sink into poverty, he said. If that happened when the country failed to upgrade technologies and boost productivity, China might get stuck in a middle-income trap.