Talking to Chinese economists and leaders of state-owned and private Chinese firms since the recent change in the Chinese leadership, I have been struck by an almost complete consensus that despite continued growth over recent years, it has been a “lost 10 years” in terms of the absence of major reform and the impact of unbridled growth on the environment.

In his valedictory comments at the recent Nation People’s Congress, the outgoing Premier Wen Jiabao, while taking credit for driving China’s urbanization level to nearly 53%, also highlighted the urgent need for the “sound development of urbanization” with a more balanced approach which moves away from a focus on megacities and with more attention to medium-sized cities and market towns ( Chinese: zhen )

Many in China regard the next period as cleaning up the mess left over from the massive infrastructure splurge used to keep the economy growing.  While the arrival of the new leadership has created a mood of cautious optimism over potential policy shifts, there are a number of continuing issues that will continue to make China’s urbanization painful and threaten its sustainability.

Moving farmers off the land

Standing on a hillside in Dalian in NE China,  looking out over a tract of land destined to be developed, a Chinese real estate developer said to me “ in China there are two most difficult things: the Liberation of Taiwan and removing farmers from the land. The latter is the hardest.”  Following the dismantling of collective farms in the late 1970s, Chinese agriculture saw a massive surge in productivity and wealth creation, creating a strong underpinning for supplies to the cities where industrial reforms were underway. But a repeat of such wealth creation on the land will be hard to achieve without larger scale farm units and the migration of many into the cities. The current process has been often been accompanied by violence directed at the farmers. In the end they do leave the land but usually not before resistance and holding out for more compensation.  Then, as they move to the cities, farmers face an uncertain existence.

Migrants arriving in the cities

As the rural migrants arrive in China’s cities, they typically do not have full residence rights (hukou ) and may be excluded from urban benefits such as education, health and pension. Urban citizens are reluctant to support these people. On a positive note, the new premier Li Keqiang has taken a strong interest in giving full rights to urban migrants and there is active discussion in government and academic circles about hukou reform. But to achieve this reform there needs to be funding for the additional social services burden in the cities and also changes to rural land ownership to permit it to be sold freely. If these reforms could be accomplished, then we would see a growth in spending power among the migrants and a boost to consumer demand-led growth.

Financing of urbanization

China’s central government has rightly been cautious about letting China’s cities issue their own municipal bonds to finance urbanization. Instead China Development Bank ( CDB ) ( former policy bank, still doing policy lending ) through its own bond issuance has channeled loans to city-owned investment vehicles ( known as Platform Companies ) which undertake the infrastructure work for new and expanded cities. The massive construction boom unfortunately left these Platform Companies with excessive financial leverage.  Their ability to handle these debt levels depend  on continued growth which yields fiscal revenue as well a profit from land sales. Without continued growth, this might become a serious overhang.

Land sales

The local governments and their Platform Companies typically carry out the first phase of development which is to remove the farmers, clear and level the land, and put in the basic infrastructure ( water, electricity, roads, bridges ). The next phase comprises a land auction and the sales of land-use rights to developers. Some of the auctions are largely staged to benefit vested interests. But the crucial thing is that at the auctions the local governments have been able to realize a very large gain. If growth slows and land prices slump we could see a crisis. Fortunately, many Chinese experts see this as a very low risk, since there will be at least 10-15 more years of urbanization and movement off the land.

Smart cities/eco cities

Most Chinese developers will dress up their projects in the language of “green”, “sustainable” “eco”, since that facilitates government approvals and creates market interest.  But the reality is much more mundane and largely disappointing.  Dongtan eco-city on Shanghai’s Qiongming Island has not materialized.  Even though the Sino-Singapore Eco-city in Tianjin is showing progress, financing pressures are said to have created tensions between the Chinese and Singapore partners and may lead to certain green targets being revised downwards in order to cut costs.

The vision of a smart city with ICT infrastructure installed as the “fourth utility” during the first phase of development is achievable with strong local government leadership and funding. However after the land auction and the sale to various developers, how do you compel building owners to install the appropriate network-enabled Building Management Systems that can achieve green targets and drive efficiency? One solution may be for China’s local Urban Planning Bureaus to use the auction process to impose such commitments on developers.  But given China’s weak rule of law, how can this all be policed downstream? Developers are notoriously conservative and cost conscious and hard to influence or reign in.

Having taken 400 million citizens out of poverty, the Chinese government aims to do the same for at least another 100 million. It is unlikely that continued wealth creation on China’s fragmented family-owned farms can be achieved and therefore further urbanization is critical. However, simply judging from the toxic smog that envelops much of China most of the time it is apparent that the current model is not sustainable. There is widespread recognition of the need for cleaner, more livable, perhaps smaller, cities.  But at the same time there is skepticism about the current rhetoric, given the recent track record and the institutional barriers to a radical rethink of urbanization.