Small Cities Astride A Social Fault Line

Just A Small City In China Getting Bigger

More than half of China’s population now lives in cities, as has been widely noted, making the country predominantly an urban nation for the first time. Two-thirds to three-quarters will likely do so by 2020. It was one in nine when Mao took power.

Urbanization has been a main prop of rising living standards, and promoted as government policy. Arguably, China’s has been the most managed such migration from farm to factory in history. The flip side of that has been an ever-widening urban-rural income gap. While that has been true for the past 30 years, it was only under the most recent five-year plan that diminishing the gap became a high policy priority. Measures were introduced to support agriculture, farmers and the countryside. They continue under the current five-year plan.

The scale of the migration from country to city is immense, some 300 million people over the two decades to 2020, needing to be provided with shelter and jobs. That is the numerical equivalent of moving the entire populations of Guatemala or Mali or Ecuador every year for 20 years.

China has 661cities by the official count. They have the capacity to absorb some but not all of those arriving from the countryside. China’s list of urban conglomerations with populations in excess of 20 million may soon extend beyond Guangzhou, Shanghai and Beijing, but small towns and cities are designated under the current five-year plan to provide the new homes, jobs and social services that will be required to absorb 40% of the labor coming off the land. As the coastal provinces are transformed into high-end service economies and manufacturing is moved inland, the eastern megalopolises won’t need vast swathes of new unskilled labor. Hence the push to develop satellite towns and second- and third-tier cities in the poorer central and western provinces. Towns and small cities are also seen as a bridge across the urban-rural income divide.

Yet, as recent events in Wukan and a host of other places earlier bear testimony, it is proving to be a troubled passage because of the fault lines in local government and the weak legal framework for land rights. The later has meant that planned rapid development has been possible because land could be taken in the name of a greater public good, but the combination has made the process highly uneven, often exacerbating inequality and sowing social discontent, leaving migrant workers and villagers, in particular, disgruntled and shut out from the benefits urbanization is meant to deliver.

One one estimate, farmland expropriation for urban redevelopment displaced 60 million-70 million people between 1990 and 2007. That is an order of population the size of Thailand, France or Italy. Even the mass migration from Italy to the U.S. at the end of the 19th century over a similar period emptied out only a third of Italy’s population.

The growing pains of towns and small cities across the country, like large ones, are all too evident. Infrastructure development–for roads, sewage, potable water, flood defense–often struggles to keep up with the rapid pace of industrialization and urbanization. Similarly, social services, transport and education. Local environments, and so quality of life, pay a huge cost, too, as land is chewed up for development and inadequate infrastructure fails to prevent the despoiling of what is left.

Some towns and small cities work better than others. Top-down planning going spectacularly wrong, resulting in ghost towns such as the much-ridiculed Ordos in Inner Mongolia, may be the exception to the rule, but the variable results in other places is partly of their own making, partly systemic. There is high variability in both the quantity and quality of trained local officials, in their cosiness with local business interests, and, most importantly, in their relationships with the next level up of government.

That last matters so much because the hodgepodge of tax and bureaucratic powers of small towns are often contested with the next higher level of bureaucracy. As a result, selling land rights to companies and developers from larger cities has become the usual way for town officials to raise funds. Wukan may have been an extreme case, but being bilked out of land by corrupt or incompetent local officials who want to turn it over it for urban development is at the heart of hundreds of thousands of similar if smaller-scale and less prominent disputes and protests every year.

These protests increasingly worry Beijing. The Party’s legitimacy to rule turns on delivering rising living standards for all. Economic development was meant to forestall social unrest, not foster it. It should also concern the rest of the world. Urbanization is an essential precursor to rebalancing China’s economy towards domestic consumption.

Beijing’s new plans for managing social unrest are designed to deal with its growing problems with urbanization. It can no longer count on the traditional cohesiveness of rural communities and danwei in the big cities to self-police. The technological upgrading of police and their surveillance capacities, and the tightening of control over mass media, including microblogs, are central to controlling the larger scale of protest that cities enable. Dissidence, whose wellsprings tend to be in the universities and artists and writers studios in the cities, is being cracked down on. Yet, tackling the root causes of social disgruntlement requires reform of local government finances and governance, and most of all, land rights. Otherwise the influx of millions of migrants into towns and small cities will only exacerbate the fault line that is trembling below.

Urban Sprawl

This Bystander had to retire to the peace and quiet of the country to pour over McKinsey’s recently published data dump on global urbanization, Urban World, Mapping the Economic Power of Cities. It is a trove of information and projections that brought out our inner wonk faster than you could say ‘megalopolis’.

Urban World ranges far beyond China, but even restricting ourselves to those parts germane to our immediate interest was mind-boggling. China is on track to become the first nation with an urban population of 1 billion people–sometime between 2025 and 2030, McKinsey reckons. One hundred new Chinese cities will enter the ranks of the world’s 600 largest economic conurbations by 2025. China will increase the number of its megacities–those with a population of at least 10 million–by 13 over the same period. And so it goes on and on.

The strains on land, energy, water and the environment will be immense; as will be the demands of providing adequate urban social services. Megacities or megaslums? More broadly, the shift in the world’s urban axis east and south will have tremendous implications for what we now call the developed world. We shall endeavor to return to these subjects in some detail, but meanwhile, on the grounds that a picture is worth a thousand words, and two twice as many, here is a graphical representation from McKinsey’s report that highlights the sheer scale of the urbanization China is undertaking and the wealth it will create.

First, population and per capita GDP for 2007:

Now, the projections for 2025:

That is quite some transformation. And remember urbanization is a policy priority.

BYD Fined, Loses Factories For Illegal Land Use

We now have a decision in the widely watched case of illegal land use involving BYD, the fast-growing compact automaker in which American investor Warren Buffett has a 10% stake. The Ministry of Land and Resources has announced that BYD is being fined 2.95 million yuan ($443,000) and that the seven factories the company built in Xian on 49 hectares of land bought from an economic development agency in Shaanxi, 45 hectares of which was zoned for agriculture, will be confiscated.

Construction had started last December and the plants weren’t due to start production until 2011, so the practical effect on BYD will be to constrict future, not present capacity, and the ruling lifts some uncertainty over the company for investors. In one sense BYD has got off lightly. The ministry had previously hit five companies this year for illegal land use, following a tougher inspection regime launched in February that found examples of illegal land use in more than half the 13 cities examined in an initial spot check and officials cooking the books in four. In those cases buildings were ordered to be demolished, land taken back, executives imprisoned and officials reprimanded. BYD’s high-profile and famous foreign investor may have helped it escape the most severe of those punishments, as least as far as we can tell at this point.

The question now is what sort of signal BYD’s punishment will send, and who will see it. One audience is foreign companies. As the China Law Blog pointed out in response to our preview post on the ruling, “if China is going after Chinese companies for putting manufacturing facilities on agricultural land, what in the world makes you as a foreign company think you will be able to get away with doing the same thing?”

The bigger audience is local officials, at least a dozen of whom in this case have been censured for not exercising effective supervision, including one, the director of the planning department in Shaanxi’s local Land and Resources office, who has been removed from office. It is not unknown for local officials to turn a blind eye to such land-use violations in the drive for economic growth. Companies want to bring new production capacity on stream without waiting for all the red tape to be dealt with, while officials themselves are  judged on their promotion of local economic growth and local governments have become hooked on land sales for their revenue.

The ministry has said that 7,800 hectares of land had been used illegally in the first half of this year, a 14% increase over the same period last year. That reversed the trend of the figures of the past three years. They had shown the issue was shrinking, but that may just have reflected lax enforcement and reporting. The country’s farmland has continued to be eaten up by industrialization and urbanization. It has shrunk by 6% over the past decade to 122 million hectares, barely above the minimum arable land the ministry reckons China needs to be self-sufficient in food. The summer’s floods and the drought earlier in the year in some parts of the country have reduced that margin further. Food self-sufficiency is considered a national security issue. Getting permission to change agricultural land to other uses, particularly commercial uses, is now tougher than ever.

Cracking Down On Illegal Land Use: The BYD Case

A deadline is drawing near in a case of illegal land use involving BYD, the fast-growing compact automaker in which American investor Warren Buffett has a 10% stake, and which is being widely watched for a potential shift in policy.

In July, the Ministry of Land and Resources said it would rule by Sept. 30 on what to do about the company building seven factories on 49 hectares of land bought from an economic development agency in Shaanxi, 45 hectares of which was zoned for agriculture.

It is not unknown for local officials to turn a blind eye to such zoning violations in the drive for economic growth. Companies want to bring new production capacity on stream without waiting for all the red tape to be dealt with, while officials themselves are  judged on their promotion of local economic growth and local governments have become hooked on land sales for their revenue.

The ministry has said that 7,800 hectares of land had been used illegally in the first half of this year, a 14% increase over the same period last year. That reversed the trend of the figures of the past three years. They had shown the issue was shrinking, but that may just have reflected lax enforcement and reporting. The country’s farmland has continued to be eaten up by industrialization and urbanization. It has shrunk by 6% over the past decade to 122 million hectares, barely above the minimum arable land the ministry reckons China needs to be self-sufficient in food. The summer’s floods and the drought earlier in the year in some parts of the country have reduced that margin further.

The ministry has hit five companies so far this year for illegal land use, following a tougher inspection regime launched in February that found examples of illegal land use in more than half the 13 cities examined in an initial spot check and officials cooking the books in four. In those cases buildings were ordered to be demolished, land taken back, executives imprisoned and officials reprimanded.

None of the companies sanctioned were as high profile as BYD. How tough will the ministry be this time? And what sort of signal will it want its ruling to send?

Details Start To Emerge Of China’s Economic Policy Tweaks

Some detail is emerging on plans to boost domestic consumption and dampen down prospective bubbles being inflated by stimulus spending.

The State Council says that tax breaks on the re-sale of homes are being cut back, though subsidies for household appliances, farm machinery and the most part for cars are being extended into 2010, as  we suspected they would. More interestingly, the State Council also announced an easing of the restrictions on permanent residence in small and medium-sized cities and town. In essence there will be free migration between such cities’ suburbs and central areas and between towns under their jurisdiction and surrounding rural areas. The idea is to boost domestic demand away from the top-tier cities.

New lending in 2010 will be capped at 8 trillion yuan ($1.2 trillion). New lending in the first 11 months of this year was 9.2 trillion yuan, 5 trillion yuan up on the corresponding period of 2008, according to the People’s Bank of China. Urban fixed-asset investment is up 32% for the period at 16.9 trillion yuan. So the proposed reining in of new loans next year will be significant, if it can be imposed.

Details of more adjustment measures are likely to emerge in coming weeks, but few if any will tackle the root problem of overcapacity we discussed a couple of days back.