Development of Urbanization Information & Research, Issue 7 Source: ccud.org.cn, July 31, 2018 13:59 (Edited by: Zhu Shu Liu Nian)
NDRC CCUD Development of Urbanization Information & Research, Issue 7, July 31, 2018
Promoting In-depth Urbanization with a Focus on Institutional Reform
By Xu Lin, CCUD
Urbanization is an inevitable step on a country's way toward modernization. Since its reform and opening-up, China, with deepened market reform and deregulated flow of production factors, has experienced the largest-scale and fastest urbanization process ever in the world history. The remarkable progress made by China in urban development is a prominent result of its sustained market-oriented reform and opening-up. From 1978 to 2017, China's urbanization rate was increased by more than one percentage point per year on average, reaching 58.5% at the end of 2017; the number of permanent urban residents increased from 170 million to 810 million, and the number of cities from 193 to over 660.
Moreover, the market-oriented reform and deregulation related with urbanization has lowered institutional transaction cost, promoted the free flow and market-based allocation of production factors between urban and rural areas, and largely raised the resource allocation efficiency and factor compensation. As a result, urban construction is in full swing; infrastructure improves notably; urban functions are continuously strengthened; per capita housing conditions are bettered;
and public services become better. Urbanization has changed the lives of hundreds of millions of farmers in China, lifting them from poverty and ignorance to modern civilization. It has also raised the human capital and per capita income as well as improved the quality of life, giving a strong impetus to economic development and the national modernization drive.
According to the general laws governing the urbanization process, China is in a fast-growing stage with an urbanization rate of 30%-70%, which is some way from the 90%-or-so urbanization rate in developed countries. As there are fewer working-age people, especially young and middle- aged laborers in rural areas, the urbanization process in China will slow down from high speed to medium and high speed, and urban development will shift its focus from scale expansion to quality enhancement. Nevertheless, a counter-urbanization trend hasn't appeared in China yet, which is determined by the fact that there is still a wide gap between urban and rural residents in income and public services, and the labor productivity differs greatly between rural and non-rural
industries. Given such differences, all kinds of production factors, including laborers, naturally move to high-paid regions and fields. This trend conforms to market laws, is good for improving the resource allocation efficiency, and couldn't and shouldn't be reversed artificially through the reverse of resource allocation. According to predictive analysis, China's urbanization process will last for another 20-plus years, and urbanization rate will be well over 80% in 2035 when China basically achieves its modernization goals.
Notably, in the first 40 years of China's reform and opening-up, urbanization mainly features the transfer of excess labor force from agriculture and the rural areas and the improvement of overall efficiency of labor force allocation. In comparison, against the current background that working-age population is decreased by millions every year and excess rural labor force is decreased year by year, urbanization in the future should be more human-centered. This means we should turn more migrant workers and their families into real urban residents; enable them to work and live in cities and towns as they wish; and comprehensively improve the urbanization quality and promote sustainable development. Let's call such urbanization mode in-depth urbanization to differentiate it from the old mode that pays attention only to the image of the city but not the contents. By adopting this mode, we'll be able to deeply promote the supply-side structural reform and further raise the efficiency of production factor allocation. Moreover, we can increase the income and enhance the spending ability of more migrant population, drive consumption and investment, and unleash new potential of domestic demand. It is also the most effective measure to cope with the possible adverse consequences from the China-US trade war.
I. Urbanization is an important content of supply-side structural reform
Urbanization is the process in which excess rural and agricultural labor force moves to non- agricultural industries that have higher labor productivity, lives and enjoys better public services in urban areas; and the whole society adapts to this change. A fundamental way to adapt to this change is pushing the market-oriented institutional reform that aims at fully tapping the advantages of a unified market, deeply merging into the global market, and letting the market play a decisive role in factor allocation. These reform measures will facilitate the free flow and market- based allocation of labor force, land, capital and innovative factors between urban and rural areas, broaden the market boundary, raise the resource allocation efficiency, and eventually improve the total factor productivity (TFP). This is the main theme of China's urbanization drive in the past 40 years, and it is perfectly consistent with the ultimate goal of supply-side structural reform.
(I) Urbanization is good for raising the overall labor productivity and HR allocation efficiency. Regarding the efficiency of labor force allocation, the overall labor productivity in China was RMB87,400/person in 2017, less than 12% of that in America on market exchange rate and even lower than that of some developing countries. Labor productivity in the agricultural sector was only 22% of that in the secondary industry and about 26% in the tertiary industry, lower than the 33% global average. In most regions, farmers work no more than two months on the farm a year, and excess labor force is a common phenomenon in rural areas. With the rising
level of mechanization, more rural labor force will move to other sectors. The transfer of excess rural labor force to non-agricultural industries will not only narrow the gap among the primary, secondary and tertiary industries in comparative labor productivity, but will also largely increase the overall labor productivity and enhance the quality and benefits of economic development.
From the perspective of human capital enhancement, China has more than 900 million laborers, of which less than 160 million are skilled workers, and untrained migrant workers account for over 60%. When rural laborers turn to non-agricultural industries, they have to receive occupational training first. The occupational skill enhancement program for migrant workers has been implemented in recent years, training over ten million laborers every year. As more migrant workers become urban residents, a growing number of their children have equal access to better education in the recipient city. As rural residents leave the farmland to non-agricultural industries and leave the countryside to cities, they are essentially embracing the opportunity to leave the rural ignorance and backwardness and accept modern civilization in cities. Even if they finally decide to go back to the countryside, they will communicate there the modern civilization and skills they have learned in cities. All these will effectively enhance the overall quality of Chinese population and labor force, increase the valid supply of HR and human capital, and accumulate the human capital needed for basically achieving modernization.
(II) Urbanization is good for intensive and efficient land utilization, efficient allocation of rural and urban construction land, and effective farmland protection. Empirical analysis shows that the larger the city, the more intensive its land utilization. Since cities are more efficient than the countryside in land utilization, their output density and population density per unit area of space is much higher than those in rural areas. As a large number of farmers enter the cities and cities become ever bigger, urban construction land will continue to increase, but rural construction land will decrease accordingly. If the seesaw relation between urban and rural construction land is regulated and the farmland occupation and compensation mechanism are carried out on a large scale, the total amount of farmland will increase instead of decreasing. This is because rural households are quite scattered, and infrastructure and public facilities take up a large land quota, leading to large per capita construction land. At present, the per capita land use in rural settlements is about 270+ square meters, 130 square meters more than the about 140+ square meters in cities.
With the rising urbanization level and the concentration of people in large and medium-sized cities, the urban space utilization will become more efficient and approach the standard of 100 square meters per person. It is planned that 100 million rural residents will come to live in cities. If the mechanism of paid homestead exit for city-going farmers can be improved through the linking between urban and rural construction land, more than one million hectares of construction land can be vitalized. As to local practices, Chongqing initiated the "land quota" system on the basis of the urban-rural construction land linkage, whereby farmland is increased through the reclamation of construction land, paid exit of farmers' homestead is realized through the trade of construction land quota, and the urban demand for construction land is better satisfied. By improving the
transfer mechanism of rural land operation right and homestead use right, we will be able to vitalize more idle land in rural areas, thus making rural land use more efficient and increasing the farmers' property income. If current idle construction land in suburban areas of big cities is allowed to be used to build rental housing, we will create valid operational properties for farmers, increase urban housing supply and mitigate the housing price and rent hike. Regarding the farmers' farmland contracting, every rural household that actually operates farmland has about 0.6 hectare land on average, less than the 1.8 hectares in Japan (the government plans to increase it to 20 hectares), not to mention the per capita 60 hectares in the US. In recent years, Shanghai's Songjiang district has increased the average farmland per rural household to more than 100 mu (6.67 hectares) through the transfer of land operation right, which increases the farmers' income by a large margin. If the Songjiang approach could be promoted on a large scale, that would significantly increase the farmland output efficiency, and free more rural laborers to move to the industries with higher labor productivity.
(III) Urbanization is good for raising the efficiency of public capital usage and the scale benefit of infrastructure. There is an obvious Scale Economies Effect in public services and infrastructure. As urban population grows in size and density, the input in additional public services and infrastructure for the incremental population is in marginal decrease. Urban and rural areas in China differ greatly in population density. In general, the larger the city, the higher its population density. Beijing, for example, has the general population density of 1,322 people/sq km, but it shoots up to 25,000+ people/sq km in the Xicheng district, the main district, and drops to only 206 people/sq km in Mentougou, a district dominated by rural areas. As rural residents are quite scattered, the infrastructure investment, including water, electricity, road, gas, postal service, heating and environmental facilities, for rural population is about 10 times as high as that for the same amount of urban population. In some remote villages in western China, rural power grid serves only a small amount of people but the cost of power transmission and distribution is as high as about RMB5/kwh/household, more than nine times higher than that in cities. If the power tariff was based on the actual cost, farmers living in western mountainous areas couldn't afford to use electricity, and the household appliances they bought after earning money in cities would be left useless. Faster steps should be taken to urge rural population, especially those in remote mountainous areas and poor areas, to seek jobs in non-agricultural industries and settle in cities where they work. This will not only give full play to urbanization's positive effect on poverty alleviation through industrial development and relocation, but also enable us to provide infrastructure and public services at a lower cost, concentrate the limited public capital on urban areas where it can be used more efficiently, make the spending of public capital and the use of public facilities more efficient, and reduce the waste of public capital. When we implement the Rural Revitalization Strategy in the future, if we don't fully tap the potential of urbanization in absorbing and gathering more excess agricultural labor force and rural population, and if we indiscriminately spend the limited public capital on the over-dispersive rural infrastructure, we
will end up with high cost and low efficiency, and the waste of resources as rural population will continue to migrate to urban areas.
(IV) Urbanization is good for concentrating innovative factors, spreading knowledge and strengthening the motivation for innovation-driven development. Because of their economy of scale, openness and inclusiveness, cities have always been the main platform of business startup and innovation in all countries, and can generate the Scale Economies Effect of 1+1>2. Therefore cities attract all kinds of talents and factors. When innovative factors gather in cities, especially large and extra-large ones, it's easier for them to spread knowledge and promote each other. This will facilitate new technologies, new ideas and various production factors to be combined into more efficient new technologies, products and business models, push mass entrepreneurship and innovation, and form the inexhaustible drive of economic growth on the supply side. Due to the Scale Economies Effect resulting from the ever-growing urban population, the division of work in cities is ever more detailed, leading to higher professional efficiency and plenty of opportunities for innovation, startup and employment in many fields. This is why around the world, innovative resources and factors are mainly distributed in cities and innovative results are mainly generated there, China being no exception. More than 90% of the research personnel, research institutes and R&D outcomes in China are distributed and generated in urban rather than rural areas. Even R&D institutes and sci-tech service organizations serving the rural and agricultural development are mainly located in urban rather than rural areas. This trend of the distribution and concentration of innovative factors has its inherent laws and cannot be changed by the initiative of "going to mountainous and rural areas." Only in cities can innovative factors be efficiently gathered and combined, receive the auxiliary support that comes from industrial clustering, and generate new output. In recent years, a variety of urban innovation and startup incubation platforms have grown rapidly in China, and new incubators such as Sinovation Ventures and Maker Space as well as business incubation platforms have kept emerging at an annual rate of more than 20%. They reflect the unique charm and effect of urban development and represent its sustained motivation. Any advocacy and effort for the reverse allocation of innovation and startup factors from cities to the countryside will, apart from wasting policies and lowering the efficiency of resource allocation, come to sporadic successful cases at best, and will never achieve overwhelming success.
II. Urbanization can further unleash domestic demand
At the center of in-depth urbanization in the new era is the citizenization of agricultural population and the continuous release of domestic demand. The urbanization rate of permanent population in China has reached 58.5%, while only 43% of urban residents have local household register. According to the plan, the urbanization rate of permanent population should be around 60%
and that of residents with local household register around 45% by 2020, which means about 16 million rural residents have to move to cities every year on average. To well cope with such massive population migration, ensure stable jobs for them and help them settle down, there is a
huge demand for consumption upgrade and urban infrastructure construction, including software and hardware, which will drive the sustained economic growth.
(I) Urbanization is the "multiplier" of consumption demand. In the past, China's urbanization was focused on the efficient utilization of excess agricultural and rural labor force in non-agricultural industries. As a result, nearly 300 million farmers found jobs in the non- agricultural industries with higher labor productivity and higher income, increasing their income and enhancing their consuming ability. However, most of them couldn't bring their families to cities, nor could they enjoy the same public services, such as social security, as urban residents.
Therefore, they tended to take the money they earned in cities back to the countryside and put it in banks, and their feeling of uncertainty about the future made them reluctant to spend. The new- generation migrant workers have some new features. Most of them are born in cities. They have no farming skills or the will to return to their hometown. In view of this, urbanization in the new era should promote the citizenization of migrant workers, help them and their families settle down and become urban residents in a real sense. This will increase urban consumers, stimulate the general spending inclination of urban and rural residents, and push the upgrade of consumption structure and the release of consuming potential. In 2017, the per capita disposable income of urban residents was RMB36,396 and consumer spending was RMB24,445, respectively 2.71 times and 2.23 times that of rural residents. After farmers become city dwellers by working in the non-agricultural industries, their income will increase and their consumer demand will also rise by more than RMB10,000. Assume that more than 16 million rural residents settle in cities every year on average, the consumer demand will shoot up by nearly RMB200 billion. If more of the current 270 million farmer-turned urban residents can choose to settle in cities, they will give birth to a consumer demand of hundreds of billions, driving the total demand increment to almost a trillion.
(II) Urbanization is a "booster" of investment demand. Although China has experienced 40 years of massive infrastructure construction, its per capita infrastructure is only 1/3 that in West Europe and about 1/4 that in North America. Considering that 200-300 million people will move from rural areas to cities for work and living in the future, a gigantic amount of infrastructure investment is needed just to keep the current per capita infrastructure level. According to the survey and estimation of public cost for citizenizing agricultural population, it costs RMB80,000- 130,000 for one farmer to settle in the city. By 2030, there will be about 1 billion urban permanent population in China, including about 400 million from the agricultural sector, which, combined with permanent residents migrating among cities, will lead to 500 million permanent residents without local household register. Assume that the public cost for each person is RMB100,000, then RMB50 trillion public investment has to be made for 500 million people to settle in cities.
The various types of urban housing supply and urban infrastructure maintenance alone require about RMB30 trillion investment. If we count in the industrial investment driven by the growing consumer demand in cities, there is even a larger demand for fixed asset investment.
Besides, there are nearly 300 extra-large towns with a population larger than 100,000 in China, and their infrastructure and public service and facilities are inferior to those in cities. Based on the practices and estimation in Zhejiang and other places, if these extra-large towns are elevated to be cities, fixed asset investment needed to upgrade the public facilities will increase by 25%-30% annually, and the new infrastructure investment will reach hundreds of billions a year.
III. Promoting in-depth urbanization with a focus on institutional reform
In the current system of China, the urbanization issue that has to be solved by the government is in essence an issue of institutional reform, and its basic direction is further marketization.
Therefore, to deepen the urbanization process in the new era, we have to push relevant institutional reforms with people at the core, clear the institutional obstacles that impede the normal progress of urbanization, and let urbanization play its positive role in aligning the supply and demand sides and promoting sustained economic growth.
(I) Accelerate the reform of household register system and promote equal access to public services based on residence permit. The household register system that features urban/rural and regional segregation is a system left from the period of planned economy that aims to restrict the free flow of population. It doesn't suit the modern governance system and is rarely seen in the world today. The negative effects of this system are worth close attention. Although it lowered the cost of urbanization and industrialization in the past, it sacrificed the personal rights and family interests of migrant workers. Migrant workers work hard in cities but cannot receive equal treatment, and their children staying in the hometown cannot be taken care of by their parents—these cause psychological impacts that may bring lasting and adverse consequences to the general society. At the moment, cities have adopted different approaches to loosen the household register system. Generally speaking, the larger the city, the higher the threshold. Cities try to use the household register system to control the size of urban population and lessen the government's responsibility for public service provision. But in reality, the household register system cannot control the size of permanent population in a city because it is decided by the city's economic scale and industrial structure. The larger economic scale and the more labor-intensive industrial structure a city has, the larger employed labor force and the more permanent residents it has. Therefore, as long as a city maintains sustained economic growth, its population will grow due to the employment demand even if the industrial structure has to be upgraded. To steer and control urban permanent population, more attention should be paid to adjusting the spatial layout of urban economy and the added value of industrial structure, rather than the direct control of the population size. Some cities vow to control the size of population while expanding the economic scale unselectively, so it's impossible for them to reach the first goal. From the perspective of lessening the government's fiscal burden for public service, permanent residents without local household register who work in the city, especially those with regular jobs, make the same contribution as, or even more contributions than, residents with local householder register to local economic development and public finance. They should be entitled to the same public services as
local residents and shouldn't be subject to any discriminatory treatment. This is a basic requirement of social equity and justice. Therefore, in light of the new development concept, all city governments should further relax the conditions and lower the threshold for people to settle down, and work faster to formulate open, transparent settling-down standards, so that permanent residents, who are willing to have stable jobs and settle down, together with their families can settle down in the place of residence and enjoy the same public services as those with local household register. For urban permanent residents that haven't settled down, we should implement the residence permit system across the board, improve the permit-based basic public service provision mechanism and gradually expand to all public services, paving the way for eventually abolishing the household register system. Some cities have launched the "talent grab" campaign, which adopts a lower threshold of settling down than before, but they may have their specific motives, and the campaign, instead of being an approach of loosening the settling-down conditions in the real sense, remains discriminatory and selective and isn't inclusive of all employed permanent residents. It has to be further relaxed and improved. Moreover, accelerating the reform of the household register system isn't just conducive to urbanization, but is also a response to America's criticism of this system as distorting the labor force price when it commented on China's non-market economy system.
(II) Deepen the reform of rural/urban land system and real estate system. In the process of urbanization, land property right and housing system are sensitive topics not only concerning farmland protection, but also the complicated structural adjustment and sharing of interests. First, to protect farmland, the centralized planning system of construction land quota is still implemented, whereby the central government determines the new construction land quota for local areas every year. The biggest defect of this system is that the regional allocation of the planned quota cannot well reflect the different demands for construction land of various regions as their economy grows at different speeds, and a cross-regional quota trade system isn't established to achieve a flexible balance among the regions. As a result, fast-developing regions are faced with construction land shortage and excessive land price rise. Some regions demolish rural housing extensively, relocate farmers to buildings in cities and turn the freed rural construction land into urban construction land, which has caused unreasonable destruction of traditional villages. Second, to guarantee urban construction, especially infrastructure construction, the current land requisition system is that land is bought from farmers at a low price but not enough compensation is given them, so farmers' interests are generally damaged in the process and social conflicts and group events happen from time to time. Third, the planned land management system attaches more importance to planned allocation than to land development and intensive land use, which results in the falling efficiency of construction land use. In the past ten-plus years, the population density in completed urban areas has fallen from 8,000+ people to 7,000+ people per square kilometer, far from the standard density of 10,000 people per square kilometer of urban construction land. Fourth, after farmers obtain a stable residence in the city, the exit system of
their homestead in the countryside isn't well developed. Despite the mechanism that the decrease of rural construction land should be of the same amount as the increase of urban construction land and market-based trading mechanisms such as land quota trade, these approaches, which are limited to specific counties, cities or provinces, cannot match with the cross-provincial flow of population. Therefore, regions that absorb a large amount of migrant workers and have a huge demand for construction land do not obtain sufficient land quota, which lowers the efficiency of the rural-urban land linkage mechanism and assets allocation. Because of urbanization, rural population in China has kept shrinking and more farmers are going to cities, but rural construction land has increased instead of decreasing. Fifth, the rural land property right system isn't sound and stable enough, which undermines the efficient transfer and allocation of a great deal of idle rural construction land and farmland. A lot of farmland is left uncultivated and the potential of farmers receiving income from land property right isn't brought into full play. Sixth, housing speculation in cities is serious. In some cities, the housing price keeps rising at a fast rate but many housing units are vacant, and the twisted relation between housing price and supply/demand arising from administrative regulation becomes more prominent. Living cost in tier-1 cities increases drastically due to the excessively high housing price, making it even more difficult for some city dwellers to have their own housing.
To solve these problems, we should establish a system of cross-regional adjustment and trade of construction land quota. The rural construction land quota freed from the urban-rural land linkage mechanism should be traded across regions nationwide, and rural people with stable residences in cities should have more ways of voluntary and paid homestead exit. In suburban areas, we should allow rural construction land to be traded in the market or used to build public rental housing to moderately mitigate the government's monopoly in tier-1 construction land market. Farmers whose land is requisitioned should be entitled to the same old age insurance as local urban residents in addition to the lump-sum compensation in order to truly dispel their worries and concerns. As to the reform of urban housing system, (1) The current distorted approach that real estate transaction and price is under administration regulation should be changed and the real estate market should be a normal market of goods and properties; (2) Housing speculation should be curbed through transaction tax and transaction VAT; (3) More stable, long-term public rental housing must be supplied in tier-1 cities, and more rental subsidy should be provided for medium and low-income groups. Collective construction land in suburban areas should be allowed to build public rental housing, and urban basements, after renovation and upgrade, can be leased as low-rent housing to ensure the basic quality and functions of rental housing in cities.
(III) Deepen the reform of fiscal and tax system and the local government's financing mechanism. The fiscal and tax system and government financing mechanism are of great importance to the in-depth urbanization centered on the citizenization of permanent residents without local household register; to the investment in and financing for urban infrastructure
construction; and to the local government's debt management and risk control. A problem that the current fiscal and tax system doesn't solve is the mismatching financial power and expenditure responsibility of the local government. As a result, cities with a large number of migrant population are not financially capable of guaranteeing the equal basic public services for permanent residents without local household register, nor do they have the ability or motivation to help them settle down and provide them with equal public services. Take Guangdong for instance.
It is an economically developed province with the largest fiscal revenues in China, but its per capita fiscal expenditure ranks 20th or so. This means that after the transfer payment system is adjusted, Guangdong's public service capability, which is measured with per capita fiscal expenditure, ranks lower than 20th in the country. This partly explains why those developed coastal provinces and cities that take in huge migrant population have no motivation to turn them into local residents.
To solve this problem, we have to reform and perfect the current fiscal and tax system. (1) We should further perfect the calculating method of balanced transfer payment from the exchequer to include the number of migrant residents who settle in and the number of migrant permanent residents. (2) We should further cut the categories and scale of special transfer payment and raise the ratio of general or balanced transfer payment. (3) After business tax is replaced by VAT, local governments don't have a main tax, so we must create new main taxes for them, appropriately increase the ratio of their revenue sharing and their financial autonomy, and keep the ratio of central fiscal revenues from rising further. Real estate tax is a potential main tax for local governments, but this system should fully consider the specialty of the land grant system and the possible disparity in the future, so that real estate tax can be a property tax in the real sense and can be generally suitable and promoted at a proper and steady pace.
As far as the local government financing mechanism is concerned, to control local governments' debts, China has been restricting their right of borrowing since the Budget Law was formulated and revised. To meet the tremendous financing demand for urban construction, local governments have set up investment and financing companies and raised debts through them.
Although it is the companies that borrow the money, the governments are actually obligated to pay the debts, either directly or indirectly, which makes their debt management complicated and hard to monitor. It must be made a system that local governments are allowed to borrow money. This is partly because that at present, local public finance is only enough to cover the compensation and benefits of civil servants, with little resources left for infrastructure construction, which must rely on land revenues and debts. It's also because infrastructure construction usually takes a long time across several generations, and debt financing spreads its investment cost among these generation, thus better reflecting the inter-generational sharing of infrastructure benefits and cost. It's a reasonable infrastructure investment and financing mechanism as well as a benefit/cost sharing mechanism. Therefore, institutionally speaking, we should legislatively allow local governments to raise debts directly. By issuing local government bonds, we can establish open, transparent debt
decision-making mechanism, agency credit rating mechanism, and market-based underwriting and investment restriction mechanism. The local government bonds issued now under the lead of the Ministry of Finance adopts the following model: the central finance plans the annual volume in a centralized way and distributes the issue quota to each province, which then issues the bonds separately and distributes them to lower-level governments. It seems that the central government controls the total quota, but it's not good for specifying the matching duties, rights and interests of the issuers, and cannot really control local debts. In the current process of deleveraging, we cannot adopt the same approach in different regions when dealing with local government debts, nor can we stop the local governments from borrowing money completely. In general, local government debts in China haven't shown systemic solvency risks yet. The debts are mainly spent on infrastructure construction rather than consumption, and the completed facilities all become government assets, which can generate social benefits and some even with direct or indirect economic benefits. As long as the re-financing cost doesn't go up drastically, we should extend the debt term and the term of principal and interest payment through the re-financing mechanism of borrowing new debts to repay old ones. Regions with too many debts and high risks can digest the risks year by year by keeping the debt balance from increasing and borrowing new debts to repay old ones, and can repay the debts by selling some government assets if necessary. As to local government financing vehicles (LGFVs), what's lacking most now is long-term debt financing vehicles. Term mismatch, such as short-term debts for long-term use, is serious, which may easily lead to liquidity risks and must be solved by increasing long-term debt financing vehicles. For assets with stable and increasing cash flow, financial instruments such as asset-backed securities and REITS can be issued for financing. To control local government debts at source, we should also put soft constraint on urban planning and on the power of city leaders, and change the situation that every leader has a new development plan, new cities and new areas are built everywhere, urban construction is too extensive, and the population, output and business density in new areas are too low. Leaders should be open-minded about achievement, and new areas should only be developed after the previous one proves mature and viable.
(IV) Promote the modernization of urban social governance with new technologies. The worries over excessive city scale are partly caused by concerns about the bearing capacity of resources and the environment. More importantly, they are caused by concerns about the inadequate ability of urban governance and public service. In the past, it was the governments and their organizational system that undertook urban governance, which featured one-way governance while public engagement and community autonomy was limited. This government-dominated urban governance model lacked a reasonable responsibility sharing mechanism. The solution is more community autonomy and public engagement, a stronger awareness of public welfare among urban residents, and a larger proportion of public fulfillment of social responsibilities. For that purpose, a democratic mechanism must be introduced in an organized and step-by-step manner to form the rational framework of community autonomy. This practice has been tried in urban and
rural areas across China to varying degrees and we can keep improving and promoting it while summarizing experience and lessons learnt.
Technological progress has also given us a new solution to big city malaises and other issues, which is the construction of smart cities. The rapid progress of intelligent technologies, such as IT, Internet, big data, cloud computing and AI, especially the mutual promotion and complementarity of deep learning algorithm, computing ability and big data, has turned AI from a special technology into a general one. It can be integrated with a wide range of areas, including urban economic and social development, eco-environmental protection, infrastructure operation, energy dispatching and conservation, social insurance operation, and public security monitoring, providing powerful technical support for the management of smart cities. A batch of companies, including Google, Alibaba, Huawei, iFlytek and Ping'an Group, are promoting their smart city solutions in different cities. But to truly establish a complete management and operation platform for smart city governance that features the "central brain + four limbs," obstacles mainly exist in the institutional aspect, and institutional reform and improvement is required in many fields. In particular, we should intensify the legislation on data sharing and privacy protection and the integration and interconnection of smart management systems installed in different sectors. This is the only way to greatly improve the efficiency of digitalized urban management and services, make urban governance and service truly affordable, convenient for both residents and enterprises, secure and reliable, and earnestly reduce the institutional transaction cost of urban operation. To that end, rules or laws must be formulated to force various government departments to proactively give up the monopoly of data and power, so that dispersive data can be gathered and turned into valid public resources, and the operation of government power and public administration will become more open, transparent, law-compliant, efficient and supervisable through the intelligent management platform. From this perspective, smart city construction isn't just a technical issue, but a supply-side structural reform conducive to raising the city's operating efficiency and lowering its institutional cost. On the demand side, smart city construction itself represents the new, robust demand for smart technologies, products and services that are growing at an ever- faster rate.
(V) Optimize the urban spatial layout, scale and structure. There are more than 660 cities in China nowadays, including 7 megacities with the population of more than 10 million; 9 extra- large cities with the population of 5-10 million; 124 big cities with the population of 1-5 million;
138 medium-sized cities with the population of 500,000-1,000,000; 380 small cities with the population of less than 500,000; as well as 20,117 designated towns, over 300 of which are extra- large towns with a population of more than 100,000. An obvious trend today is that some cities will continue to grow, the number of megacities, extra-large cities and big ones will increase further, while some cities will decline, such as those whose resources are exhausted and old industrial bases that are no longer competitive. The spatial distribution of cities is mainly determined by geographical conditions. For instance, about 94% of China's population is
distributed in the east of the Hu Line, or Heihe-Tengchong Line, an overall layout which is hard to change and shouldn't be changed, either. Another characteristic of the spatial layout of cities is the clustered distribution, a phenomenon and pattern common in all countries. A number of mega city clusters are rising to varying degrees, such as the Guangdong-Hong Kong-Macao Greater Bay Area city cluster, the Hangzhou Bay Greater Bay Area city cluster (the Yangtze River Delta), the Bohai Bay Greater Bay Area city cluster, the Chengdu-Chongqing city cluster, and the midstream- Yangtze River city cluster. Many metropolitan circles based on central cities are also growing rapidly. This trend appeared because of the market-based resource allocation and division of work of industrial clusters on a unified market, and it results in higher working efficiency and stronger competitiveness. Currently the government is formulating the development plan for city clusters and metropolitan circles, but it's worth noting that their appearance essentially isn't the result of government planning, but is driven by the market and technologies together. However, that doesn't mean the government can sit with folded arms during their formation. It has to make overall plans for the infrastructure network, maintain market unity, clear market barriers, set up reasonable interest sharing and compensation mechanisms among cities, and establish the integrated social security system within city clusters. On that basis, the government should let the market better play its role and let the enterprises decide their industrial deployments independently.
It's hard to define the standard for a rational city scale and structure. China for a long time implements the policy of restricting the development of big cities and encouraging the development of medium and small ones and small towns, but the result is exactly the opposite - big cities get bigger and only a small proportion of urban population is distributed in medium and small cities and small towns. This is closely related to the fact that the larger a city is, the more job opportunities it has, the better its public services and the more open its culture. Unlike in western market economy countries, Chinese cities have administrative rank. Leaders of municipalities directly under the central government are of deputy state level, and there are also deputy provincial-level cities, prefecture-level cities and county-level cities. As the allocation of public resources is dominated by administrative power, cities on higher administrative rank tend to obtain more public resources, better public services, and stronger political and policy influence. Those factors, in turn, make high-ranking cities more attractive to production factors and push them to become ever bigger. This implies that China's institutional characteristics go counter to the government orientation on city scale and structure, and even reinforce the imbalance in that aspect to a large extent. A simple logical inference is changing this irrational administrative rank system, but it's obviously impossible to adjust the current administrative power structure. A feasible solution may be making new reform attempts in the fiscal and tax system and budget system, so that the per capita fiscal expenditure and public service capability of different cities may become equalized gradually, the gap among cities of different sizes will be narrowed, and medium and small cities will become more attractive. It's a pity that in the foreseeable future, the city scale and structure in China won't have substantial structural change. Maybe we can explore to elevate
extra-large towns that have more than 100,000 urban residents and great developing potential to be cities of higher administrative rank. In this way, they will adopt higher standards for public resource allocation and public facilities and services, thus enhancing their own appeal.
(VI) Reform the urban planning management system. The great pressure resulting from urban complexity and sustainability poses many new challenges to urban planning, which calls for innovation and reform for playing a better role in guidance and constraint. There are four major issues about China's urban planning that need explorations. The first is how to make urban plans both flexible and rigid. In current urban plans, the restrictive goal on population control conflicts with the goal of economic expansion as the latter implies more employment and a larger population. But economic expansion is mainly market-driven and cannot be controlled by the government plan, which is the main reason why many cities in China cannot meet the goal of population control in their plans. Once the goal of population control is unrealistic, land and public services allocated around that goal will be unable to meet the demand, thus affecting the city's operation. A reasonable approach is defining those goals that are largely affected by the market as prospective goals and keep them flexible and revisable, while goals concerning spatial and ecological management must remain highly rigid, such as the delimitation of the "production, life and ecological" space, the red line target, and especially the eco-space, parks, footpath and energy-saving buildings. Second, we should establish a more rational urban planning system.
Urban planning, as the planning for spatial arrangement, should have a layered system with different degree of precision according to the coordinates, and also an overall framework that encompasses economic and social development, infrastructure, public service, eco-environment, history and culture, development and protection, and space utilization. This is to ensure the coordination and integration of various types of factors on all dimensions and the clear division of work with respective priorities during execution, which has to be supported by new technologies and endorsed by the reorganization of government functions. Third, we should better the plan formulation, review and approval system. Urban planning concerns people's immediate interests and has to coordinate and balance the interests of multiple parties. Therefore, it should be based on extensive consensus and adequate public engagement procedurally, so that different interest groups can fully air their opinions, and the process of plan formulation will be a process of establishing goals, improving layout, coordinating interests and fostering consensus. The parties reviewing and approving the plans are critical for their implementation. At present, a city's plan is reviewed and approved by the superior government, but its economic and social development plan and special plans are reviewed and approved by the local people's congress and government, giving rise to institutional obstacles to the coordination between the two systems. The system that a city's plan is reviewed and approved by the superior government cannot reflect the matching duties, rights and interests of the local government in city planning and plan execution, and it's bad for the integration and coordination of the city plan with other plans. This system should be adjusted—the local people's congress should review and approve the city plan to give it a legal
position. This approach will also intensify the legal supervision of the formulation, execution, management and revision of the city plan by the local people's congress as the legislative body, reduce the Party and government leaders' random interference in the planning, and lift the soft constraint on urban planning. Fourth, we should set up a unified urban planning information platform, which will monitor the formulation, revision and execution of urban plans, perfect the government's working procedures and the reviewing process of major urban construction projects, and record the whole history of urban plans from formulation to execution.
The Nobel Economics Prize winner Professor Joseph Stiglitz described China's urbanization as one of the two major factors that steered the world economic trend in the 21st century, a judgment that still holds water today either for China or the world. According to the above analysis, from the supply side China's urbanization reform can foster and accumulate human capital, largely raise the efficiency of labor force allocation, consistently improve the overall economic productivity, intensify the clustering effect of innovation and business startup, make the urban society more harmonious, and lower the institutional trade cost. From the demand side, it can increase the income and consuming ability of urban and rural residents, create new consumer demand and urban infrastructure and housing demand, and drive urban construction investment. In sum, urbanization is the best instrument to push economic growth and improve its quality and efficiency on both the supply and demand sides.
The recent China-US trade frictions are, on appearance, "Trump-style" measures adopted by the US to address its trade imbalance with China, but they actually imply the dissatisfaction of US-led western countries with China's current system undermining the old international trade rules, and may also be the representation of the "Thucydides-style" game between the two superpowers in the new era. No matter how the trade war will end, as long as China doesn't adjust and reform its current system, trade frictions and lawsuits with our main trading partners about anti-dumping and countervailing duties will keep emerging. Considering that the US is the largest source of our trade surplus, its unilateral tariff retaliation will make trade less effective in boosting China's economic growth. In view of the possible short-term impacts of the trade war, main measures and policies that can consistently counter the unemployment resulting from reduced export all lie in the field of in-depth urbanization. This is because the most prominent outcome of urban expansion is the faster development of service industry, which conforms with the structural upgrade of Chinese city dwellers' consumer demand and will generate a lot of opportunities for business startup and employment. However, to do that, cities, especially big cities, extra-large ones and megacities, should fully tap such opportunities during service industry development, but not force low-end industries and population to leave the city in the name of decentralization. All city leaders must realize that every city, regardless of its advanced industrial structure, has residents from different stratums. For the city to have efficient division of work, it needs industries and laborers of various levels, thus creating consumer needs of different levels too. The larger the city, the more so, and the more startup and job opportunities there are. Therefore, an open and
inclusive attitude toward migrant population should be the common awareness of all city leaders with socialist belief, of all old urban residents upholding the socialist core values, and of all city administrators with economic thinking. In face of new changes in the external environment and reduction of external demand, and to maintain relatively stable economic growth and structural upgrade, we have no choice but steadily tap new domestic demand through the urbanization drive and create a better environment for innovation and entrepreneurship. The methods to truly unleash the potential of domestic demand, invigorate innovation and business startup and raise the supply- side efficiency is to press ahead with the institutional reforms in the field of urbanization, to remove the institutional hurdles to urbanization, and to make more farmers become workers and make more rural residents urbanites. Furthermore, only by promoting in-depth urbanization can we meet the target of poverty alleviation and consolidate the results thereof, smoothly implement the Rural Revitalization Strategy, and drive and underpin both initiatives. Without the support of urbanization, poverty alleviation in rural areas and rural revitalization is hard to achieve, consolidate and sustain, and may even lead to new waste of public resources.
Xu Lin CCUD
(Thanks to Mr. Wang Junfeng, President of Sino-briller Industry-Region Joint Development Funds, for his basic research, and to teachers and students at the School of Economics, Nankai University for their suggestions on revision.)
Contact person: Zhang Xiaoxu
