China Rethinks Urbanization

Story and photos by Donald Johnson, AICP

This spring, planners in China calling for a more sustainable model of urban development gained a surprising new ally: the State Council, China's highest level of government. The National New-Style Urbanization Plan, released in March, is a comprehensive policy document based on the conviction that while China's growing cities will continue to be the country's main economic engine, the current model of urbanization has hit its limits and needs a complete overhaul.

The plan is part of a gradual but significant shift in planning practice in China, and planners working there say it is already making a difference. John Law, AICP, planning leader in Skidmore, Owings & Merrill's Shanghai office, says, "We saw the document and realized it would be very beneficial to us, since client education in what makes up a quality urban environment forms a big part of what we do. Now we have a high-level government plan supporting us."

Unprecedented challenge

For decades, China has been undergoing what may be the largest internal migration in history. About 260 million rural workers have left their farms for urban factories and construction sites, according to a recent World Bank report, "Urban China: Toward Efficient, Inclusive and Sustainable Urbanization." The construction boom is visible in almost every urban area, with expressways, railroads, shopping centers, business parks, and massive blocks of high-rise apartments mushrooming out of cities and popping up across the countryside. Some 600 million people have worked their way out of poverty, and for millions more middle-class living standards are now a reality.

Far from running its course, China is now preparing for the next wave of urbanization, and the plan is testament to its intention to do it differently. China is still less urban than other nations at similar levels of development, like Malaysia, Mexico, and Brazil, let alone developed nations like the U.S. and Japan. China proposes to add a daunting 100 million additional residents to its cities by 2020, according to the World Bank, yet the economic and environmental landscape has completely changed since China's urbanization was first unleashed in the early 1980s.

The current model of urbanization is the product of several high-level policies that maintain tight control over urban growth: the household registration or hukou system, which restrains labor migration; collective ownership of rural land, which keeps individual farmers from selling or leasing the land they work; a finance system that all but forces cities to take and sell rural land for development; and national urban codes that impose a rigid separation of land uses in superblocks.

These regulations have prevented some of the worst features of urbanization found across the developing world; there are no sprawling favelas or unmanaged slums surrounding China's cities. But many agree that China's model has also come with high environmental, social, economic, and (crucially) political costs that cumulatively are holding China back.

Already the compromises and contradictions of breakneck urbanization are apparent. The environmental costs are grim. In arid northern China, half of water resources can't be used for drinking, and a quarter of them are so polluted they can't be used at all. City dwellers across the country now routinely check the local air quality index along with the weather before going out.

Many migrants are jammed into substandard housing, poorly served by infrastructure and social services, while ubiquitous new districts of isolated superblocks provide a shallow and unsustainable urban life. China today is a socialist nation in which a third of the population has no social safety net, and the gap between rich and poor is growing. Local governments seize land from farmers to finance development but still face crushing levels of debt from quasi-legal loans. The last wave of migration fueled China's immense economic expansion, but the next wave threatens to overwhelm it.

If successful, the National New-Style Urbanization Plan will not only repair China's cities but also reknit local government finances and social fabric and wean the economy off injections of urban infrastructure investment. If it fails, China risks falling into the "middle-income trap," a cycle of low productivity and deteriorating demographics, unable to maintain its infrastructure and beset by worsening traffic, pollution, and housing problems. Either way the effects will be felt worldwide: China is big enough to affect the global economy and worldwide climate in the coming decades.

Evolution of the plan

The plan is widely understood to have the backing of Premier Li Keqiang, China's second most powerful leader after President Xi Jinping and a long-time advocate of economic reform. Li took the unusual step of involving partners outside the Chinese government, proposing a research partnership on urbanization between the State Council's Development Research Center, the Ministry of Finance, and the World Bank. Together they produced "Urban China," an exhaustively researched policy white paper that serves as the plan's foundation.

The ministries involved in urban development have all publicly signed on: Housing and Urban and Rural Development, Land and National Resources, Public Security (which oversees the household registration system), and the influential National Development and Reform Commission (NDRC, responsible for national macroeconomic planning.) This plan is not an advisory document, but one meant to embody policy and guide regulation.

Although the plan's focus is urbanization, the real goal is economic transformation. Zhuo Xian, an associate researcher with the State Council Development Research Center and a member of the team that wrote the World Bank report, writes in an article in Shanghai Economic Commentary: "Unlike a specific city plan, the Urbanization Plan includes nearly all of the disciplines involved in China's economic and social development. . . . How to break the systemic barriers preventing factor mobility and improve the efficiency of resource allocation, thus freeing the potential of economic development and propelling China's modernization, is the logical chain behind the eloquence of the Urbanization [Plan]."

According to Zhuo, the plan's focus is on three significant reforms: labor mobility, land controls, and local government finance.

Labor, land, and finance

Labor mobility in China is limited by the hukou system of household registration. Rural residents may move to the cities to find work, but it's hard for them to settle permanently because their registered residence stays in the countryside. They can't register for health insurance or social security in the cities, and despite legal guarantees their children often are blocked from local schools. They end up being "guest workers" in their own country, often disdained by city residents, and they are not full participants in the urban economy.

In these circumstances, migrant workers tend to live as cheaply as possible and save nearly all their wages. This is one driver of China's abnormally high ratios of savings and investment, and a roadblock to developing a robust consumer economy. The urbanization plan calls for loosening hukou restrictions to reap the double economic benefits of workers moving from low-productivity rural work to higher productivity urban labor — and being confident enough in their new lives to spend their wages.

Meanwhile, as professor Chen Jie of the Institute of Public Policy and Governance at the Shanghai University of Finance and Economics said in an interview, "Land reform in the countryside is politically difficult, but it is the way to true urbanization."

Currently, workers are tied to land rights in the countryside that they can't capitalize if they move to the city. At the same time, with rural land held in collectives, it is easy for village leaders to cut deals with real estate developers; most of China's demonstrations and riots involve taking land without villagers' consent or adequate compensation.

Giving rural residents the ability to sell the right to work the land they farm — which the plan calls for, while it also carefully avoids the politically sensitive concept of outright land sales — would allow them to migrate and give them starting capital when they do. It also would make it easier for rural land, most of which is currently fragmented in tiny plots, to be assembled and farmed more efficiently.

The flip side of land reform is fixing public finance, which is distorting both the process and the form of urbanization. There is no property tax in China, so the primary way local governments finance future development — and even ongoing expenses — is by taking farmland at agricultural prices (with or without consent) and then selling it in large chunks to developers as urban land. Many times the peasants who previously worked the land are resettled on it in new apartment buildings, having gained only a fraction of its value and having lost the means to make a living.

This kind of false urbanization is made worse by the ongoing need for land sales, which tends to push urbanization to the edges of urban areas and even to disconnected pockets outside it. Combined with huge development plots and restrictive separated use urban codes, the result is "urban" development that is internally inefficient, unconnected to existing development, and lacking any underlying reason for existence. The plan calls for ending exploitative development practices and giving local governments sustainable sources of income.

Smart growth, Chinese style

The plan also takes on the physical model of development. The supporting World Bank report is firm in saying that improving the quality and efficiency of China's cities must be an integral part of urbanization reform, partly because the average population density in China's cities "has dropped by more than 25 percent in the last decade." For American visitors, the notion that Chinese cities are not dense enough is almost laughable, but the World Bank is referring not to the city cores but to the wide swaths of newly developed land on the outskirts.

China's new urban districts are almost universally built on an "edge city" model: unconnected developments of high-rise buildings set among vast boulevards, gigantic setbacks, and isolated commercial centers. Because cities and districts compete for investments, China on average uses more than a quarter of its urban land for industry, compared with less than 10 percent in Seoul and Hong Kong, according to the World Bank report. The upshot is that Chinese cities have plenty of room to densify while increasing usable open space and improving quality of life.

Consequently, the plan is groundbreaking for its explicit call to change the physical model of development. One development goal titled "scientific and rational urban development" calls for a "high density, mixed-use, intensive and compact transit-oriented development model to become dominant." While this kind of language is now standard in the U.S., it is pioneering for an official policy plan in China.

Justin Huang, AICP, the planning and urban design director of Sasaki Associates' China office, says the concept of good urbanism is still a new concept in China: "We see a lot of generic principles, but planners need to get to the next level of applying them to specific sites." He says China's planning system, in which legal control plans must be drawn up and stamped by a local design institute in accordance with national codes, is a barrier to new approaches.

"Right now planning codes are a challenge; national and local codes are a powerful tool for control, but they are hard to change" at the LDI level, Huang says.

Implementation

The importance of a plan — even one without detailed regulations or the force of law — is magnified in a highly regulated economy such as China's, and the plan is already important as a statement of principles. But its lasting significance depends on how it is implemented: Real changes in how urbanization takes place will require supporting regulations.

In the plan, implementation and evaluation are left to the NDRC, although the document makes clear that ministries and local governments will have to cooperate. A common view among Chinese academics I spoke to is that the plan offers nothing truly new, and that its significance lies in the message that the government is intent on implementation. Given the complexity and political sensitivity of key elements in the plan, John Law of SOM says, "It may be that the plan takes longer than 2020 to fully implement. But we see the trend as more important than the timeline."

There are challenges. Eliminating hukou restrictions is one of those ideas that everyone supports: Most cities already have some kind of a point system in place, in which residents with higher education, or those who invest in businesses or property, can eventually convert their temporary residence permits to an urban hukou. But bringing all rural migrants into the system immediately would cost trillions of yuan and break local governments. The plan calls for gradual expansion of residence permits and hukou benefits; it acknowledges that all migrants cannot be included by 2020.

To reform local government financing, pilot property tax schemes have been floated in Chongqing and Shanghai, but the number of properties they cover is minimal. Currently real estate is cheap to hold but expensive to sell, and upending this balance is a change that few municipalities are eager to take on even as their debt levels grow. Recently local governments have also been allowed to sell bonds, so they can theoretically get cheaper financing. But this may also have limited short-term effects.

"The immediate effect will be small, since local government finances are not transparent, and the market may not find them attractive," says Chen Jie. "But in the long term, bonds will be another financing option for local governments."

One challenge to reform is the assumption that the real purpose of the plan is to prop up growth through continuing infrastructure investment. It does contain specific service targets for the national high-speed rail and highway networks, and it advocates the widespread replacement of substandard housing. And several Chinese scholars I talked to, who asked not to be named, confirmed there is a widespread assumption that stimulus — an influx of government spending to boost economic growth — is a big part of the plan.

On the other hand, SOM's Law says, "Beyond the economic driver for this plan, I think China's leaders are interested in using smarter urbanization as an opportunity to also address issues of environmental quality, water and food safety, and urban livability."

Finally, there are policy contradictions within the plan itself. While China wants rural workers to move to cities, the plan suggests small and medium-sized cities instead of the three megacities of Beijing, Shanghai, and the Pearl River delta region (Guangzhou, Shenzhen, and Hong Kong.) Already, urban hukou in small and medium-sized cities are often relatively easy to get — but of course these are not as desirable.

The World Bank's work suggests that channeling migration this way is bucking economic history, and from an efficiency point of view China's largest cities should be allowed to grow. The question is important because China's smaller cities have sunk huge investments into infrastructure, housing, and new commercial and industrial districts. Real estate analysts say these have the greatest risk of becoming "ghost cities," unsupported by real demand.

Planners respond

John Law says the market for SOM's services started changing before the plan was released. "There has already been a shift from single-use projects to more mixed use, transit-oriented, and commercial," he says. Justin Huang of Sasaki also foresees long-term reform, pointing to the evolution in urban development concepts in the U.S. in the past few decades, which were the result of efforts from both public and private sectors.

"Chinese leaders travel a lot and see the most cutting-edge designs in the world, and they adapt," Huang says. "The planning mechanisms are still very conservative, but they may change very quickly once there is consensus from the government."

Law also sees alignment with public opinion on the issue of protecting local culture. "This is a reaction to previous development replacing villages with endless high-rise towers in which everything looks the same," he says. "One of the aspects of the plan that we are most excited about is that of cultural preservation. We are hoping to see projects with more aggressive preservation strategies by the local municipalities that will allow us to highlight and strengthen the region's unique character and reflect local culture."

The New Urbanization Plan marks a turning point in China's development. Its message is that the old model of investment-led growth at city fringes needs to give way to a new focus on efficiency, resource protection, and quality of growth over quantity. If China's leaders follow through with the difficult reforms necessary to see the plan realized, development will gradually shift from showpiece new districts to urban rejuvenation, and there will be a new focus on environmental and cultural resources and quality of life.

Donald Johnson is a planner and researcher who has been based in Shanghai since 2006. He is the founding principal of DDJ Consulting.

Resources

Images: Top — As Chinese cities swell with millions more migrants every year, they face the challenge of integrating new developments on the fringe, like this one on the outskirts of Ningbo, into liveable and sustainable urban districts. Middle — Urbanization has taken a high toll on China's environment and citizens' quality of life. Bottom — The massive scale of China's urbanization is visible in Datong, an industrial city in the northern province of Shanxi. Photos by Donald Johnson, AICP.

The World Bank report, "Urban China: Toward Efficient, Inclusive and Sustainable Urbanization": www.worldbank.org/en/country/china/publication/urban-china-toward-efficient-inclusive-sustainable-urbanization

A bilingual presentation by SOM on China's urbanization challenges and planning best practices is at www.som.com/news/2014_som_china_tour.