April 19th 2014

S P E C I A L R E P O R T

CH I NA

Building the dream

20140419_SRChina.indd 1 08/04/2014 13:56

SOME HISTORIANS BELIEVE that Marco Polo never went to China. Buteven if the 13th-century Venetian merchant did not lay eyes on the coastalcity ofHangzhou himself, he certainly reflected the awe it inspired in oth-er foreign traders when he described it as “beyond dispute the finest andthe noblest in the world”. And, “incredible as it may seem”, he wrote,Hangzhou (which he called Kinsay) was but one of more than 1,200

“great and wealthy cities” in southernChina. “Everything appertaining tothis city is on so vast a scale…that it isnot easy even to put it in writing.”

In Marco Polo’s day it was the or-nate palaces, paved roads and meticu-lously planned layouts of Chinese cit-ies that impressed visitors; in today’smegacities it is some of the world’s tal-lest skyscrapers and largest shoppingmalls, interlinked by the world’s lon-gest bullet-train network. And if allgoes according to the CommunistParty’s plan, the coming two decadeswill evoke a few more gasps.

By 2020 the high-speed rail net-work will expand by nearly two-thirds, with the addition of another7,000km (4,300 miles). By then almostevery city with a population of half amillion ormore will be connected to it.Tens of millions more migrants willhave poured in from the countryside.Between now and 2030, says theWorld Bank, the average rise in thenumber of city-dwellers each year islikely to be around 13m, roughly thepopulation of Tokyo. In 2030 China’scities will be home to close to 1 billionpeople, or about 70% of the popula-tion, compared with 54% today. Bysome estimates the urban populationwill peak around 2040, still just shy of

the 1 billion mark but close enough. As James McGregor, an Americanbusinessman, put it in his book, “One Billion Customers”, published in2005, the notion of a billion Chinese spenders has come to symbolise“the dream of staggering profits for those who get here first, the hype andhope that has mesmerised foreign merchants and traders for centuries”.

After taking over as party chief in 2012, Xi Jinping (now also presi-dent) launched his expected decade in power with a catchphrase: “TheChinese dream”. Itwasa strikingbreakfrom the party’s tradition ofideol-ogy-laden slogans. Now endlessly invoked in official speeches and thesubject of numerous books and songs, the phrase is clearly intended toappeal to upwardly mobile urban residents striving for the comforts oftheir rich-world counterparts.

Only 15 years ago such a middle class barely existed in China. In2011, when the country reached 50% urbanisation, it had become obvi-ous that the party’s fate rested with the stability ofcities and the content-

Building the dream

By 2030 Chinese cities will be home to about 1 billion people.Getting urban China to work properly is vital to the country’seconomic and political future, says James Miles

The Economist April 19th 2014 1

CHINA

SPECIAL REPOR T

A list of sources is atEconomist.com/specialreports

An audio interview with the author is atEconomist.com/audiovideo/specialreports

CONTENTS

3 Spreading the wealthA billion shoppers

5 The rural-urban divideEnding apartheid

6 Local governmentEmerging from the shadows

8 Urban sprawlPeople, not paving

9 The city as pasticheDreaming spire

10 GreeneryLet us breathe

11 PoliticsThe urban voice

13 A new societyPushing the boundaries

1

ACKNOWLEDGMENT S

Apart from those individuals namedin the report, the author would liketo thank the following who alsoprovided generous help and sharedvaluable insights: Cai Fang, GregClark, Dai Bin, Du Yang, Feng Jin,Feng Yongfeng, Anna Greenspan,Guo Xiaoming, Guo Zhengmo, J.Vernon Henderson, Huang Rui, LianSi, Liu Li, Liu Zhi, Lu Ming, XinMeng, Gordon Orr, Paul Procee, KlausRohland, Victor Shih, Song Shinan,Tang Jun, Jeff Wasserstrom, YaoYang, Ye Xiaoyu, Yu Xiaogang, ZhaoJian, Zhu Liangmin and Zhu Ning.The views expressed in this report donot necessarily reflect theirs.

HongKong

Chengdu

Zhongshan

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LIAONINGI N N E R

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SHANXI

HEBEI

TIANJIN

BEIJING

Macau

10-13 13-16

7-104-71-4

GDP per person, 2012, $’000

NATIONAL AVERAGE = 6.1

Population, 2012, %

NATIONAL AVERAGE

*250+ metres tall†Guangdong data exclude

Hong Kong and Macau‡Registered as rural, living elsewhere

Urban, with rural status‡

Registered urban

Rural,living where

registered

17.5

35.646.9

HongKong

Chengdu

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MacauMacauMacauMacau

10-13 13-16

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GDP per person, 2012, $’000

NATIONAL AVERAGE = 6.1

Population, 2012, %

NATIONAL AVERAGE

*250+ metres tall†Guangdong data exclude

Hong Kong and Macau‡Registered as rural, living elsewhere

Urban, with rural status‡

Registered urban

Rural,living where

registered

17.5

35.646.9

Number of skyscapers*

Sources: Council on Tall Buildings and Urban Habitat; Economist Intelligence Unit; Haver Analytics; The Economist estimates

Nominal GDP at current exchange rates, $trn

F O R E C A S T

China United States

0

10

20

30

40

50

95 05 15 251990 2000 10 20 30

China

United States India

Japan

Total, 2014Completed2000-14

72

43

Pre-2000

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edness of their middle-class residents. The largely rural countrythat Deng Xiaoping (himself of peasant stock) set out to “reformand open up” in the late 1970s had become overwhelmingly ur-ban in its economic and political focus. Thanks mainly to a tideofmigration, China’surban population had grown bymore than500m since Deng launched his reforms: the equivalent of all thepeople in the United States plus three Britains.

Li Keqiang, who took over as prime minister in 2013, seesfurther urbanisation as critical to China’s economic success. Hehas called it a “gigantic engine” for growth. Mr Li and other offi-cials are fond of quoting Joseph Stiglitz, a Nobel prize-winningAmerican economist, who said that technological innovation inAmerica and urbanisation in China would be “two keys” tomankind’s development in the 21st century.

A new grand plan for China’s cities, overseen by the primeminister and published last month, admits to a number of pro-blems, such as worsening pollution, urban sprawl and conges-tion as well as growingsocial tensions. It also points out that Chi-na’s urbanisation lags behind that of other countries at similarlevels of development (typically around 60%), and that there re-mains “quite a lot of room” for further urban growth.

Getting cities right will help China to keep growing fast foryears to come. Getting them wrong would be disastrous, bring-ing worsening inequality (which the World Bank says has ap-proached “Latin American levels”, although Chinese officials in-sist it has recently been improving), the spread of slums, theacceleration ofglobal climate change (citiesconsume three-quar-ters of China’s energy, which comes mainly from coal) and in-creasing social unrest.

After more than a decade of spectacular growth in China,much of it in double digits, doubts are setting in both at homeand abroad about the sustainability of the “Chinese model”.Growth is slowing. Lavish spending by local governments haspiled up huge debts. Increasing numbers of middle-class Chi-

nese are looking for boltholes abroad for themselves, their fam-ilies and their assets. Scandals involving senior officials have re-vealed corruption on a gargantuan scale. Censors generallysucceed in preventing anti-party messages from spreading wide-ly, but microbloggers with thousands of followers still boldly re-lay damning critiques.

MrXi describes the country’sproblemsand hisapproach tosolving them in colourful terms. Reforms, he says, have entered a“deep-water area”. China must “venture along dangerous pathsto breakthrough barriers to reform”. In tacklingcorruption it willneed the resolve of a man who must “cut off his own snake-bit-ten hand to save his life”. At a plenum of the Central Committeein November the party declared that market forces must play a“decisive role”, the strongest support it has ever expressed for themarket. This seems all the more stirring after years of vacillationunder Mr Xi’s predecessor, Hu Jintao, who retreated from reformin the face ofpowerful resistance byvested interests, above all lo-cal governments, huge state-owned enterprises and, ironically,the new middle class, which would rather not share the fruits ofgrowth with rural migrants.

Why cities matter

All the most important reforms that Mr Xi needs to tackleinvolve the movement to China’s cities. He mustgive farmers thesame property rights as urban residents so they can sell theirhomes (which is currently all but impossible) and leave the landwith cash in hand. He must sort out the mess of local-govern-ment finances, which depend heavily on grabbing land fromfarmers and selling it to developers. He must loosen the grip ofstate-owned enterprises on the commanding heights of theeconomy and make them hand over more of their profits to thegovernment. He must move faster to clean up the urban environ-ment, especially its noxious air, and prevent the growth of Chi-na’s cities from exacerbating climate change. And he must start

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giving urban residents a say in how their cities are run. This list is both daunting and urgent. The recent growth of

China’s cities has created two new social forces whose concernsMr Xi cannot afford to ignore. One is a vast migrant population(including the urban-born children of recent migrants from thecountryside) that now makes up more than one-third of the ur-ban total of 730m. It is far harder for a member of this group togain official recognition as a city-dweller in his own country,with all the welfare benefits and access to public services thatstatus confers, than to gain citizenship in America or Europe ifhewere to migrate there. The harsh treatment of China’s internalmigrants is creating huge social divisions that could erupt in seri-ous unrest.

The other new force is the urban middle class, now thoughtto be roughly the same size as the migrant population, whichnumbers around 260m. It has been kept reasonably content bythe rapid growth of the past few years, but that may not last. Chi-na’s middle classes, like those elsewhere, worry about property:how to protect it from the whims ofurban planners and party of-ficials, what is happening to prices, and what to do if the bubblebursts. Increasingly unaffordable house prices, or conversely asteep drop, might prompt different ends ofthe middle-class spec-trum to protest. So too might the party’s many sins and blunders:a food-safety scandal, perhaps, linked to official corruption.

Like his predecessors, Mr Xi is nipping signs ofunrest in thebud. Dissidentswho have done little more than brieflyraise prot-estbanners in tinygroupsare being thrown into jail. But there arealso some positive signs. He has taken charge of a new party or-gan, a small group of officials with a wide range of portfolios,who are working to improve policy co-ordination and overcomebureaucratic resistance to change. It even has a taskforce dedicat-ed to building “democracy and the legal system”, although thatmay not get very far. Mr Xi has also launched a fierce campaignagainst high-level corruption which, though unlikely to offer alasting cure to the endemic problem of graft, could scare officialsinto compliance with his reform plans.

A dwindling labour supply

As economic growth slows and the pool of surplus labourin the countryside shrinks, the speed ofurbanisation will dimin-ish. For the past few years about 9m people have been movinginto cities every year. The number will fall to 7m in the secondhalfof this decade and 5m in the 2020s, according to Jin Sanlin ofthe Development Research Centre, a government think-tank. By2017, he writes, that supply of surplus labour in the countrysidewill have all but disappeared.

Chinese officials note that the speed ofurbanisation in Chi-na has been far faster than in Western countries during their in-dustrial transformations. It took China only 30 years to climbfrom 20% urbanisation to today’s 54%. In Britain the equivalentjourney took100 years and in America 60. However, in more re-cent times population growth in urban China has been slowerthan in countries such asSouth Korea and Indonesia during theirperiod of rapid economic development, mainly because of Chi-na’s discriminatory policies against migrants and its state mo-nopoly on rural-land sales.

By any measure, the country’s urbanisation has been im-pressive. Shanghai is about to finish a 121-storey American-designed skyscraper that will be the word’s second-tallest build-ing (after Dubai’s Burj Khalifa). Whole new urban districts,underground railways, modern airports and intercity express-ways have been built on a scale and at a pace most countrieswould be proud of. But China has failed to reap the full benefitsofcity growth. This is becoming a pressing problem in the face ofdiminishing returns from pouring ever more concrete. 7

DENG HONG’S AMBITION, according to a Chinese news-paper, was to build a city inside a single building; a “tem-

perature-controlled paradise”. Last September his dream edifice,the New Century Global Centre, formally opened in the south-western city of Chengdu (see picture, next page). China’s officialmedia call it the world’s largest building. Its centrepiece is a shop-ping mall of such arresting dimensions that many visitors pauseon arrival to take souvenir photographs. It boasts a 300-metre in-door beach, a skating rinkand an IMAX cinema. The Chinese of-ten say that theirs is a country of too many people and too littleland. The cavernous Global Centre building begs to differ.

Mr Deng did not attend the launch ceremony. He was incustody, suspected ofbeing involved in a corruption scandal thathas also ensnared a former mayor ofChengdu, who in turn maybe linked to an even biggercase linked to a formermember ofthePolitburo Standing Committee, Zhou

�ongkang. Mr Deng’s trou-

bles are an uncomfortable reminder of the perils of hubris. Mas-sive buildings help to boost local officials’ egos and brand theircities. According to the Council on Tall Buildingsand Urban Hab-itat, an American industry association, China has about 200 sky-scrapers over 250 metres tall, four times as many as America.Close to Mr Deng’s building is an office complex reminiscent ofBeijing’s “bird’s nest” stadium that cost1.2 billion yuan ($175m) tobuild. It was supposed to become the city government’s head-quarters, but after a public outcry over its extravagance its lead-ers decided to move to more modest buildings nearby.

The Global Centre, though, is also a monument to an in-creasingly essential ingredient of China’s economic develop-ment: consumption on a scale that helps to lessen the country’sdependence on infrastructure investment as an engine ofgrowth. China’s leaders want citizens to save less and spendmore. Mr Deng’s brainchild is a proud declaration by a local gov-ernment far inland that it wants a consumer culture like that inmegacities such as Beijing, Shanghai, Guangzhou and Shenzhen.The capital’s most iconic new structures are stadiums, officebuildings and a colossal egg-shaped centre for the performingarts. Chengdu’s is a jaw-dropping shopping experience.

Spreading the wealth

A billion shoppers

Chinese consumers are spending plenty, but theycould do even better

1Cultivating a consumer culture

Source: CEIC

China’s GDP growth, contribution by source, percentage points

5

0

5

10

15

+

–

2000 01 02 03 04 05 06 07 08 09 10 11 12 13

Consumption Investment Net exports Total (% increaseon a year earlier)

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2 Chengdu, the capital ofSichuan province, is a “second-tier”city, a loosely defined category that includes most provincialcapitals; yet it is rapidly gaining the “first-tier” status ofShanghai,1,600km (1,000 miles) to the east. That suits China’s leaders, whoare trying to boost consumption in regions that have fared lesswell in China’s almost uninterrupted boom of the past 35 years.Thanks to massive government investment since the turn of the21st century, the gap between the wealthy east and the far less de-veloped west of China has narrowed. According to the Econo-mist Intelligence Unit, a sisterorganisation ofthis newspaper, av-erage GDP per person in China’s western provinces in the late1990s had dropped to about one-third the figure in the nine east-ern coastal provinces; but by 2012 it had recovered to more thanhalf, the highest level since China launched itseconomic reformsin the late 1970s.

The Global Centre seems to be reckoning on a fair numberof wealthy spenders in Chengdu: it provides 15,000 parkingspaces. It is also readily accessible by the city’s first metro line,which opened in 2010 (there are now two lines, and plans for anunderground network of more than 350km by 2020, close to thelength of London’s). But Chengdu’s new middle classes muchprefer to drive. The city has more than 3m private cars, secondonly to the number in Beijing. And at weekends the centre al-ready seems to be packing visitors in.

Consuming passions, continued

Like the rest of the country, though, Chengdu is beginningto slow down. The city estimates that its GDP last year grew byabout10%, two percentage points less than it was aiming for andthe lowest rate since 1999. Nationally the picture is much thesame. This year’s overall growth target is for 7.5%, the same as lastyear’s and a far cry from the double-digit advances ofmost of thepast decade. But that does not mean household spending willfalter. Andy Rothman of Matthews Asia, an investment firm,calls China “hands down the best consumption story on theplanet”. Retail sales last year went up by 11.5% in real terms, after12.1% in 2012 and 11.6% in 2011. China’s household spending overthe past few years was holding up well, he argues. It was just thatinvestment grew even faster.

A “rebalancing” may be under way. Except for a dip lastyear, the share of GDP growth contributed by households andthe government has been rising (see chart 1 on the previouspage). In 2011 and 2012 it exceeded that contributed by invest-

ment for the first time since the middle of the past decade. Lastyear China overtookJapan to become the world’s second-largestconsumer economy.

However, there isa lotmore thatChina’s leaderscould do toachieve the goal set by the prime minister in March: that thecountry should “fully tap the enormous consumption potentialof more than a billion people”. The Global Centre was not builtfor the mass market, as attested by a display inviting shoppers toinvest in luxury resort property in Thailand. A large group ofpeople living in China’s cities is, in effect, “shut out of the urbanconsumer economy”, says Tom Miller, author of “China’s UrbanBillion”: the one-third of urban residents who have migratedfrom the countryside. They make up about 40% of urban labourand the majorityofChina’sworkforce in manufacturingand ser-vices, but they spend very little.

As Mr Miller notes, this is changing, thanks to a shift in Chi-na’s demography. In 2012 China’s working-age population (thosebetween 15 and 59; most Chinese retire young) began to shrink.In response to shortages of young, unskilled labour, local gov-ernments have been raising minimum wages. This has beengood for inland cities like Chengdu, which have benefited fromproduction shifting westward in search of lower labour costs. Ithas also been great formigrants: theiraverage wages doubled be-tween 2005 and 2011, to about 2,050 yuan ($322) a month, andlast year rose by nearly 14%. But a lot remains to be done to turnthese migrants into big spenders.

A good start would be to change their official householdregistration, or hukou, to the city, entitling them to the welfarebenefits and access to public services enjoyed by other city-dwellers and thus releasing some of their spending power. Mi-grantshave an unusuallyhigh savings rate, farhigher than thatofeither urbanites or rural dwellers, perhaps to compensate for theabsence of welfare benefits. According to Chi Fulin of the ChinaInstitute forReform and Development, rural migrantson averagespend 2.7 times as much when they move to urban areas as theydid athome. But theystill need to save to make up for their lackofentitlement to housing and other benefits. If they also changetheir hukou, their expenditure more than triples. �

et for most migrants changing hukou is next to impossible.They continue to be called mingong (peasant workers) no matterhow long they have been living in the city, and so do their chil-dren, even ifurban-born and raised. For reasons ofequity as wellas economic advantage, hukou reform has become urgent. 7

The GlobalCentre is amonumentto con-sumption—an in-creasinglyessentialingredientof China’seconomicdevelop-ment

1

MIGRANTS ENCOUNTER BARRIERS ofspeech, habits andmanners the world over, but in China these are heavily re-

inforced by the system of hukou, or household registration,which permits routine discrimination against migrants by bu-reaucratsaswell asbyurbanites (a term applied in this special re-port to city-dwellers who have no rural connections themselves,and nor do their parents). In a survey conducted by the ChineseAcademy of Social Sciences, nearly one-third of respondents inShanghai said they would not like to live next door to a migrant,against only one-tenth who said they would rather not live nextto a poor person. In Changchun, a less outward-looking city inthe north-east, nearly two-thirds said they did not want to livenext to a migrant. Chinese urbanites seem as anxious as Euro-peans about migration from poor to rich places, even though inChina the migrants are fellow citizens.

In one crucial respect, however, they fall short of that sta-tus. A migrant may have been living in a city for many years, buthis hukou will still identify him as rural. The document acts as aninternal passport. China’s first constitution in 1954 said that citi-zens enjoyed “freedom ofresidence and freedom to change theirresidence”. Four years later Mao Zedong introduced the hukousystem in order to prevent a flood of migrants pouring into thecities. It was eased only in the 1980s when China needed cheaplabour for its factories. But the pernicious legacy of hukou-in-duced apartheid persists today.

If China’s level of urbanisation were calculated on the ba-sis of hukou, rather than residency, it would be a mere 36%, notfar ahead of India’s (31%). Very few of those who have migratedto the cities over the past three decades have obtained urban hu-kou. This matters a lot because a person’s hukou, rather than hisplace of residence, determines the level of welfare benefits he isentitled to. The city-born children of migrants suffer the samediscrimination, often being denied access to urban state-runschools and having to clear higher hurdles to get into university.

The hukou divide is sharpest ofall in China’s “first-tier” me-gacities, which are among the biggest magnets for migrants. In

some, including Beijing, theyare not allowed to buy cars orhouses unless they meet whatfor most would be impossiblyexacting conditions. Thus, asChina’s middle class has ex-panded rapidly, a similarlylarge group of urban “second-class citizens” (as even the offi-cial media have sometimescalled the migrants) has grownin parallel. Not that it matters ina one-party autocracy, but mi-grants and their urban-raisedoffspring are not even allowedto vote in the cities.

In the decade to 2010 themigrant population living in cit-ies grew by more than 80%, a colossal influx that pushed up thetotal number of urban residents by some 200m. China has beenremarkably successful in controlling the spread of urban slums:over the same period the proportion of city-dwellers living inslums fell by one-quarter to below 30%, according to a UN study.And many of these slum-dwellings are relatively smart com-pared with their counterparts in other developing countries,thanks to tough controls on building shanty towns.

Risking an explosion

Even so, migrants often live in grim conditions. Out of sightare pockets of wretchedness similar to slums in developingcountries such as India. One such is the village of Dongxiaokounorth of Beijing, just beyond the edge of the city’s urban core. Avillage only in name, it is essentially a centre for processingwaste. Thousands ofmigrants, most of them from impoverishedvillages in a single prefecture of the central province of Henan,prepare sackfuls of tin cans, piles of iron scrap and mountains ofplastic bottles for bulksale to recycling plants.

It is a scene of Dickensian poverty, with migrants packedinto tiny brick shacks off muddy, rubbish-strewn streets. Theirchildren go to ramshackle private schools that charge around4,500 yuan ($725) a year, several weeks’ income for many mi-grants. Formostofthem there are no placesat state schools. Ifmi-grants fall seriously ill, they have little choice but to go back totheir villages; their government-subsidised rural medical insur-ance is often not valid in a different province (or even, until lastyear, in a different part of Henan). The only migrants who haveurban health insurance are those with formal job contracts, butnot even one in five enjoys that privilege.

The party appears to be waking up to the disruptive poten-tial of an urban underclass. Early in 2013 Li Keqiang, the primeminister, began calling for a “human-centred new style ofurban-isation”. In November lastyear the partydecided to speed up thepace of hukou reform. Officials have been calling for “equalrights” for all urban residents. A new word has entered the partylexicon: shiminhua, which means turninga migrant into an urba-nite with all the perksofa city hukou-holder. The declared aim ofurbanisation now is not just to move people into cities, but moreimportantly to make urbanites of them.

That will be both costly and hugely contentious. Mr Li’splan for a new style of urbanisation was published in Marchafter many months of bickering among officials. It glossed overthe crucial question ofhow to pay for it all, which hints at strongresistance by local governments that do not want to foot the bill,and by urbanites who fear their privileged access to educationand health care will be stripped away. Li Tie, a government re-

The rural-urban divide

Ending apartheid

For China’s reforms to work, its citizens have to bemade more equal

2Still plenty of upsideChina’s urban population

Sources: UN Population Division; Haver Analytics *Resident for six months or longer

As % of totalNumber, bn

0

10

20

30

40

50

60

1997 2000 05 10 13

Actual*

Hukou

0

0.2

0.4

0.6

0.8

1.0

1950 75 2000 25 50

F O R E C A S T

3No longer so cheap

Source: Haver Analytics

China’s migrant workers

0

50

100

150

200

250

300

0

0.5

1.0

1.5

2.0

2.5

3.0

2008 09 10 11 12 13

Numberm

Average incomeyuan ’000 per month

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reform could work. Since 2007 migrantsinto the city (who make up more than halfits population) have been able to apply forcity hukou on the basis ofpoints scored foreducational qualifications, ownership ofproperty, payments ofsocial-security con-tributions and volunteer work (such asgiving blood). Yet since the scheme waslaunched, only around 30,000 out of a to-tal migrant population of 1.6m havegained local hukou this way. Migrants canalso use their points to apply for just someof the benefits associated with urban hu-kou, which has enabled them to secureplaces at state-run schools for about25,000 of their children. But that is out ofatotal of 200,000 migrant children attend-ing school in Zhongshan (and many morewho are studying in their parents’ villagesof origin). All the same, in January Zhong-shan won a prestigious award in Beijingfor its points system.

In June 2012 three days of large-scalerioting erupted in Shaxi, a satellite town

of Zhongshan, fed by rumours that security agents had maltreat-ed the son ofa migrant worker who was involved in a fight. PengRonghui of Zhongshan’s department in charge of migrant man-agement admits that the city’s migrant population has created “aproblem of social control”. She says they “lacka sense ofbelong-ing and their morale and self-discipline is relatively poor”.

Cities like Zhongshan worry that lifting hukou restrictionswould require massive extra spending on public services such aseducation, health care and housing. Yet most local governmentswould simply not be up to the task. 7

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searcher, in a book last year wrote that online support for hukou-related reforms was “not running high”. Part of the problem, hesaid, was that policymakers, journalists and online commenta-tors were themselves urban hukou-holders and as such formed a“rigid interest group”, posing a “severe” challenge to reforms.

At the same time many holders of rural hukou, despite thediscrimination they suffer, are suspicious of moves to give themurban status. They fear that it might lose them the right (con-ferred by rural hukou) to a small patch offarmland and a residen-tial plot in their village of registration. Mr Li’s urbanisation planfailed to provide reassurance.

In July lastyear the agriculture ministryconducted a surveyof nearly 7,000 rural hukou-holders, mostly male and living inthe countryside, which found that only about a quarter regardedgetting an urban hukou as important. Even among those whoseentire families were living in urban areas, the share was only justover half. The main reason for not wanting urban hukou, the sur-vey found, was fear of losing entitlements to land. Last October asenior official on the National Health and Family Planning Com-mission said that as many as 70% of rural migrants wanted tostay in the cities but had no wish to give up their rural hukou.That chimes with the views of the waste-recycling migrants ofDongxiaokou village. One middle-aged man standing by theroadside says he would far rather have his tiny patch of land inbackward Henan province than a promise of a pension inwealthy Beijing.

Losing the plot

Given the discrimination they face, it seems odd that mi-grants themselves resist reform, but they will continue to do sountil the government allows them to sell their land and severtheir ties with the countryside for good. Mr Li has promised this,but local governments, used to seizing land at will, are loth togive up that privilege.

The new urbanisation plan calls for 100m migrants to begiven urban hukou by 2020, but there will still be conditions: at aminimum, applicants will need a stable job and a legal place ofresidence. That would rule out most migrants, who often live inunauthorised lodgings and workwithout contracts.

Officials sometimes hold up the city of Zhongshan in thesouthern province of Guangdong as an example of how hukou

Going to a better place

RESIDENTS OF CHAOBEI NEW����know what it is liketo be “upstairsed”—the word for turfing farmers off their

land, pushing them out of their homes and making them moveinto newly built clusters ofblocks offlats without lifts. It is forcedurbanisation, to which local governments have taken with relishin their rush to acquire precious land. Chaobei NewCity is the re-incarnation of six flattened villages: a desolate, prison-like, rub-bish-strewn ghetto. On a concrete wall alongone side, billboardsspell out the risks of protesting. For example, depositing funeralwreaths, ashes from cremations or corpses at government peti-tioning offices could be treated as crimes.

Chaobei New City’s very name conveys the mindset ofthose who ordered it built: officials who hoped that by destroy-ing the villages and building 56 blocks of flats in their place theycould create a semblance of urbanity. The residents would stillbe classified as peasants for welfare purposes, but the statisticswould count them as urban. To local officials, who take enor-mous pride in urbanisation rates, such numbers matter. Xianghecounty, to which the “new city” belongs, is in Hebei province,

Local government

Emerging from theshadowsSeizing land and running up debts is no way to financelocal government

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about 45km (30 miles) east of Beijing. Like almost every other lo-cal government in China, Xianghe’s has an urbanisation target:60% by 2017, up from around 50% today and ahead of the nation-al target of 60% by 2020. Since the global financial crisis in 2008,governments have been hardening such objectives as a way ofstimulating growth, and have been borrowing heavily to meetthem. The result has been a rapidly growing pile of debt that hasspooked global investors.

Seizing land is an easy way of acquiring cash or collateralfor borrowing, and since the 1990s this technique has become afavourite of local governments. Some have used the pretext ofbuilding what they call “new-style rural communities”, such asChaobei New City. Such schemes have uprooted millions offarmers around the country. In one prefecture alone, Chinesemedia quoted a local leader in 2010 as saying he planned to flat-ten villages with a total population of 1m within three to fiveyears. The coastal province of Shandong has moved more than12.5m villagers into nearly 5,200 “new-style rural communities”since 2009, according to the local government. It calls this “ur-banisation on the spot”.

Mod cons from hell

Central-governmentofficialshave expressed alarm and (in-effectually) reminded local governments that resettlement mustbe voluntary. Beijing newspapers have run several exposés ofthe horrors of being “upstairsed”, comparing the phenomenonto Britain’s enclosure movement of the 18th and 19th centurieswhen landlords stripped farmers of their right to use commonland. Last September Xinmin Evening News, a Shanghai newspa-per, described cracks in Chaobei New City’s buildings, floodedbasements, sagging ceilings and a leaky sewage system.

Angry victims of forced appropriations are legion. Accord-ing to state-controlled media, seizures of rural land by local gov-ernments are the cause of60% ofmass petitionings in China andof nearly 4m disputes every year. Lynette Ong of the Universityof Toronto says almost all compulsory relocations involve gangsor secret societies, often hired by local governments to pushfarmers out. Occasionally evictions trigger large-scale protests,but strong-arm tactics usually deter farmers from putting upmuch resistance. The thuggery, often brought to light by socialmedia, is a political embarrassment to the central government.But what is behind these land grabs is of far greater concern: a fi-nancial system that has gone wrong and a system of local gover-nance that has become dangerously dysfunctional.

Chaobei New City is symptomatic of both. The local gov-ernment sold ten hectares (25 acres) of the land seized from thevillagers to a local developer, Xiu Lan RealEstate Group. The company is using it tobuild Rivedroite Town, a cluster of lavishFrench-style houses separated by a wideroad from the farmers’ new flats. It is un-clear how much Xiu Lan is investing orwhere the money is coming from, but thecompany’s website suggests it has a closerelationship with large state-owned trustcompanies. Such institutions are a wide-spread and openly acknowledged sourceof financing for property projects. Theirlending is less strictly regulated than thatof formal banks. A cosy relationship be-tween both types of institution has en-abled what Stephen Green of StandardChartered calls “shadowy activity” by for-mal banks, which use their informal coun-terparts to channel lending into property

and other risky projects. Some trust companies and banks raise funds by selling

fixed-term investments known as wealth-management pro-ducts (WMPs). These promise better returns than bank deposits,interest rates on which are capped at extremely low or even neg-ative real levels—a legacyofMaoistbanking thathasproved hardto shake off. But this short-term finance often supports long-termprojects, creating a dangerous maturity mismatch. And some in-stitutions may be repaying maturing products with fresh fundsraised from new ones. In 2012 Xiao Gang, then chairman of thestate-owned Bank of China and now in charge of regulating thecountry’s stockmarkets, described this as “to some extent…aPonzi scheme”.

In theory banks are not liable when WMPs go wrong. Inpractice, when defaults have occasionally loomed, ways are al-mostalwaysfound ofkeepinginvestors from losingmuch, ifany-thing (including in the biggest potential default so far, ofa $490mtrust product issued through China’s biggest bank, ICBC, thatwas due to mature in January; a stalled mining venture related tothe project suddenly got official permission to go ahead).

Local governments, which in China cannot borrow fromformal banks or sell municipal bonds without central-govern-ment backing, are among the biggest borrowers through suchshadow channels. They mostly use the money to finance publicworks (including knocking down villages in the hope that result-ing “urbanisation” might stimulate growth). In response to theglobal financial crisis of 2008 the central government loosenedcontrols on bank lending. The volume of new loans doubled in2009. Much ofthe money found its way indirectly into the handsof local governments which used it in a spending binge in an ef-fort to maintain growth. As a result, debts soared. Along withWMPs, this has become the biggest worry to bearish observersofChina’s economy.

There are good reasons for concern about local-govern-ment borrowing, and about the banks and trust firms, but finan-cial meltdown looks unlikely. An audit made public in Decem-ber showed that in mid-2013 local governments directly owed10.9 trillion yuan ($1.8 trillion), an increase of more than 60% on2010. This is by no means crippling. Taken together with otherdebts for which local governments are, or might be, liable, suchas those of local state-owned enterprises, it amounts to one-thirdof GDP. The central government would never allow a local gov-ernment to default, so these debts are for the centre to worryabout. GK Dragonomics, a research firm, says total governmentdebt may be 70-80% of GDP, still well below the levels of manyrich countries with lower growth.

Localgovernmentsreceive halfthe nation’sfiscalrevenue butareresponsiblefor 80% ofspending

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Risks are certainly grow-ing. Standard & Poor’s, a credit-rating agency, points out thatprojects which once looked via-ble may cease being so asgrowth slows. It outlines a pos-sible scenario: a WMP fails, in-vestors stop buying new pro-ducts and non-bank credit driesup. Investment slows and prop-erty prices drop. Non-perform-ing loans rise, putting pressureon banks. Credit slows further,and growth with it. In the eventof such a crisis, however, thecentral government could takebad loans off the banks’ booksand order them to resume lend-

ing. It could also ramp up its own spending. It would not solvethe problem, but could avert an immediate crisis.

To reduce such risks, China must introduce a range of re-forms. The most pressing of these is to lift controls on bank-de-posit interest, which would reduce depositors’ incentives to shiftmoney into riskier WMPs. There are signs that it is graduallymoving that way, but for all the recent talk of the importance ofmarkets, progress remains slow. Zhou Xiaochuan, the governorof China’s central bank, in March held out the possibility of fullliberalisation of interest rates in a year or two. Banks themselvesare not keen because higher rates would cut their profit margins.

Reform isalso slowin two areas thatare key to local govern-ments’ woes: the way in which their spending obligations, suchas on public works, are funded; and the ownership of rural land.Changes in both are vital if China’s new “human-centred” ur-banisation is to succeed and officials’ rapacious instinct to grabland is to be tamed.

Local governments’ lack of money to cover their spendingneeds is a problem of the Communist Party’s own making. In1994, worried about the central government’s rapidly decliningshare ofthe country’s total revenue, the party reorganised the taxsystem to boost the centre’s takings. But it failed to reduce the bur-den on local governments, which have remained responsible forsuch coffer-draining activities as providing education and healthcare. The central government transfers funds to local ones (viaprovincial governments) to cover basic costs, but this is often farfrom enough. Local governments receive half of the nation’s fis-cal revenue but are responsible for 80% ofspending.

To make up shortfalls, local officials turn to rural land.Whereas the property rights of urbanites were strengthenedfrom the late 1990s, thanks to the privatisation of urban housingand legislation to protect it from government interference, theproperty rights of villagers have remained vulnerable to abuse.Landesa Rural Development Institute, an American NGO, foundthat in 1,791villages it surveyed, the number of land seizures hadnearly tripled between 2007 and 2011. Land-related income,which in 2001 made up one-sixth of local-government revenue,had soared to three-quarters a decade later.

Counting the cost

Giving urban benefits to migrants will cost a lot of money.Unless a new way of funding local governments can be found,they are likely to solve the problem in the time-honoured man-ner: by seizing yet more land. The central government mighthelp, but could it afford to? Estimates of the likely expense varywidely. A report this year by the Chinese Academy of Social Sci-ences put the cost of providing a migrant worker with full urban

benefits at 130,000 yuan. A government study in 2010 came upwith a figure of80,000 yuan. But Kam Wing Chan of the Univer-sity of Washington writes that even at about 100,000 yuan permigrant, the total would still be manageable.

Mr Chan calculates that it would add up to around 23 tril-lion yuan, or more than 44% of China’s GDP in 2012. That wouldbe more than any economy could cope with, but it would nothappen all at once. If it were done gradually, bringing in 20m mi-grants annually, it would mean spending a far more manageable3.8% of2012 GDP a year. But in fact those 100,000 yuan ofhealth-care and other expenses would be stretched out over a lifetime,so the actual annual cost of converting 20m people to full urba-nite status would be 0.1% of 2013 GDP, Mr Chan reckons: aboutone-fifth ofwhat China spent on the 2008 Olympic games.

That would leave the task of giving full property rights tofarmers. Doing so would make it more difficult for local govern-ments to seize land, which in turn would make it harder for themto find ready collateral for piling up huge debts. Most important-ly, itwould empowerfarmers, and perhapseven end the tyrannyof village officials who use their control over land to fill theirpockets. Last November the party pledged to allow rural land(though notarable land) to enter the marketon the same termsasany other property. This will take time: even deciding who ownswhat in the countryside will be tricky. And local governmentsare not keen to dispense with a ready source ofcash.

But the party has to press ahead. If financial and social sta-bility are not sufficiently powerful incentives, there is another toconsider: the rampant urban sprawl encouraged by local govern-ments’ ability to seize rural land at will. Such unrestrained ex-pansion may work in parts of America where there is plenty ofempty land (albeit at a cost to the environment and often to thequality of life). In China, where urbanisation has forced around40m farmers off their land over the past three decades, usuallywith little or no compensation, it will not. 7

4Unsustainable

Sources: Haver Analytics;National Audit Office

China’s local-government debt:

0

3

6

9

12

15

18

0

6

12

18

24

30

36

2007 10 13

yuan trn as % of GDP

TO GRASPTHE size ofChina’s largest cities, and the pace ofexpansion of even the remotest of them, consider the

south-western city of Kunming. Looking at a map, it would beeasy to dismiss it as a backwater, tucked in a mountainous sub-tropical corner of China that borders on some of South-EastAsia’s poorest coun�����ietnam, Laos and Myanmar �unnan,

the province of which Kunming is the capital, is one of China’smost backward, with a nominal GDP per person roughly that ofAlbania. By the standards of China’s provincial capitals Kun-ming’s urban population is merely middling, yet at 3.8m itroughlyequals thatofAmerica’s second-largest city, LosAngeles.By the end of this decade it is likely to have risen by 50%.

There will, however, be no mushrooming of shanty townsalong the shore of Dian Lake��unnan’s largest and the one-timepride of Kunming (ill-regulated urban growth has since turned itso toxic that its water is deemed unfit even for industrial use). Of-ficials have what they think is a far better plan: building a newsuburb called Chenggong. Thiswill account formostofa project-

Urban sprawl

People, not paving

China’s largest cities can mostly cope with populationgrowth. The spread of concrete is a bigger problem

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OXFORD STREET IS a quiet cobbled lane, withTudor-style shop fronts and lights supposed tolook like gas lamps. At one end it opens outonto a small square. A bronze statue of Win-ston Churchill stands in front of the open-aircolonnade of Thames Bar, looking towards anelderly man sitting on a bench on the otherside of the plaza. He is petting his two pugs,one dressed in a yellow jacket and the other inblue. It is so much cheaper here than in cen-tral Shanghai, he says—and, traffic permit-ting, it is only an hour away by car.

President Xi Jinping may be having aChinese dream, but the country’s city plannersare often inspired by foreign examples.Thames Town has Victorian- and Georgian-style housing for 10,000 people, red phonebooths and, perhaps oddest of all, a church(pictured) with a spire closely modelled on amid-19th century Anglican one in Bristol. Acolumnist in Global Times, an English-lan-guage newspaper in Beijing, accused Shang-hai officials of being “unconcerned aboutcultural affinity or national ethos”, succumb-ing to “the appeal of the foreign”.

Thames Town is often scoffed at as oneof China’s most peculiar “ghost towns”. Foryears most of its houses remained empty. Its

town centre attracted far more people insearch of a novel background for weddingphotographs than for suburban homes. (Cash-ing in on this, many of Thames Town’s shopsoffer photographic services and weddingregalia for hire.) But in the environs of a citylike Shanghai, one of China’s most prosper-ous, building the town was probably a goodlong-term bet. Soaring property prices in thecity centre are forcing buyers ever farther out.

Shanghai has a record of proving doom-sayers wrong. Thames Town and other Euro-pean-themed suburbs like it are but tinyspecks compared with the vast endeavour thatthe city undertook in the 1990s, clearing asemi-industrial, semi-rural area of tens ofthousands of people to make way for a newfinancial centre on the east side of theHuangpu river. In 2000 this newspaper calledthe new Pudong zone a “ghost town of abusiness district”. It is now a skyscraperedicon of Chinese economic power.

New shops are opening in Thames Town,and residents say occupancy is picking up.Three years ago even the church acquired acongregration—though that was just trans-planted from a Catholic church nearby, demol-ished to make way for yet more urban growth.

Dreaming spire

A Shanghai suburb that is forever England

ed 40% expansion of the built-up area of the city of Kunming.Kunming’s urban-planning exhibition promises “a beautiful en-vironment” for Chenggong.

Workon the new addition is already well underway. Thick-ets of residential tower blocks and office buildings are sprouting.Chenggong was connected to Kunming’s new metro networklast year. City-government offices and local universities have al-ready moved there. By 2016 it will have a $525m bullet-train sta-tion with one of its 30 tracks connecting to Shanghai, 2,000km(1,200 miles) to the east. By the end of this decade the populationof Chenggong is expected to reach nearly 1m, three times its cur-rent level. Not so longago Chenggongwas derided as a ghost cityin the making. Few are now so scornful.

Kunming’s orgy of urban expansion sits oddly with a long-established Chinese policy of seeking to limit the populationgrowth of large cities. An urban-planning law adopted in 1989calls for strict control. Even after a decade of huge expansion inwhich the urban population of Beijing (including its satellitetowns) grew by about 7m to nearly 17m, the party still clings tothe hope that it can keep such expansion in check. When it un-veiled plans for wide-ranging economic reforms last November,it called again for “strict control over the population size of extra-large cities”. For all the party’s recent emphasis on the role ofmarket forces, they are still not allowed to determine people’smovements.

Kunming could now argue that it is not “extra-large”. Thecentral government’s new urbanisation plan released in Marchsuggests that the term applies only to cities with urban popula-

tions over 5m. On this definition only about 15 cities qualify, andthey do not include Kunming. Previously, however, “extra-large”had meant any city with more than 1m people, of which Chinahas more than 130. (America, by contrast, has a mere nine in thiscategory.) A little redefinition goes a long way.

The central government wants cities to grow, but prefers thesmaller ones to grow faster than the rest. Its new urbanisationplan calls for hukou barriers to be scrapped altogether in citieswith fewer than 500,000 urban residents. Those bigger than500,000 have been asked to remove or relax hukou rules, but inan “orderly” or “reasonable” manner, meaning not all at once. Inextra-large cities tough hukou restrictions are to remain in place.�et in the past decade the populations of small cities have been

shrinking, largely because bigger ones have proved to be a muchmore powerful draw for migrants.

Plenty of room for more

The government’s worries about population size are over-blown. Chinese cities are by no means unusually crowded.Three Chinese scholars, Ming Lu and Zhao Chen of Shanghai’sFudan University and Zheng Xu of the University of Connecti-cut, argue in a recentpaper thatapart from citieswith 10m peopleor more, the average big city in China has “a lot of room forgrowth”. Even greater Beijing, which city officials think is burst-ing at the seams, is far less densely populated than greater Tokyo.

Rather than try to control population size, the central gov-ernment would do better to have a go at curbing the spatial ex-pansion of cities. Local bureaucrats have a predilection for vast

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areas of concrete. Plazas, broad boulevards and colossal airportsand railway stations have become their badges ofhonour. In thecentral city of Zhengzhou, what local officials called the largestbullet-train station in Asia opened in 2012: a $2.4 billion edificewith a plaza in front which together cover around 240 hectares(about 340 football pitches). The station is half-deserted.

Such extravagant use of land and money will only increaseif the government continues to encourage cities to expand theirpopulations. Built-up areas across the country have recentlybeen growing by an average of 8% a year whereas their popula-tions have been rising by only 5%. In western China the gap is farwider, with urban areas growing three times faster than theirpopulations, according to Fudan University’s Mr Lu. Kunmingprovides evidence of extravagant habits. Luo Chun, a professorat�unnan University, reckons his institution’s new campus inChenggongdistrict is five times the size of its old one in the centreofKunming. The original campus remains in use.

Central officials are concerned about this, but for the wrongreasons. They fear that urban sprawl could make it more difficultfor China to maintain near-self-sufficiency in staple foods. Thecountry is already hovering close to what officials describe as a“red line” of 120m hectares available for planting such crops.Even so, grain production has been rising. Thanks to fewer peo-ple in the countryside, farming is becoming more efficient.

A better reason to worry about sprawl is that it is makingChina’s cities less “harmonious and liveable”, to use a phrase invogue among the country’s city planners. Old neighbourhoodsare being demolished, their inhabitants scattered into far-flunggated communities, commuting times are lengthening, car-de-pendence is growing and the spatial divide between rich andpoor is widening. All this contributes to what officials call thecountry’s growing “urban disease”. 7

THE WORD “EC�������first took off with a book writtenin 1987 by Richard Register, a green thinker based in Califor-

nia. Now what may become the world’s first city with the wordin its name is beginning to take shape in the unlikely setting of asmog-shrouded expanse of salty mud on the northern Chinesecoast. Around a lake that not so long ago was a sewage farm, en-ergy-efficient apartment blocks are going up. Electric buses plythe still largely empty streets. Public litterbins are equipped withsolar lighting so that residents can find them more easily at night.China’s urban growth is warming up the planet, and the elabo-rately named Sino-Singapore Tianjin Eco-City is being touted asa cool solution.

Few other countries could dream of building a large cityfrom scratch, let alone an eco one, but China has the advantageof an autocratic approach to urban planning (and to governancein general). It can decree that a piece of land will become a greencity, commandeer it and sell it cheaply to developers. That ishowthe eco-project began in 2007 when Singapore proposed a co-op-erative green-city venture. China’s leaders agreed, having recent-ly awoken to the environmental horrors wrought by breakneck

urban expansion. Later thatyear the party formallydeclared thatits goal was to build an “ecological civilisation”. The 30 square ki-lometres of inhospitable terrain near the northern port city ofTianjin became a test bed.

China has tried a couple of eco-city projects before andfailed. About 60km (40 miles) farther along the coast to the eastofTianjin, in Caofeidian, workbegan in 2009 on an eco-city aim-ing for 500,000 residents by 2020��et most of the site remains awilderness, too remote to attract developers. In Shanghai, plansa decade ago for a similar-sized eco-city on an alluvial island be-came entangled in local corruption and never got offthe ground.But Tianjin’s, with strong backing from central and local govern-ments, is making progress.

To give it a flying start, officials designated it as China’s firstindustrial park devoted to the animation industry. The $690mstate-funded zone opened in 2011 and has attracted hundreds ofbusinesses. To lure in more residents, the government buil

���ic-

torian-style school in brown brick with lavish facilities, includ-inga room full ofstuffed animals to help children learn aboutna-ture (“all real, except the tiger and the panda,” says a proudteacher). A 350-bed hospital, supposedly one of the best in Chi-na, is due to be completed next year, at a cost of$110m.

At a control centre a dozen officials watch a giant screen dis-

Greenery

Let us breathe

Pollution in cities is becoming a political issue

5The price of progress

Source: EDGAR

Carbon-dioxide emissions, tonnes bn

0

2

4

6

8

10

1990 92 94 96 98 2000 02 04 06 08 10 12

China

United States

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2 playing readings from heating and water systems, as well asfeeds from closed-circuit cameras at traffic intersections. “If anemergency happens, we can respond,” says an official surveyingthe images of lifeless streets. Officials are not deterred by the“ghost city” label. The city opened two years ago and now has10,000 residents. By 2030 it aims to have 350,000. Work is due tobegin this year on subway lines that will make it easier for localsto get to Tianjin, currently about an hour’s drive away, and near-by industrial zones.

The government has a powerful incentive to support theproject. Within China, public resentment of its deteriorating en-vironment, particularly the noxious haze over its cities, is grow-ing, and abroad the country is beingcriticised for its contributionto global warming. In 2006 China became the world’s biggestemitter of carbon from energy, overtaking America; it is nowspewing out nearly double America’s level (see chart 5, previouspage). The spread of Chinese smog across the region is worryingneighbours such as South Korea and Japan.

Ho Tong�en, the Singaporean CEO of the eco-city’s devel-opment company (and a director of Mr Register’s Californianconsultancy, Ecocity Builders), says he believes many of the eco-city’s methods will eventually become “a key part of urbanisa-tion in China”. A decade ago, he recalls, Chinese officials he metat conferences would boast about their cities’ GDP growth. Nowthey brag about how green their cities are.

A work in progress

This sounds like a bit ofa stretch. China’s urban landscapesappear to be the antithesis of green: smog, foul-smelling streamsand canals, roads jammed with exhaust-belching cars, shoddybuildings erected with little heed to building codes. But growingpublic discontent with the urban environment is beginning tochange at least the rhetoric ofofficials, and in some cities theirac-tions as well. In recent years about a third of China’s 600-plusmunicipalities have announced plans to turn themselves intoeco-cities. The central government has imposed stricter controlson emissions of carbon and smog-forming pollutants. In Marchthe prime minister, Li Keqiang, declared “war” on pollution.Smog, he said, was nature’s “red-light warning against the model

of inefficient and blind devel-opment”. It was a remarkableadmission of urbanisationgone wrong.

Since there is no agreeddefinition of an eco-city, localgovernments interpret the termto suit themselves. They oftenuse it as an excuse for prettifica-tion, or worse, for seizing yetmore land from farmers and us-ing it to build luxury housing,with golf courses next to them(because grass is “green”). Eventhe eco-city in Tianjin, adrought-prone area, has a golfcourse, supposedly irrigatedwith recycled water. Mr Regis-ter himself is not altogetherbowled over by the project. In2012 he wrote that its layout, with the wide streets and longblocks typical of modern Chinese cities, looked “every bit as ifcreated to encourage driving”. Its plan for 20% of its energy tocome from renewable sources does not sound much bolder thanthe nationwide target of15% by 2020, against 9% now.

And forall its claims to greenery, the eco-city lacks a vital in-gredient: a thriving civil society that is free not only to protestabout the environment but to put pressure on the government tolive up to itspromises. The party talksgreen and sometimes evenacts tough, but all the while it has been machinating to preventthe growth ofan environmental movement. It does not want res-idents to set their own agenda for the way cities are run. 7

6Many people, many cars

Source: China SignPost

Private passenger carsSelected cities, 2012, m

0 1 2 3 4

Beijing

Houston

Chengdu

Tianjin

New York

Guangzhou

Shanghai

Berlin

Chongqing

Xiamen

Publicresentmentof China’sdeterior-ating en-vironment,particularlythe noxioushaze overits cities, isgrowing

CAO TIAN IS a property dealer who dreamed of changinghis city. As a poet and writer chosen by the government of

Henan in central China as one of the province’s ten cultural per-sonalitiesofthe year in 2006, he clearlydid not lackimagination.When in May 2011 the mayor of Zhengzhou, Henan’s capital, an-nounced he was stepping down, Mr Cao said that he wouldstand forelection to replace him. Not only would he take no sala-ry, he would put up 100m yuan ($15.4m) as a guarantee of goodbehaviour while in office.

It was a good try, but he knew it was doomed. Chinese lawsays that independent candidates can stand for the post ofmayor in cities. In theory all they need is the support of20 mem-bers of a city’s legislature, which in Zhengzhou is less than 4% ofthe total. But legislators are hand-picked by the CommunistParty. Mostofthem are officialsand partymembers. Mr Cao sayshe spoke to halfa dozen he knew and got nowhere; they were all“very obedient” to the party. “�ou can eat with them, you cangamble with them, but you cannot talk [about standing for elec-tion],” he says. The authorities made that clear enough. Theylaunched a tax investigation into his company, a common tactic

Politics

The urban voice

China’s new middle classes, quiescent so far, maysoon become more demanding

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for intimidating dissenters. Mr Cao left town for a few months.To no one’s surprise, the acting mayor, Ma Yi, was elected byZhengzhou’s legislators to fill the post.

MrCao’s challenge was an act ofrare bravado. In China, en-trepreneurs like him are usually reluctant to cross the line intopolitical activism because business deals often depend on goodties with the party. At the time of Mr Cao’s mayoral bid China’sleaders were more than usually jittery following a series of pro-democracy uprisings in the Arab world. Internet activists wereanonymously calling for China to stage its own “jasmine revolu-tion”, the name given to Tunisia’s revolt in late 2010. Online cen-sors were busy trying to expunge any reference to the word “jas-mine”; police were rounding up dissidents and even tellingflorists not to sell the flower.

It was a bad moment to provoke the authorities, especiallyfor someone like Mr Cao, who had form. After the pro-democra-cy unrest of1989 he had been sentenced to 12 years in prison for“counter-revolutionary” behaviour (he had organised a protestagainst the bloody crackdown in Beijing). Thanks, he believes, toforeign pressure on China he served less than three years, but re-calls jail as “hell”. His punishment, he says, included having towatch condemned prisoners being shot.

The rapid growth of a middle class in China increases therisk, as the party sees it, that more people like Mr Cao will beginto find their political voice. Unusually for a man who makes hisliving from property, Mr Cao says that as mayor he would have

tried to control soaring prices. He thinks a property tax wouldhelp, but would be opposed by the many corrupt officials whoown expensive properties.

Many argue that China’s new middle class is largely in fa-vour of the political status quo; many of its more affluent mem-bersare officials, formerofficialsorclosely in league with official-dom. But the economic make-up ofmiddle-class China is rapidlychanging. McKinsey, a consultancy, reckons that in 2012 only14%ofurban households belonged to what it calls the “uppermiddleclass” (with an annual household income of 106,000-229,000yuan, or$16,000-34,000, in 2010 real terms) and 54% to the “massmiddle class” (with an income of 60,000-106,000 yuan). By2022, it estimates, the upper segment will have expanded tomore than half and the mass part will have shrunk to 22% (seechart 7). With this rise ofwhat McKinsey calls “sophisticated andseasoned shoppers” will come demands for a bigger say in howtheir cities are run. “Unmet, these demands could raise socialtensions,” as the World Bank and China’s Development Re-search Centre observed in a joint report in 2012. Asecond joint re-port by the two organisations, “Urban China”, published inMarch, called for comprehensive reforms.

Very few are challenging the party politically, but growingnumbers are getting involved in campaigns to protect theirneighbourhoods from government projects that might affecttheirhealth and comfort or the value of theirproperty. Such prot-ests occasionally take on a political hue, providing cover for awealth of grievances about the opacity of city management, thehigh-handedness ofofficials and pervasive corruption.

The biggest middle-class protests have been mostly aboutfactories producing paraxylene, a chemical used in the produc-tion of polyester. Since 2007 large-scale protests have erupted infive cities over plans to build such facilities, the main concern be-ing that the factories might release poisonous fumes. The fears

are probably overblown, but reflect wide-spread and profound distrust in official-dom. The demonstrators’ ability to gatherin public places in their tens of thousands,with the help ofmobile text messages andmicroblogs, has highlighted the weaknessof China’s censorship system. PX, as thechemical isoften called, hasbecome a cov-er for poking at the party. Those of dissi-dent bent gleefully count off the cities thathave witnessed PX protests: Xiamen inJune 2007, Dalian in August 2011, Ningboin October 2012, Kunming in May 2013 andMaoming earlier this month.

Zhou Min, a restaurant reviewer inKunming, is one of them. She says sheused not to care about politics. But in re-sponse to the protests in her city last Maythe police detained dozens ofactivists. Of-ficials even briefly attempted to stop thesale of medical face-masks for fear they

might be donned by demonstrators. “Now I’ve changed mymind,” says Ms Zhou, who was herself interrogated by police, ac-cused—falsely, she says—of being an organiser. “If only we hadthe vote, then we could veto projects like these,” she says, visiblyangry. During the recent anti-PX protests in the southern city ofMaomingpolice used teargasand batonsagainstdemonstrators.

Most of the time urban China displays few obvious signs ofdiscontent. Since the late 1990s the party has managed a periodof rapid middle-class growth, along with huge urban expansionthanks to an upsurge of migration, with remarkably little unrestin the cities. Protests have been farmore common in the country-side, mainly against the government’s seizure of land from farm-ers. The mostlypeaceful PX protestshave been a rare exception towidespread middle-class quiescence.

Looking on the dark side

But the mood in China’s cities could be changing. Middle-class urban residents look ahead with greater anxiety: about theslowingofChina’s growth; about the harmful effectsofair pollu-tion and contaminated food; about rising house prices that aremaking middle-class dreams of property ownership ever lessachievable; about the burden of looking after an ageing popula-tion that is growing ever faster; and (especially among recentgraduates) about the difficulty of finding a job. Richer Chineseworry about whether they can protect the wealth they have ac-cumulated in the past few years. Could a marginalised urban un-derclass turn against them? Could an anti-corruption campaignsuch as President Xi Jinping’s current drive land them in jail?Growing numbers are voting with their feet. When in 2012 and2013 researchers at Shanghai University surveyed nearly 2,000people in urban areas of Shanghai and five provincial capitalsacross China, nearly one in five said they would emigrate if they

7A thicker upper crust

Source: McKinsey *Forecast

China’s urban households by income bracket, m

2012

2022*

0 50 100 150 200 250 300 350 400

Poor Mass middle class Upper middle class Affluent

The biggest middle-class protests have been mostlyabout factories producing paraxylene (PX), which somefear might release poisonous fumes

The Economist April 19th 2014 13

CHINA

2

1

FEWOUTSIDE CHINAhave heard ofSansha, the country’sbiggest city. Its administrative area is 150 times larger than

Beijing’s, or roughly the size of Kazakhstan. Yet Sansha’s popula-tion is no bigger than that ofa village and consists mostly offish-ermen. Its government is on an island too small even to fit in anairport; the military airstrip stretches out into the South ChinaSea, where most of the city’s watery territory lies. It is a city onlyin name, setup to assertChina’s claims in a vast swathe ofsea en-compassingsome ofthe world’sbusiest sea lanes. IfShanghai in-spires awe, Sansha causes alarm.

The city was created (in bureaucrats’ minds, though proba-bly not the fishermen’s) seven years ago and upgraded in 2012 to“prefectural level”. Its tiny land area comprises about 200 isletsclustered in three groups that are bitterly contested. Two of thegroups, the Spratlys (Nansha in Chinese) and the Paracels

(Xisha), are claimed by Vietnam. The third, known as Zhongshain Chinese, includes Scarborough Shoal, which is claimed by thePhilippines but has in effect been controlled by China since 2012.Some of the Paracels were controlled by Sou

���ietnam until

1974, when it was expelled after a battle with China. It was onone of these, Woody Island (pictured), that the party installedSansha’s legislature, which duly elected a man likely to be thecountry’s least busy mayor.

An empty threat

Sansha is one of China’s most bizarre, and unsettling, at-tempts at city-building; an undertaking motivated by a desire tostake out territoryand scratch the itch ofnationalism. Some 2.6mof the South China Sea’s total area of 3.5m sqare kilometres aresaid to be under the city’s jurisdiction, giving access to a wealthof resources: an estimated 5m tonnes of harvestable fish andhuge reserves ofoil and natural gas. Parts of the vast area are alsoclaimed by five other countries. The creation of Sansha was in-tended to rebuffthem.

China’s spectacular urban-led growth in recent years hasbeen changing the way the country behaves abroad in impor-tant ways. First, it has been fuelling a voracious demand for im-ports ofcommodities, from oil to iron ore. More than half ofChi-na’s supplies of both are now bought from abroad. As a result,much more of China’s diplomatic attention is being focused oncultivatingrelationswith commodity-exportingcountries, most-ly in the Middle East, Africa and Latin America (several of themno friends of the West).

Second, China is now much more worried about the secu-rityofits supplies. It feelsuneasyabout leavingAmerica to patrolvital shipping lanes such as those through the South China Sea.And third, China’s growth has given it much greater confidence,increased by the West’s economic malaise in recent years. Thecountry is asserting itself more visibly, especially in nearby seasthat have long been under America’s sway.

Mr Xi himself also happens to be a far more confidentleader than his predecessor. He has not been afraid to take stepsthat raise tensions with American allies, notably Japan and thePhilippines. This suggests to some in Asia that China has hadenough ofAmerica as the region’sdominantpowerand isbegin-ning to do something about it. Certainly the risk has increasedthat a small incident might escalate into a bigger conflict. For

A new society

Pushing theboundaries

The rapid move to the cities has handed Xi Jinping adaunting challenge

had the chance. Those in the wealthiest cities were most eager toleave. In Shanghai one-third said they would go if they could,and in Guangzhou nearly 40%. Hurun Report, a company thatmonitors China’s rich people, said in January that 64% of nearly400 Chinese with personal wealth of at least 10m yuan ($1.6m)that it surveyed were emigrating or planning to do so, comparedwith 60% a year earlier.

With his talkofa “Chinese dream”, Mr Xi has prompted de-bate among his countrymen about how far they feel they arefrom a dream state. A survey last year by the Chinese Academyof Social Sciences (CASS) on attitudes to the “Chinese dream”found that only just over half of the 7,300 respondents believedthey lived in a “good society”. Equality, democracy and beingrich and powerful were rated most highly as the hallmarks ofsuch a society. The party itselfbandies around such terms, but LiChunling of CASS says that what China’s middle class under-stands by democracy is closer to Western ideas.

China’s leaders clearly worry about this, as evidenced bythe cottage industry that has sprung up to produce translationsand analyses ofAlexis de Tocqueville’s workon the French revo-lution, “The Old Regime and the Revolution”, published in 1856.This was prompted by a recommendation of the book in 2012 byWang Qishan, who is now a member of the Politburo’s StandingCommittee. Exactly what drew Mr Wang to the book is notknown, butChinese media have focused on one ofitsmain argu-ments: that revolution is more likely to occur when an authori-tarian society begins to reform than during its period of maxi-mum repression. China Daily, a government-controlled news-paper, notes that copies of the book have been prominentlydisplayed in the Beijing bookshop of the Communist Party’smain training school for senior officials. New versions carryblurbs such as “Recommended by Wang Qishan”. One is sub-titled: “Why Does Prosperity Hasten the Advent ofRevolution?”

The possibility of revolution still appears remote, but therisk of larger-scale social unrest in urban areas is growing. To di-vert attention from trouble at home, China’s leaders may betempted to flex their muscles abroad. 7

SPECIAL REPOR T

ty apparatus that now spendsmore than the army, most of iton policing cities.

Mr Xi and his team havecorrectly identified the need fora better approach to urbanisa-tion: one that will help ease so-cial tensions which have builtup over the past decade, bringlocal governments into line andmake big SOEs contribute muchmore to welfare and share moreof their markets with the privatesector. They have been makingencouraging noises about theneed to reform the iniquitoushukou system, strengthen farm-ers’ property rights and makecities more “liveable”.

But Mr Xi needs to gomuch further. The party stillcannot bring itself to talk of a“middle class” (too unsocialist-sounding), much less acknowl-edge that its aspirations aremore than just material ones. InJanuary a famous actor, HuangBo, introduced a new songabout the “Chinese dream” onstate television’s most popularshow of the year, the Spring Fes-tival gala. It was called “MyNeeds Are Modest”. The middle-class fantasy it described (with-out naming it as such) was an advance on the usual calls for self-lessdevotion to the nation, but itwasstill politically sterile: “I canearn money, and still have time to go to Paris, New York and theAlps. I stroll through the shopping mall and go skiing in themountains. Days like these are so carefree.”

Optimists still wonder whether Mr Xi might eventually al-low a little more political experimentation. At the party’s 19thcongress in 2017, five of the Politburo Standing Committee’s sev-en members are due to step down, leaving only Mr Xi and Mr Li,

the prime minister. Of the replacementsexpected to join them, at least two arethought to have liberal(-ish) leanings. Butfew observers are holding their breath.

In 1997 China’s leaders set a goal ofmaking China “moderately well off” by2020, just in time for the party’s 100th-birthday celebrations the following year.Judgment on whether this has beenachieved will be passed while Mr Xi isstill in office. As long as China’s GDP

keeps on growing at about 7% a year (as isplausible, possibly even making China’seconomy bigger than America’s by then),it will not be hard for him to tick off theeconomic targets. But the party has saidthat “moderately well off” also means amore democratic China, and one that re-spects human rights. Ignoring those as-pects risks antagonising the constituencythat has become most vital to sustainingthe party’s power: the urban middle class.Mr Xi would do so at his peril. 7

14 The Economist April 19th 2014

SPECIAL REPOR TCHINA

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2 now, however, Mr Xi does not appear to be spoiling for a fight.China cosies up to America’s rivals, most notably Russia, but italso sees its economic interests, and hence its strategic ones, asclosely linked with America’s.

It is developments inside China, in real cities, that shouldworry the outside world more. Urbanisation, especially over thepast decade, has handed Mr Xi a daunting legacy. When his pre-decessor, Hu Jintao, came to power in 2002, urban China was farless of a challenge. The country was recovering well from theAsian financial crisis of1997-98. Its north-east had been wrackedby large-scale protests by workers laid off during the massivedownsizing of the state sector from the 1990s, but Mr Hu kept theregion largely quiet by directing dollops ofcash to it. The internetwas still the preserve ofa small urban minority.

A harder place to run

The picture today is very different. Economic growth isslowing. As this special report has explained, rapid urbanisationhas spawned two huge new social forces: a middle class and anunderclass. Both are much bigger than they were a decade ago;both are suspicious of, and sometimes hostile towards, each oth-er; and both often distrust the Communist Party.

Just in the past five years social media such as Sina Weiboand WeChat have connected hundreds ofmillions ofChinese ina conversation held in near-real time, much of it less than flatter-ing about the party. More than 60% of urban residents now usethe internet. The shoots of civil society are beginning to grow;small, scattered groups are working on everything from helpingHIV/AIDS sufferers to cleaningup the environment. The securityapparatus keeps close tabs on them but rightly worries that ur-ban China may be changing too fast for it to keep up.

Double-digit growth for much of this century has not onlymade manyordinaryChinese betteroffbutbestowed breathtak-ing riches on the families of some members of the political elite(including some ofMr Xi’s extended family). This has proved im-possible to cover up. Mr Xi’s anti-corruption efforts risk causingstrife among political clans eager to protect their privileges. Hemay be China’s strongest leader since Deng Xiaoping, but urban-isation has fuelled the growth of other, often countervailing,powers too: large state-owned enterprises that have gorged onproperty and commodities, local governments bloated by reck-less borrowing to build ever bigger cities, and an internal securi-

Huang Bo’s modest needs