city horizons: what does the future hold for china’s cities?

OECD URBAN POLICY REVIEWS: CHINA 2015

William Tompson Head of the Urban Development Programme Public Governance and Territorial Development Directorate Sciences Po, Campus de Reims 31 March 2015

1. TRENDS AND CHALLENGES

2

1990

2010

28 Oct 2015 Centre for Cities, London

3

The world’s urban population is projected to rise

by about 3.4bn during 2000-50 (= +125%)

Source: UNDESA Population Division (2012), World Urbanization Prospects: The 2011 Revision

Growth of world urban population in absolute numbers, 1950-2050

Right now, about one in five of the planet’s new urban residents is Chinese

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1950-1970 1971-1990 1991-2010 2011-2030 2031-2050

Developed countries Non-OECD Asia Developing countries excluding Asia China

Right now, about 60% of the planet’s new urban residents are in Asia; one in five is in China

Bil

lio

ns


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The speed of Asian urbanisation is

unprecedented

1750 1775 1800 1825 1850 1875 1900 1925 1950 1975 2000 2025 2050

China, People's Rep. of

Bhutan

Lao PDR

Indonesia

Viet Nam

Asia and the Pacific

Europe

North America

Latin America andCaribbean

Number of Years from about 10% to 50% of Urbanization Rate

10% 49%210 years

9% 51%105 years

12% 51%150 years

11% 51%95 years

12% 50%90 years

12% 54%65 years

10% 52%60 years

10% 51%55 years

11% 51%61 years

Source: ADB estimates using Bairoch (2008) and UN(2012).

But in China it is unfolding against the backdrop of a very different demographic dynamic – the so-called “one-child policy”.


—

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.019

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196

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197

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World China

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China is now a predominantly urban

country

China may be both more and less urban than it appears.

Source: UNDESA Population Division (2012), World Urbanization Prospects: The 2011 Revision

Urbanisation rates: China and the World, 1950-2050


1. Long history and yet very low starting point.

2. Governance: cities as units of central administration (and yet with a strong element of localism at the lowest levels).

3. Sociological dimension: hukou status and rights urbanisation as “citizenisation”.

4. Settlement patterns – together with governance arrangements and hukou complicate the definition of “urban” and “rural”.

5. Largely endogenous take-off (it’s not just a globalisation story).

6

Urbanisation with Chinese

characteristics


7

Actual and administrative

urbanisation rates are diverging

Source: NBS, China Development Research Foundation.

Hukou-based

Residency-based

• By 2012, around half of the urban population did not hold an urban hukou.

• By 2020, in the absence of policy change, this ratio could approach one-half.

Hukou- and residency-based urbanisation rates


28 Oct 2015 Centre for Cities, London 8

China may be both more and less

urban than it appears

Population range

1. Number of FUAs, 2010

2. Population 2000

3. Population 2010 4. Annual growth rate 2000-2010

5. Urban population 2010

Megacities (> 10m) 15 212 860 603 260 549 325 1.86% 190 024 964

Very large metro areas (5m-10m)

23 128 863 733 148 007 123 1.40% 91 231 962

Large metro areas (1.5m-5m)

89 215 694 602 234 603 655 0.90% 134 145 464

Metro areas (0.5m-1.5m)

165 137 959 460 146 644 039 0.66% 77 023 351

Medium-sized areas (0.2m-0.5m)

83 28 713 162 30 601 406 0.76% 17 076 090

Total metro areas 292 695 378 398 789 804 142 1.28% 492 425 741

Total FUAs 375 724 091 560 820 405 548 1.26% 509 501 831

Total China 1 265 830 000 1 339 724 852 0.57% 678 624 285

FUA share of total population:

57.2% 61.2% 38.0%

Metropolitan areas’ share of total population:

54.9% 59.0% 36.8%

Total urbanisation rate 50.7%

Functional urban areas in China

Source: Authors calculations of NBS data, via IPLE/CASS for the FUAs; NBS data from the China Statistical Yearbook 2010.


The functional urban hierarchy looks

rather different

City size and growth in China: functional vs statutory cities



Even the “top 20” list looks different

FUAs Statutory cities

City Population (millions) City Population (millions)

Shanghai 34.0 Shanghai 22.3

Guangzhou 25.0 Beijing 18.8

Beijing 24.9 Chongqing 15.7

Shenzhen 23.3 Tianjin 11.1

Wuhan 19.0 Guangzhou 11.1

Chengdu 18.1 Shenzhen 10.4

Chongqing 17.0 Wuhan 9.8

Tianjin 15.4 Dongguan 8.2

Hangzhou 13.4 Chengdu 7.4

Xian 12.9 Foshan 7.2

Changzhou 12.4 Nanjing 7.2

Shantou 12.0 Xian 6.5

Nanjing 11.7 Shenyang 6.3

Jinan 11.0 Hangzhou 6.2

Haerbin 10.5 Haerbin 5.9

Zhengzhou 9.7 Shantou 5.3

Qingdao 9.6 Jinan 4.3

Shenyang 7.7 Zhengzhou 4.3

Wenzhou 7.6 Changchun 4.2

Nanchang 7.4 Dalian 4.1


FUAs and statutory cities, 2010 – total population


Even the “top 20” list looks different


FUAs and statutory cities, 2010 – urban population FUAs Statutory cities

City Urban population (millions)

City Urban population (millions)

Shanghai 28.2 Shanghai 20.2

Guangzhou 21.0 Beijing 16.4

Shenzhen 21.7 Chongqing 10.8

Beijing 19.2 Shenzhen 10.4

Wuhan 12.6 Guangzhou 9.7

Tianjin 11.6 Tianjin 9.6

Chengdu 11.3 Wuhan 7.5

Chongqing 11.1 Dongguan 7.3

Hangzhou 9.3 Foshan 6.8

Nanjing 8.3 Chengdu 6.3

Xian 7.8 Nanjing 5.8

Shantou 7.5 Shenyang 5.7

Changzhou 7.3 Xian 5.2

Shenyang 7.0 Hangzhou 5.2

Jinan 6.9 Haerbin 4.9

Haerbin 6.4 Dalian 3.9

Qingdao 6.2 Zhengzhou 3.7

Zhengzhou 5.8 Shantou 3.6

Wenzhou 5.3 Jinan 3.5

Nanchang 4.2 Changchun 3.4


The urban system is growing more

concentrated…

Panel A. OECD countries, 2001-11 Panel B. China, 2000-10

0.0%

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Large Metropolitan(>1.5m)

Metropolitan(0.5-1.5m)

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Largemetropolitan

(>1.5m)

Metropolitan(0.5-1.5m)

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-2.0%3.0% (300) 700

Large metropolitan (>1.5m)Metropolitan (0.5-1.5m)Medium (0.2-0.5m) Av

er

ag e

an

n…

Population in millions Average annual growth rate (%)

Note: Small urban areas, with a population of between 50 000 and 200 000 people; medium-sized urban areas, with a population between

200 000 and 500 000; metropolitan areas, with a population between 500 000 and 1.5 million; and large metropolitan areas, with a population

of 1.5 million or more. The OECD Metropolitan Areas Database includes 275 metropolitan areas.

Source: OECD Metropolitan Areas Database.

13

…And converging over time towards

the international norm

Source: OECD (2013).

Population growth of cities grouped by initial size, 2000-2010

The political hierarchy of Chinese cities biases the allocation of fiscal resources and capital in favour of the biggest cities even as policy-makers call for growth elsewhere.



Larger FUAs tend to have higher per

capita incomes…

FUA population and GDP per capita (2010)

500

1 000

2 000

4 000

8 000

16 000

32 000

0.2 1.0 5.0 25.0Millions

Note: The horizontal axis represents logged values of the 2010 population of the Chinese FUAs. The vertical axis represents logged values of the GDP per

capita (in USD) for Chinese FUAs in 2010.

Source: Authors’ calculations of NBS data; accessed via IPLE/CASS.


…And the size/income relationship is

clearer in respect of urban population

FUA urban population and GDP per capita (2010)

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2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Note: The horizontal axis represents logged values of the 2010 urban population of the Chinese FUAs. The vertical axis represents logged values of the GDP

per capita (in USD) for Chinese FUAs in 2010.

Source: Authors’ calculations of NBS data; accessed via IPLE/CASS.


Cities of all sizes continue to show

great economic dynamism


Chinese cities may still be under-

specialised Economic structure of Chinese and selected OECD FUAs

• Agglomeration economies.

• Consumption opportunities.

• Environmental challenges and urban policy responses.

Urbanisation and development

18

Urbanisation and income, 1970-2005


Significant positive correlation between urbanisation and economic prosperity in China

Close to one-quarter of China’s population now lives in areas with per capita incomes comparable to Chile, Mexico or Turkey.

BUT: Current trend tends to favour sprawling metro-regions.

Pollution and congestion costs. Limit agglomeration economies. Social challenges (integration of migrants)

China benefits from agglomeration

economies

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Productivity and city size in China

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51-7

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101-

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451-

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Thousand constant 2010 USD PPP

Thousand constant 2010 USD PPP

MexicoTurkey

Chile

Portugal

Poland

Source: CEIC, National Bureau of Statistics: City Statistical Yearbook; Communiqués on 6th

Census issued by local national Bureau of Statistics offices; World Development Indicators and

OECD Economics Department calculations.


• Air: 58% of Chinese cities have PM2.5 concentrations five times the WHO standard.

• Water: Fresh water resources per capita are ¼ of the world average but 42% of the water in the seven biggest river systems is not potable.

• Land: 27% of land is desertified and this figure grows by almost 2500 km2 per year.

Increasing social discontent and palpable economic costs.

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Environmental pressures are

increasing


21

Income inequality has grown but is

now falling on some dimensions



There is some evidence of

convergence at different scales Initial income growth and income levels, Chinese FUAs

China’s urbanisation (and, to a great extent, its macroeconomic performance) has been driven by:

1. Cheap labour.

2. Cheap land.

3. Cheap pricing of environmental externalities.

4. Robust export demand.

These are not a basis for sustained – or sustainable – growth in future.

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China needs a new model of

urbanisation


Urbanisation is about people, land and flows – of ideas, people, goods and bads. And, of course, money. Challenges:

• “Citizenising” the rural population (more than just integrating the segmented labour market).

• Integrating urban and rural land markets (closely linked to citizenising peasants, because it concerns their land rights).

• Changing incentives that shape the way cities are built.

• Reforming municipal finance to remove the incentives for discrimination against migrants and crazy, inefficient land use.

None of these will be easy, but the good news is that they are entirely consistent with the broader goal of rebalancing China’s economy away from investment and exports towards consumption and domestic sources of growth.

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So where to go from here?


2. PEOPLE

25 28 Oct 2015 Centre for Cities, London

26

Chinese migrant workers play a huge

role in driving growth In 2013, 262m migrant workers in China (>1/3 of internal migrants in the world).

• Mostly men, almost 60% between 16 and 40.

• High (and rising) levels of education, which facilitates further up-skilling.

1.5

14.3

60.5

13.3

4.75.7

Illiterate Primary schoolJunior high school Senior high schoolTechnical secondary schools College or higher

Educational endowments of the migrant

population, 2010

Source: NBS, OECD calculations.

Around 35.6% work in industry, 18.4% in construction, 6.6% transport and logistics, the rest in services.

Inter-provincial migration flows, 2005-2010

Adapted from K. Chan (2012), “Migration and

Development in China: Trends, Geography

and Current Issues”, Migration and

Development: 1:2, pp. 187-205.


• Segmented land markets and differential land rights.

• Discrimination in access to education, social protection and physical infrastructure.

• Increased cost of rural-to-urban migration (which was, once upon a time, the point).

• Also increased cost of urban-urban migration (perhaps 15-16% of migrants).

• Issue is not merely hukou status of migrants – it is the status of rural citizens as a group.

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Consequences of the hukou system


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Migrants are disadvantaged in terms

of education and housing

Region

Type (% of all migrant children)

Key school

Public school

Private school

East 6.3 70.3 23.5

Middle 6.9 63.6 29.5

West 12.9 84.5 2.6


Type of school attended by

migrant children in cities

Accommodation of migrant workers, 2013

The children in the able above are generally better off in terms of education than the “left-behind” children – estimated to include 38% of rural children and 22% of the entire population of children in China.

This has huge implications for the next generation…


• Higher rural household incomes

• Changes to rural lifestyles and consumption patterns

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Consequences of migration for

sending areas

3.37%

32.67%

10.70%

36.39%

16.89%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Living on his/herown due to both

parents' out-migration

Living withgrandparents dueto both parents'

out-migration

living with othersdue to both

parents' out-migration

Living withmother due tofather's out-

migration

living with fatherdue to mother'sout-migration

Source: OECD calculations based on NBS (2013) data.

Living conditions of “left-behind children”, 2010

• Family separation: “Left-behind” women (47m), children (60m) and elderly (58m).

• Impact on work & family burdens, emotional state.


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Despite some improvement, social

protection of migrants is poor

Social insurance coverage for migrant workers

In 2012, it is estimated that 55-60% of migrant employees had no labour contracts at all.


• Endless debate but timid reforms (making it easier for people to go where they do not wish to).

• Reform often countered by local action: many local authorities are strengthening hukou.

• Better to break the link between hukou and access to pensions, healthcare, education, etc.

Allow migrants’ children to enrol in high schools and take university entrance examinations in their places of residence. Abolish local quotas for entrance to university.

Strengthen and extend recent reforms aimed at reducing the gap between urban and rural social protection systems (portability of rights) with a view to eventual consolidation.

• Estimated cost of urbanising a rural migrant: RMB100,000. But what is the long-run cost of not doing so…?

31

Hukou reform is a dead end: the key

is “citizenising” the rural population


3. LAND


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China’s land-management system:

an institutional mapping

Fortunately for you all, this is not examinable material (and it is incomplete: reality is even more complex).

Source: Li, Morris, Nevares Parras and Parker (2014).


1. Urban land is state-owned; rural land is collectively owned.

2. Urban land is relatively available for development.

3. Rural land is broken into several categories. Changes of use are, in principle, strictly regulated, as is the use of each category by the collective.

4. Rural dwellers cannot sell or otherwise alienate their land rights (this means, inter alia, that taking urban hukou means surrendering land rights).

5. City governments typically manage spatial planning well outside their administrative boundaries.

6. City governments can, under certain circumstances, convert rural collective land into state-owned urban land – increasing its value 10-fold or more via an administrative action.

7. Governance of the collectives themselves is also an issue.

34

How the land market is divided


• Rural collectives cannot realise the potential of their land – at least not legally.

• Informal developments do occur around major cities (so-called “weak property rights housing”).

• The Land Management Law, though apparently strict, leaves local governments considerable scope to requisition rural land for urban purposes.

• Compensation is largely determined locally – it varies but the usual ceiling is based on the gross annual yield of the land in agricultural use.

35

How the land requisition system

works


Fiscal pressures create incentives for local governments to:

• Make land cheaply available for industrial development.

• Restrict the supply (and maximise the price) of land leased for residential and commercial purposes.

• Vary the mechanism of land allocation according to the type of investor/developer (negotiation vs various types of auction).

36

What happens once land is

“urbanised”

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

%%

GDP (LHS) Government revenue (RHS)

Gross revenue from the sale of land-use rights

Source: Wu (2012).


• Wasteful use of prime urban land for industry.

• Poor urban planning.

• Abusive expropriation of rural collectives’ land.

• Concentration of migrants in “urban villages” and “small property rights housing”.

• Property bubbles in some cities – and ghost towns in others.

• Corruption and pressure to game the system for restricting farmland conversion.

37

This results in…


• Change the use-rights of agricultural land to the same length as in urban areas.

• Specify the rights of rural collectives to use land as collateral (much discussed but never implemented).

• Subject to zoning and planning requirements, ease the limits on the use of agricultural land for development and housing.

• Allow farmers to sell land to developers directly and to consolidate agricultural land parcels in order to raise productivity.

• To smooth the transition, rural collectives could for some period be restricted to commercial activity on the housing rental market.

• Strengthen the governance of rural collectives.

38

What is to be done? Step-by-step

desegregation of the land market


4. FLOWS


• Trends with respect to income, population, structural change and transport costs all point that way.

• Chinese cities are already far denser on average than cities in OECD countries (despite wasteful use of land for industrial parks). Reductions in density have so far been greatest in the cities that were densest to start with.

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Chinese cities are going to spread

out

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Initial population density

Change in population density and initial density (Chinese cities, 1990-2010)


The risk, of course, is that uncontrolled spatial expansion will lead to urban sprawl, with undesirable economic, social and especially environmental consequences.


• The extent of urban spatial expansion can be affected by policy.

Most obviously, this concerns things like transport-oriented development and approaches to land-use planning that favour density, but

the first step should be getting rid of policies that positively encourage sprawl – these are rooted in the fiscal system and the arrangements for land requisition and development.

• Containing urban development should not be overemphasised. Failed containment is worse than planned accommodation of growth. It leads to

Higher prices for housing.

Land speculation and high prices on the urban fringe.

Underestimation of future land and infrastructure needs.

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Urban expansion must be managed


Current practice is characterised by

• extreme functional segregation,

• the development of very large superblocks,

• poor internal connectivity, and

• inadequate investment in public transport.

Desirable steps include

• building economic indicators into planning processes,

• designing road networks to better support foot traffic and public transport, and

• managing density at smaller scales.

This could allow more transit-oriented development, more multi-functional urban spaces and greater competition among developers.


Better planning can make cities greener,

more efficient and more liveable

• Generous but credible urban growth boundaries allow policy-makers to plan realistically for the land, infrastructure and amenities that will be needed.

• Selective protection of non-urban land, which is probably more credible in such places than very tight growth boundaries.

• An arterial grid of roads spaced about a kilometer apart that can support public transit.

• Reservation of land for public infrastructure.

• Reforms to urban planning. Best practice in China is already impressive: day-to-day practice is not. Extreme functional segregation and short-termism are common.

• Fiscal incentives probably matter more here than technical capacity.

• Governance matters, too: long-term decisions are typically taken by people who will not remain long in the city.

43

Changing the way China builds cities


• Generous but credible urban growth boundaries allow policy-makers to plan realistically for the land, infrastructure and amenities that will be needed.

• Selective protection of non-urban land, which is probably more credible in such places than very tight growth boundaries.

• An arterial grid of roads spaced about a kilometer apart that can support public transit.

• Reservation of land for public infrastructure.

• Reforms to urban planning. Best practice in China is already impressive: day-to-day practice is not. Extreme functional segregation and short-termism are common.

• Fiscal incentives probably matter more here than technical capacity.

• Governance matters, too: long-term decisions are typically taken by people who will not remain long in the city.

44

Changing the way China builds cities


• Big cities are growing more – the authorities wish to take the pressure off the big four.

• The aim is to create satellites around the largest cities. Networks of cities may be allow some de-concentration.

BUT

• The econometric evidence suggests that Chinese cities have not exhausted potential agglomeration economies.

• Policy still favours the mega-cities, which may indeed lead to over-concentration.

• Size-neutrality may be a policy worth trying.

45

How many mega-cities?


5. A WORD ABOUT MONEY


• Reform of the financial system and capital markets will greatly affect urbanisation:

Big-city bias contradicts stated national goals but reversing it will be unpopular.

Some studies find that productivity performance has been better in non-administrative cities.

Most Chinese cities are relatively “under-specialised” ( reduced benefit from agglomeration).

Some evidence that the financial system plays a role here, too.

Chinese savers need new instruments.

47

“Urban policy” is broader than you think


• Local governments’ own-revenue sources are limited.

• In the absence of a property tax, the one-off conveyancing charges from land conversion procedures are a huge source of income.

• Increased central transfers – and changes in transfer allocation formulae – are needed.

• Public services with strong spill-overs may need to be re-centralised some degree (e.g., compulsory education, skills training, affordable housing).

• The argument that farmers should not capture the rents from land conversion begs the question of who should capture them.

48

Fiscal reform is essential


TO SUM UP…


• The sociological and spatial dimensions of urbanisation have to be addressed together. Land reform and the status of rural dwellers are linked. It is not about the “citizenisation” of migrants but about the citizenisation of the rural population.

• Neither can be addressed without addressing the fiscal resources of cities, which will be profoundly affected on both revenue and expenditure sides.

• The bias in the allocation of both fiscal resources and capital towards the largest cities must also be addressed.

• Currently policy seeks to preserve big-city bias while simultaneously promoting urban deconcentration. This will fail.

• Bottom line: incentives trump rules.

It all has to fit together


A new approach to urbanisation to match a new economic model:

• Economic policy shift: greater reliance on consumption, productivity, efficient resource use.

• The changes in urbanisation outlined here policies reflect and reinforce that shift.


Urbanisation and economic policy

THANK YOU FOR YOUR ATTENTION.


city horizons: what does the future hold for china’s cities?

Economy & Finance