Urbanization & Municipal Debt

Here's a slightly more structured account of what's happening in the Chinese urban space, including the rural-urban divide and the massive mountain of municipal debt that's being underwritten by national GDP growth...

June 2nd, 2013

Managing Migration?

All countries have difficulties managing the flow of people from across borders and over regions. The Hukuo system of personal and household registration revised by the Chinese Communist Party (CCP) in the 1950s was one potential way of managing this flow. By establishing individuals’ towns of origin and restricting where they could migrate and settle, the Hukuo system was simultaneously a logistical and political tool, used to centrally plan rural agricultural development by means of collective agricultural farms and production units.

When market reform reopened China’s eastern coastal cities to foreign investment, the incentives for internal migration were turned on their heads. The centralized employment and welfare system began to erode, and urban (factory) work drew even illegal labor from the countryside. Hukuo became a means of regulating population flows to cities.

Yet owed partly to poor enforcement, public protest and subsequent reforms, and ultimately to mere impracticality, hukou has been relatively ineffective in limiting hyper-expansion of cities. In spite of counter-measures, “the proportion of Chinese citizens living in cities has increased from 18% in 1978 to 43% in 2005, a number which omits rural-to-urban migrants…[another] 10% of the national population. In fact, it can be argued that the CCP has encouraged the development of and migration to medium sized cities through devolved policy implementation and decentralized market reforms to facilitate urban economic growth.

Land Use “Planning”

Increasingly, land use planning and other more localized policy has become the preferred means of managing urban spaces. In what are ultimately vain attempts to accommodate growing cities---growth owed to external investment as well as domestic migration---land markets have heated up. The evolution of land has followed a vicious cycle of city expansion:

(i) Municipalities displace peasants and confiscate their land on the urban fringe.

(ii) This land is leased on 30-year terms to developers in exchange for lump-sum cash infusions.

(iii) This cash, and the land, itself are used as collateral for loans that cities (through their investment corporations) borrow from state-run banks.

(iv) These loans are often based on land that is appraised at values far exceeding what would be their market value, which is difficult to determine because there no free/open market on land exists in China. Nonetheless, this debt is used to finance massive “showcase” projects such as housing, highway and subway systems, or skyscrapers---development that caters primarily to a rising consumer class.

(v) But because these projects have been valued so highly, many consumers (notably in the informal sector) are often priced out, leaving much of this infrastructure unoccupied and unused but accruing massive amounts of debt. Meanwhile, municipalities continue to expand further beyond city limits through sprawl and automotive expansion.

Without being buttressed by a steady export and fiscal surplus at the national level, the municipal situation in China is financially unsustainable.

Corrective Measures

Policy has managed some of the effects of this expansion: investments in mass transit and car usage restrictions have attempted, for example, to limit the environmental and logistical consequences of car usage. Public protests have also been means of collecting and incorporating popular feedback on specific policy measures, such as the extension of the Maglev train into downtown Shanghai. But ultimately, these represent growing tensions within China: between rural and urban areas, formal and informal sectors, coastal cities and rural hinterlands, downtowns and the urban fringe, not to mention national financial solvency and municipal indebtedness.