2014-15 Canada-China Business Forum Magazine - Page 64

URBANIZATION The Central government aims to shift urbanization outside of the major eastern cities and reinforce less developed city clusters in the interior, including the Chengdu-Chongqing Corridor and the Central China Plain. Sustaining this geographic dispersion will involve heavy infrastructure spending. According to the plan, every city with a population over 200,000 will be accessible by regular railways and expressways, while highspeed railways will connect every city of over 500,000 people. The civil aviation network will also expand to service over 90 per cent of the population. Critics point out that the effort to focus new urban growth in smaller, non-coastal centres may work against the government’s efforts to reinvent the national economy. Moving rural residents into small cities will not boost productivity, output and consumption if there are no jobs for them. Edward Leman, President of Chreod Ltd. and long-time consultant on China urbanism, observes that the ability of cities to act as drivers of growth lies in the agglomeration economies most often found in large metropolitan areas. By reinforcing a twenty-year-old policy of limiting the growth of megacities, the plan falls short of its potential to spur industrial restructuring and upgrading. Whether the National New-Type Urbanization Plan will succeed at limiting growth in China’s “The ability of cities to act as drivers of growth lies in the agglomeration economies most often found in large metropolitan areas.” larger cities is another question. A 2014 report published by the Economist Intelligence Unit predicts that, despite the new plan, urbanization will lag in Western and Northeastern China as migrants continue to move to more developed metropolitan areas. Many prefecture-level cities may actually see a drop in their urban population based on current migration and birth trends. Local governments in smaller cities could end up overspending on ambitious projects for a population that never arrives. A further issue is how local governments will finance their part of the national urbanization project. In an effort to move local governments away from their dependence on land fees, the Central government has started to allow certain cities and provinces to issue bonds. Discussions are also underway to institute a new property tax. The Central government also appears to be increasing its support of Public-Private 63 Partnerships (P3s) as a means of funding new infrastructure investment. In April 2014, the State Council opened 80 major public infrastructure projects to private investment in industries that used to be dominated by SOEs, including railway and harbour construction, IT infrastructure and clean energy projects. Next on the State Council’s list for opening up to private-sector investment are public utilities, water resources and airport construction. Many of these contracts may be opened to foreign companies. Shortly after the new urbanization plan was announced, Xu Xianping, Vice Minister of the National Development and Reform Commission, declared that the Chinese government welcomed international companies to participate in China’s new type of urbanization. Project finance is one area that Canadian banks and financial institutions may want to participate as a growing option in China. Canadian companies that can provide planning, engineering, architectural services are also well-positioned to participate in the new city building drive. The Toronto-based architectural firm B+H has already designed a number of large projects in China, including several airports. Growth in China’s smaller cities, combined with improved transportation infrastructure is opening up access to new consumer markets and lower labour costs. Writing for The Atlantic, Matt Schiavenza notes that there are over 160 cities in China with a population over one million people. There are nine in the U.S., by comparison. Betting on this trend, in early 2014, H&M, the world’s second largest fashion retailer, announced plans to open 80 to 90 new stores in China, many in China’s secondand third-tier cities. But such expansion strategies must be pursued with an eye to regional specificity. Not all of China’s smaller cities will experience population growth in the coming years and per capita consumption levels will vary widely from city to city. CHINA’S LOCAL DEBT Currently, state land transfer fees for converting agricultural land to construction land make up more than half of the revenues for many local governments in China. This has led to wasteful projects and unrestricted urban expansion, causing Chinese and international scholars to call for fiscal reform at the municipal level. Over the last few years, the Central government has been experimenting with allowing wealthier provinces and cities to directly issue bonds. Twenty years ago, concerned about reckless borrowing by provincial and municipal governments, Beijing banned local borrowing. Local go