Unlocking the growth potential of Chinese cities

Residential property prices in China’s first-tier cities — Beijing, Shanghai, Guangzhou, and Shenzhen — are back up. A home there now costs buyers half as much as a home in the world’s most expensive cities: New York City, London, and Hong Kong. Letting some of the air out of this housing bubble, before too much pressure builds up, will require improved management of China’s rapid urbanisation — and not just in the four first-tier cities.

Of course, the housing situation is most urgent in the first-tier cities. And their governments have moved quickly to cool the market. Beijing, for example, raised the required down-payment for residents buying a second flat for investment to as much as 80 per cent of the price, and barred non-residents from such investments altogether.

But this is just a temporary fix. A longer-term solution will require the authorities to address the fact that demand for a limited supply of residential property is high and rising, owing to the rapid flow of often-young Chinese talent to cities that offer access to economic opportunities, not to mention better public infrastructure. Policymakers must determine the proper balance between state control and market forces in guiding urbanisation throughout the country.

As it stands, urbanisation pressure is being felt by the top 100 (out of 600) Chinese cities, which housed 714.3 million residents — 52.8 per cent of the total population — and generated 75.7 per cent of China’s GDP in 2016.

Of those 100 cities, six recorded GDP growth above 10 per cent last year, compared with the national average of 6.7 per cent; 82 recorded GDP growth between 6.7 per cent and 10 per cent; and just 12 grew by 6.7 per cent or less.

Perhaps more significant, per capita GDP in 33 Chinese cities is higher than US$12,475 (S$17,492), meaning that, by World Bank standards, they have attained high-income status. Four years ago, only 16 Chinese cities had crossed that threshold.

Urbanisation in these high-income cities may provide more valuable insight into how to continue China’s remarkable development story than the experiences of the first-tier cities.

FOSHAN’S FLEXIBLE APPROACH

A new book, China’s Evolving Growth Model: The Foshan Story (coauthored by one of us), offers a case study of one of those cities.

In recent years, Foshan has transformed itself from a rural county outside Guangzhou, the capital of Guangdong province, into the most dynamic industrial city in China, with per capita income reaching US$17,202 in 2016, compared with US$16,624 for Beijing and US$16,251 for Shanghai.

In 2015, Foshan’s GDP grew by 8.3 per cent, compared with 6.7 per cent in Beijing and 6.8 per cent in Shanghai, with industry accounting for 60 per cent of the city’s GDP.

Moreover, in a country where excessive debt is a growing concern, Foshan’s loan-to-GDP ratio in 2011 was only 85 per cent — far less than the national average of 121 per cent.

Foshan’s rapid GDP growth — among the fastest in China — was driven by the private sector, with appropriate local-government support, and therefore depended largely on self-financing, not debt. Likewise, the private sector has financed about two-thirds of Foshan’s fixed investment, which is up to 30-40 per cent of GDP.

Foshan’s development strategy focused on embedding the city within the supply chains of the dynamic Pearl River Delta, which includes the global cities of Hong Kong, Shenzhen, and Guangzhou, thereby securing linkages to the entire world. It also included the development of skills and capacity in specialised sectors, creating the world’s largest lighting and furniture market in the world.

Foshan now boasts numerous private firms and small- and medium-size enterprises spread across the city’s more than 30 specialised industrial clusters and integrated into global supply chains. Midea Global, for example, is a global leader in the development, manufacture, and sale of household appliances. The city also created linkages with others nearby, with each complementing the others’ comparative advantages, thereby reinforcing collective progress. At the same time, however, Foshan fostered intense competition internally and with other cities in China, which may well be the biggest reason for its success.

Foshan’s municipal government, which was among the first to experiment with township and village enterprises and privatisation in the early 1980s, has played an important role in buoying private enterprise. In particular, it has supported skills upgrading and built critical infrastructure, while avoiding creating unaffordable housing or unnecessary office buildings.

In a country plagued by excess capacity and housing bubbles, this was a prescient policy. The key to success has been the authorities’ flexible approach, guided by close monitoring of market signals. Thanks to such monitoring, Foshan’s municipal- and county-level governments recognised a dramatic restructuring in global supply chains and responded accordingly, such as by improving housing and healthcare, providing such social services even to migrant labour, and addressing excessive pollution.

The local government has also driven Foshan’s private enterprises largely to complete a difficult process of restructuring since 2008. Foshan’s ceramic industry, for example, has transformed itself from a dirty, energy-intensive and fragmented industry into a clean, energy-efficient and consolidated sector, largely owing to high standards designed and enforced by the municipal government.

Meanwhile, local governments in north-east China continue to struggle with the supply-side structural reforms needed to tackle overcapacity, excessive leverage, high transaction costs, and gaps in technology upgrading.

There is increasing awareness in China of the potential of cities. As Foshan has proved, cities have a unique capacity to support growth — including by fostering competition, advancing innovation, and phasing out obsolete industries — while addressing social challenges, tackling pollution, and creating a labour force that can cope with technological disruption. As China attempts to manage urbanisation — responding to, rather than trying to overpower, market forces — the Foshan model may prove invaluable. PROJECT SYNDICATE

ABOUT THE AUTHORS:

Andrew Sheng is Distinguished Fellow at the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance. Xiao Geng, President of the Hong Kong Institution for International Finance, is a professor at the University of Hong Kong.