A San Francisco Every Month

How China’s Urbanization Pays for Itself

 

The strength of a nation derives from the integrity of the home. Confucius, Analects.

San Franciscans unable to afford the $3,600 monthly rental for a one bedroom apartment sleep in the streets and, like most world cities Beijing recently faced a similar problem. Twenty-three million prosperous Beijingers wanted meals from local restaurants but the quarter-million migrant workers who delivered them could not afford the city’s eye-watering rents. Resourcefully, they found neighborhoods condemned for renewal, hooked up illegal wiring to leaky buildings and moved in until the inevitable fires drove them as TV cameras recorded their misery. The city built one-hundred thousand low-rent apartments in twelve months, the problem vanished, yet Beijingers barely noticed. China has been building homes for a million people–the entire housing stock of San Francisco, every month since 1950.

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China’s landlords, the world’s oldest social class, maintained their grip on the country’s land for three thousand years until, in 1949, Mao placed it in public trust, divided[1] it, and began a series of experiments that continue to this day. In 1960 he combined individual plots into communal farms for the Great Leap Forward. In 1978, Deng redivided them into family plots that proved inefficient, but attempts to recombine them into larger, more efficient farms failed until 2012. Then a Trial Spot in Sihong County created land management rights that farmers could rent or pledge as collateral, so long as their land remained agricultural. Beijing promoted Sihong’s solution nationwide and, today, millions of rural people are unlocking twenty-two trillion dollars of previously inaccessible wealth. One farmer, Sun Zeshun[2], leased his plot to an agribusiness corporation, became a roofing contractor in a nearby town, and used his new income to build a house and buy an SUV, “Life is much better now. I have more freedom and my income is less affected by weather.”

Urban experiments began in 1953 when, to maintain food production and prevent slum formation, the government issued urban hukou, residency permits, to rural people only if they attended university, joined the Army, or worked in state-owned enterprises. The UN’s Alain Bertaud[3] says, “Urbanization didn’t happen because the government wanted the country to urbanize–they actually kept the hukou in order to slow it down. But the economy asked for it and people voted with their feet. The government has to cope with urbanization rather than it being a deliberate policy decision. In a way, they are paying the price of this rapid urbanization now.” Every year since then, as housing becomes available, ten million people converted their rural hukou into urban permits and soon only Tibet will retain hukou–so people won’t move to the country and overgraze fragile ecosystems.

In 1960, city governments began building hundreds of millions of homes to accommodate the biggest baby boom in history, and, though individual floor space was only forty square feet, they charged tenants nominal rent. Planners trying to build a more productive economy saw housing as a nonproductive expense, but public attachment to its low cost accommodation made reform difficult. Then, in 1981, a Housing Privatization Trial Spot encouraged renters to buy the homes they lived in–for half their market value and the experiment’s success reverberated in every city in China. Within seven years, tenants purchased two-thirds of all urban housing–worth one-third of China’s GDP–and unleashed the biggest real estate boom in world history.

Planners had capital to invest, the economy boomed, and housing became a pillar of the country’s welfare system. When markets overheated, city governments simply released more land for development to keep housing supply aligned to local wage rises. When oversized apartments created problems, a Trial Spot halved their value by applying a progressive sales tax to floorspace, forcing speculators to release thousands of units onto the market. Yet local price bubbles regularly caused social unrest because, though eighty percent of buyers paid cash, twenty percent or would-be owners–rural folk moving to cities, cash-strapped first-time buyers, students, and migrant workers–found city prices out of reach. Another Trial Spot, in 2007, allowed them to pay half the deposit while the government paid the other half and guaranteed to buy or sell its interest on demand. Yet another Trial Spot gave land, permits, utilities, and loan guarantees to developers to build rent-only dwellings–on condition that rentals remained below fifteen percent of local wages. The canny developers pre-sold entire projects to insurance companies and retirement funds for their secure, long term cashflows. The work of urbanization will continue through 2049, when half the current rural population will be living in new cities.

Two million people living in regions prone to natural disasters, severe desertification, soil erosion or water depletion need special assistance. Planners are spending thirty-billion dollars (of which each villager contributes five hundred) building cities for them and will complete their relocation in 2021. The publicly owned banks financing the project will recoup their investment over thirty years from increased tax revenues because, in addition to normal wage growth, each year of city life adds two percent to residents’ income. Meanwhile, planners are spending five billion restoring and reforesting the vacated land.

China in 2021

Some local governments are blurring the urban-rural divide. In 2018 Beijing Province began providing its fourteen million urban and seven million rural residents with the same world class education, healthcare, employment, social welfare and housing. The positive public response encouraged the city fathers to extend the largesse to the rural poverty belt in adjacent Hebei Province.

Rural folk are naturally reluctant to leave their ancestral villages and grave sites until their new towns have utilities, public transport, schools, jobs and shops, and their hesitation leads to tales of ‘ghost cities,’ says Wade Shepherd[4]. “I’ve been chasing reports of deserted towns and have yet to find one. Over and over, I would read articles in the international press claiming that China is building towns that are never inhabited–only to find something very different upon arrival. Ordos, the most famous ‘ghost city,’ took ten years to populate but now has a thriving downtown and rising home prices. Xiangluowan, Lanzhou, Zhengzhou, Zhujiang, and Zhengdong, former ‘ghost cities,’ now host the biggest urban migration in history. Newer cities–backwaters a decade ago–are complete and awaiting occupants while others, like Xinyang New District, are finishing construction.”

Today, most urbanites and almost all country folk own their homes and fifteen percent own a second property. By 2020 housing will account for sixty percent of personal assets (twice the US level) and individual living space will be 450 square feet (half the US average). Housing quality already exceeds Japan’s.

The absence of property taxes makes carrying costs negligible and speculative pressures remain strong so the government barred rich people from buying extra homes and warned speculators to blame themselves if policy changes cause losses. As the Prime Minister said, “Houses are built to be lived in, not traded.” A homeowner in remote Kunming told me of his attempts to buy a second property after the policy went into effect:

Over the last few days I must have gone to nine banks and none of them will let me mortgage my property for a loan to buy another $300,000 apartment that is coming on the market in my neighborhood. The bank managers all told me that the government imposed tough restrictions on loans since last year so, if I really want to borrow the money, I will have to pay shadow bankers thousands in extra interest. Also, I cannot buy normal houses in my market because I already own one so, according to their policy, I cannot buy or sell my current one inside three years. When I bought my current apartment last year I could not buy in locations Kunming had zoned for college graduates who want to settle here. So our local real estate bubble isn’t going to burst anytime soon, as far as I can see.

As a first time home buyer, he was required to make a thirty percent deposit, so he put down $100,000–$37,300 from savings and $63,700 from his father, sister and friends (for a second home, the deposit jumps to sixty percent and third homes must be purchased for cash). He’s willing to invest in housing because, along with everyone else, his wages have grown twelve percent annually for the past decade and annual per-capita disposable income has jumped from $1,800 to $8,000.

An airline stewardess friend owns a shabby, $300,000, fifteen year-old[5], one-thousand sq. ft. apartment in outer Shenzen, across the bay from Hong Kong. Her fiancé’s similar flat inside Shanghai’s Inner Ring Road, she says, cost one million dollars while, in her inland home town, it would be one-hundred fifty-thousand. Like most employees, she contributed to her employer’s Housing Provident Fund which matched her contribution when she signed the sales agreement. Since her salary is over twice the payments, loan approval was automatic.

With seven of the ten most expensive cities on earth for residential property, Chinese prices are disproportionate to local incomes. The minimum wage in coastal Xiamen, for example, is $300 and the average wage is $2,000, yet ninety percent of families own apartments, of which eighty percent are mortgage- and lien-free. Their secret is collective action. Chinese evaluate potential spouses more realistically than we do: a good-paying job and a home are essential for familial approval, so multigenerational clans and even school friends pitch in and, since parents often move into their children’s homes in old age, they often contribute a large portion of their savings. Low-income parents take second jobs to help with the deposit, canvass their social networks, and borrow the balance. Since owners spend one-third to one-half of their incomes on mortgage repayments, only eighteen percent of households nationally have mortgages[6] and loan default rates are barely one-third US levels.

Access to housing in big cities is becoming difficult and, partly because cities have low population densities[7], and Tier One cities are capping their populations. Non-residents moving to Shanghai must buy for cash and pay city taxes and social insurance for five years before applying for a Shanghai houkou. Tier Two cities are deleveraging and Tier Three and Tier Four cities are optimizing their population density, infrastructure and efficiency.

This urban growth has lifted demand–and competition–for skilled workers. The balmy island province of Hainan (pop. nine-million), is developing medical tourism and advertised, “Talented people coming to Hainan won’t have to worry about affording a home.” Medical professionals receive eighty percent of their home’s equity after five years and clear title after eight. Inland Chengdu (pop. fifteen-million), lures researchers and entrepreneurs with subsidized rents and home finance, cash incentives, prioritized service at banks and hospitals, discounts on subways, free bicycles, and free entry to museums, events, and the local panda research center. Nanjing, plagued by labor shortages, lowered home deposits to five percent and was rushed by cash-strapped couples.

Since the effective size of a labor market is defined by the average number of jobs accessible in a sixty minute commute, well-designed infrastructure is vital to the current phase of urbanization. Cities generate ninety percent of the world’s economic growth, so Chinese planners studied prosperous megacities like Seoul and Tokyo and concluded that there is no need to limit their size if they are well planned. Now they are creating nineteen supercity clusters, the five biggest of which average 110 million people, which they expect to generate ninety percent of the national economy by 2030.

The first step is to strengthen the links between cities along two horizontal and three vertical corridors to create mega-regions, of which Beijing has prioritized three to drive national economic development by 2020: the Pearl River Delta, the Yangtze River Delta, and Beijing-Tianjin-Hebei and planners expect two medium-sized clusters, Yangtze Mid-River and Chengdu-Chongqing, to eventually join them.

Though each is ambitious in its own right, the government plans to turbocharge them by linking the clusters along two horizontal and three vertical corridors, the five biggest of which will average 110 million people, three times the size of Tokyo. The two horizontals are the Land Bridge Corridor in the North and the Yangtze River Corridor; the three verticals are the Coastal Corridor, the Harbin-Beijing-Guangzhou Railway Corridor, and the Baotou-Kunming Railway Corridor.

Hong Kong: Democracy Trial Spot

By linking the Yangtze River Corridor’s existing airports, railways, highways and waterways horizontally they will anchor the ‘land’ end of the Belt and Road Initiative, while the Coastal Corridor anchor the maritime road. Clustering will reallocate resources from bigger cities to smaller ones which tend to be at earlier stages of industrialization, and help them move up the value chain and away from heavy polluting industries. New free trade zones (FTZs) will help bigger clusters attract innovation-based investments and focus on the Made in China 2025 industrial strategy. Alain Bertaud says, “When I saw the original plan for Shenzhen, a fishing village that became one of China’s richest cities, I told them, ‘You’re being too ambitious.’ But I underestimated China’s enormous ability to get these things done.”

The mayor of remote Chongqing[8], whose thirty million people are clustering with Chengdu’s eight million says, “We became part of the high-speed rail network in 2017. Today we’re seeing China’s old pattern of provincial production based on self-contained industries being replaced by a more rational division of labor and production across the nation in a unified, efficient domestic market. Our objective was to become the economic center and major growth pole of Western China by 2020 and for our large urban and rural areas and to balance our urban-rural development. Today, fifty-one percent of us live in urban areas and forty-nine percent in rural areas. Once our urban population reaches seventy percent we will have three urban layers: one large metropolis, thirty medium cities and a hundred small cities. We’re creating a livable, green, drivable, safe, healthy Chongqing.”

Of all the urban projects, Beijing’s Xiong’an New District, sixty miles to its south, is probably the most ambitious. The forty square mile development, which physically connects the world’s richest city to its poor hinterland, will re-house industries incompatible with the needs of a world capital. Its twenty-five-acre city hall opened last year and seven hundred miles of new track put Beijing thirty minutes away and keep all commutes in the region under sixty minutes.

More commuter lines connect the district’s city centers, universities, factories, hospitals, offices, institutions and government departments and, to optimize space, much transport, water and electricity infrastructure is underground. Four high-speed train lines will run through the region and connect its three new airports: Beijing Daxing, Tianjin, and Shijiazhuang. Since airlines must choose between Beijing’s existing airport and Beijing Daxing, planners doubled the speed of the trains running to the more distant airport to make them equi-temporal.

Xiong’an’s infrastructure runs on 5G Internet of Things, artificial intelligence, big data cloud computing, smart sensors, smart lighting and integrated facial recognition–all to reduce energy, time and manpower investment, improve energy efficiency and reduce management overhead. Local media claim it will have neither traffic lights nor traffic jams because Alibaba’s CityBrain AI platform provides its traffic management and Baidu and China Mobile are running remote controlled self-driving vehicles.

Who will pay for this whizzbang technology? Alain Bertaud says the new clusters will give Xiong’an a productivity edge over competing cities, just as the Industrial Revolution gave England a productivity advantage over the world in its day. Like China’s high speed rail network, it will pay for itself.

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[1] In Fanshen, William Hinton tells how this was accomplished in a single village.

[2] China’s Reforms Allow Villagers to Rent Out Land and Boost Incomes. Bloomberg

[3] Endless cities: will China’s new urbanisation just mean more sprawl? Helen Roxburgh. The Guardian. Bertaud, formerly the World Bank’s urbanization advisor, now advises Beijing.

[4] Ghost Cities of China: The Story of Cities without People in the World’s Most Populated Country. by Wade Shepard. Asian Arguments. May 15, 2015

[5] Chinese housing has a designed life of thirty years

[6] The corresponding figure is fifty percent in the USA.

[7] London’s population density is twice Beijing’s.

[8] The China Wave: Rise of a Civilizational State by Weiwei Zhang

CHINA DREAMS OF Gini