Special Report - China bets future on inland cities

GUSHI, China Tue Aug 3, 2010 1:22pm BST

1 of 11. Construction workers walk past a farmer leading his goat herd past newly constructed residential buildings in the town of Gushi in Henan Province, March 28, 2010.

Credit: Reuters/David Gray

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GUSHI, China (Reuters) - China has put big money down on a momentous gamble: rush to build new cities in its poor interior, then wait for people to come and help drive the economy to a new stage of growth.

Here in this corner of the Chinese hinterland, the government has widened farm lanes into highways, turned wheat fields into an industrial park, spent a fortune on government offices, and set up a school for thousands of students in what was a dusty town a few years before.

Old, cracked gravestones have been bulldozed to make way for a housing estate featuring 60 apartment buildings, a winding creek and tennis courts, the latest such development in Gushi.

But the roads are mostly deserted apart from the odd goat herd trundling along them. The industrial park features a handful of workshops and no big factories. Vast new housing estates fan out from the original town centre, most of them uninhabited. Skeletons of half-built villas, stained from neglect, are splayed across fields.

About 1,000 km (600 miles) south of Beijing in Henan province, Gushi is a microcosm of this latest face of China's urbanisation, featuring ambitious officials, angry farmers, countryside capitalists, a new batch of consumers -- and empty buildings.

Over the past three decades, rural migrants flocked to big, prosperous cities along the coast. Now, in its revamped model of urbanisation, the government is trying to bring cities to its farmers, a project that could absorb more residents than the entire population of the United States in the coming decades.

Farmers such as Xiang Wenjiang are not at all sure they like what they see rising up from their muddy fields.

"This is my land, but now it's all been sold," said the wiry, sun-beaten Xiang, eying a row of apartments under construction advancing towards his hut. "I won't leave until they give us the right money for moving, not just a few coins."

The apartment complex encroaching on Xiang's land is part of a vast urban development juggernaut that has become a new engine of economic growth as global demand sputters. It offers enormous opportunities for the companies that dig up the raw materials needed to build the new cities; that make the cars for the new roads and the washing machines for the new homes.

But such high hopes come with ample scope for disappointment. If the unprecedented population shift from villages to cities is mismanaged, it could squander resources, radicalize peasants and damage China's prospects.

RUSHING TO CATCH UP

With 1.7 million people, Gushi is the most populous county in Henan and one of the biggest in the nation. Locals boast it sends out more workers to cities than any other county in China.

This annual flow from farms to factories is at the heart of how China's economy, a welterweight in global terms in 1980, will become the world's biggest in a little more than a decade.

"You are going to see smaller cities being created out of townships, townships created from villages," said Jing Ulrich, chairman of China equities at JP Morgan.

"I do believe in the long-term thesis that playing this urbanisation trend, playing consumption growth on the back of urbanisation and income growth, this is probably one of the brighter spots in the global economy."

Like much of central China, Gushi has been in a rush to catch up with the wealthier coastal regions.

"Failing to develop is the worst kind of corruption," Guo Yongchang said before he fell from power as Communist Party chief of Gushi in 2008. "If you'd prefer not to develop, and you don't get close to businesspeople, then it's more evil than corruption a hundred times over."

That sort of cockiness led to his downfall. He and another former head of Gushi county have been accused of graft. Buildings for a new university that went bankrupt stand abandoned. The town's main factory also went bankrupt.

Villagers denouncing corruption and resisting the loss of farms have turned a strip of land where their fields meet the expanding township into a protest battleground.

"The local officials force the farmers to sell the land for very little. Here there are no controls," said Zhao Jiuzhou, a 24-year-old in jeans, watching local farmers dig the foundations of a new apartment block.

"If you foreigners want to develop here in Gushi, it would be like Cinderella being eaten by the big wolf," he added, mismatching his fairy tales. "Here the officials can make a killing from nothing".

Gushi is not alone. Multiply its problems across thousands of towns and small cities across China, and the risks of the country's headlong rush towards urbanisation become evident.

Yet if the pitfalls are clear so is the potential. Between now and 2040, China's urban population will expand by up to 400 million, according to Han Jun, a rural policy expert who advises the government. In other words, cities will absorb about 15 million new residents every year.

"That means growth," Stephen Green, chief China economist at Standard Chartered, told Reuters Insider TV. "And it means better education and health care. It means higher labour productivity and higher wages. People living in urban areas tend to consume more. So this is really the crux of China's transition into a wealthier, more balanced economy, and the faster it happens, the better."

THE NEW CONSUMERS

From the window of Duan Guofei's new apartment, Gushi's ambition to leap from sleepy town to grandiose city begins to look more plausible -- even if it is not happening as fast as they might like in terms of creating jobs.

Duan and his wife, Rang Fei, live in Xiangzhang Garden, a housing development where many apartments have been sold and real estate agents give tours to a stream of prospective buyers.

Their apartment is decorated with soft-focus wedding portraits, and a large flat-screen television sits across from their glass coffee table. It is a far cry from the mud-brick village homes they grew up in. Duan's parents were farmers and his wife's father a village teacher.

The young couple is part of a generational shift in rural China. They have worked in far-off cities, too costly and officially unwelcoming to offer them a permanent home, and yet they feel too attached to urban life to return to their home villages.

"Before you used to build a house in your home village," Duan said. "Now everyone is buying in the county seat. All my parent's relatives have moved here, because life is so much easier."

Gushi, which lies in a remote corner of Henan province bordering on rural Anhui province, is an intense example of how migration has transformed the Chinese countryside.

About 500,000 of its 1.7 million population work elsewhere as migrants in factories, shops or offices or as merchants, said Cai Liming, deputy head of the county propaganda department. The county government is betting it can draw these migrants back to buy homes, invest their savings and create jobs. But many find only disappointment when they migrate back.

"There's some work here but the wages are lower," said Wu Anxia, who moved here from Shanghai to ensure her son went to a decent school, because government restrictions barred children of migrants from good ones in Shanghai. "I was a warehouse manager in Shanghai," Wu said. "But back here in Gushi, there's nothing. So I became a cleaner."

In the first phase of urbanisation, from the start of the country's post-Mao reform era in 1978 to the present, rural citizens began migrating to booming coastal towns from Tianjin in the north to Shenzhen in the south. About 140 million made the trek last year.

Few of these migrants stay on. The hukou system of residency registration deprives them of benefits, such as public education, away from their home villages. Only 19 percent of rural migrants had settled permanently in cities as of 2004, according to the National Bureau of Statistics.

In the new phase of urbanisation, the government's strategy is not to move farmers to big coastal cities, but to draw them to new urban areas in the hinterland. Its clearest expression came in the Communist Party's No. 1 Document in January, a policy blueprint for 2010. In it, China vowed to reform the hukou system by giving rural citizens the right to the same services as urbanites -- but only if they move to small cities within their own province.

By 2025, the country will have 221 cities with populations of a million or more, compared to 35 in Europe, according to a report by McKinsey & Co, the consultancy firm. China had 108 such cities in 2004.

But whereas work awaited migrants who flocked to factories on the coast over the past two decades, the creation of cities and employment by decree in the interior is less of a sure thing.

China tried once before to develop small cities in a hukou reform experiment in the 1990s.

"There was not much success because of the limited employment opportunities and poor public services in small cities," said Tao Ran, an economist at Renmin University in Beijing. The modern furnishings in Duan and Rang's apartment in Xiangzhang Garden cannot gloss over Gushi's shaky prospects for creating lasting jobs. Duan earns about 2,000 yuan (184 pounds) a month decorating homes. But officials fret the property sector, the pillar of the town's economy, will suffer as empty apartments pile up.

OFFICIAL AMBITION

The man who presided over Gushi's transformation now waits out his days in a detention cell. Guo Yongchang was the Communist Party secretary of the county for four years, before his fall in a cloud of corruption charges last year. One of his subordinates, Fu Kongdao, the deputy head of the county in charge of land decisions, committed suicide in early 2009.

Guo's ambitions for the town, and for himself, are visible across Gushi, and so are the costs. They are seen in the 10-storey polished stone building that dominates the new government compound, in the expansive square next to it, and in the unfinished villas marooned on once-fertile farmland.

"If everyone moved into the county seat, they still couldn't fill all these homes," said Zhou Jun, a taxi driver, as she drove past acres of unoccupied and neglected apartments. Zhou says she can tell which apartments are empty by looking for the air conditioner units outside windows. If they are missing, no one is living inside. Her car passes one building block with 72 windows, just two with air conditioners.

In the curt official announcement, the reason given for Guo's dismissal was corruption at a post before he became boss of Gushi. But residents believe his misdeeds continued, and grew enormously, when he was head of the county.

"He got too greedy, took too much. Here, you could take land, sell it cheaply and make millions," said Ren Jun, a small-time investor in the Gushi property market.

Guo came to Gushi in 2004 with bright hopes for himself and for this town. With his credentials as a lawyer and reputation as a hard-driving official, he itched to launch Gushi and himself onto a bigger stage by working hand-in-glove with local capitalists. "Run the government like it's a business. Run a city like it's a commodity," Guo once told Decision Making magazine, a Chinese business publication.

He was not shy about putting that philosophy into practice. When a local businessman opened a luxury bathhouse -- one of many such businesses across China where businessmen and officials go for saunas and massages -- Guo made sure he and other senior county officials turned up for the ribbon-cutting ceremony. "We must treat businesspeople better," said Guo, according to the 2005 magazine interview. "We've got to bathe with them."

Gushi offered developers cheap land, and lots of it, defying repeated efforts by the country's top leaders to slow land grabs for development.

"The central government has told local governments to entirely freeze land (requisitions), so we must speed up land seizures and seize up to 10,000 mu (1,650 acres) of land. Otherwise, what will we have to develop the city?" Guo told officials, according to a report in the Southern Metropolitan Daily, a Chinese newspaper, in June of this year.

Some of that land went to two vast housing projects -- Phoenix New Town and Xinhe New Town. In return, the developers provided the county government with a stream of revenue that helped pay for new office buildings and monuments.

Near the main government building sits the county outpost of China's central bank. Its carved stone walls and a fountain covered in stone frogs look as if they were torn from an aristocratic European manor and plopped on the plains of Henan. An equally ornate museum, celebrating Gushi's small role as a cradle of the communist revolution, stands empty by the square.

In better days, Gushi's transformation from poor backwater to an urbanising model brought Guo and his government kudos and admiring visits from senior officials. Among them was Xu Guangchun, the Communist Party secretary of Henan province, who told Guo the county had set an example for the province to emulate. "Your ideas are golden," Xu told him.

HOOKED ON LAND

Much of this urban charge is being led by officials aiming to literally leave their mark on the landscape, boosting their career prospects and sometimes their personal wealth. China's worry is that the troubled trajectory of Guo Yongchang is being duplicated, in some way or another, in cities and towns across the country.

Local officials have huge powers over land and investment. But in their ambition to transform dusty towns into aspiring cities, they are leaving behind worrisome levels of government debt and a model of sprawling urbanisation that will exact a toll on the economy and society over time.

Partly it is a case of perverse incentives. Local governments in China have become "hooked on land," in the words of Tao Ran, the economist at Renmin University. A reform of the taxation system in 1994 shifted the lion's share of tax revenues to the central government and left provinces, cities and especially towns with bigger burdens. Over time, they saw that land could plug the gap. Seized cheaply from farmers, it is sold for a tidy profit to developers, many of whom count on cheap funding from state-owned banks to bankroll their construction projects.

Chinese finances are in good health, at least in official terms. The government says its total debt is just 20 percent of gross domestic product, compared with about 80 percent in the United States and nearly 200 percent in Japan. But officials acknowledge the picture is grimmer when local government debt loads are added.

Though legally barred from borrowing, provinces and cities have found ways around the restrictions, often through government-backed investment firms. These financing vehicles have borrowed a total of 7.7 trillion yuan ($1.1 trillion) from banks, according to the China Banking Regulatory Commission. That alone would about double the national debt, and some suspect the total is higher. Realising the potential scope of the problem, the regulator warned banks at the start of this year to limit their lending to local governments.

For years, Gushi had been running full tilt in the opposite direction, trying to find ways to catalyse investment and escape restrictions on local debt. Some of the spending that Gushi routed through its financing units may yet prove worthwhile.

In a list of development projects for 2009, the County Construction Investment Co was named as the developer of a water supply plant. It was also listed as the main investor in a hotel and entertainment complex, a questionable need in a town that already had a new hotel and few visitors.

Other examples of wasted land and money litter Gushi's landscape. The abandoned "Heyuan University" campus sits on the edge of town, sinking back into the fields that were taken to build it. A couple of guards mind the crumbling buildings after the investors fled a couple of years ago.

"They've run away and left us with these rotten buildings," said Fu Jinzhi, a wrinkled woman in her 70s living in a village near the campus. "We've been hurt, but what can we do?"

The sheer numbers involved in China's urbanisation are staggering.

To accommodate the onrush of new city dwellers, the country will have to pave 5 billion square metres of road, construct 5 million buildings, including 50,000 skyscrapers, and add up to 170 mass transit systems, the McKinsey report said. All by 2025, it added.

In such haste, mistakes are made.

"This has happened so quickly that the cities have not had an opportunity to grow organically. And there is a real risk that what you are going to be left with is these cities that are very sprawling," said Arthur Kroeber of Dragonomics, an economic consultancy in Beijing.

Little thought is given to energy efficiency or quality of life by officials whose main objective is to build and build some more, he said.

Some Chinese officials have started to muse about the need for slower economic growth, down from the double-digit pace which has been the norm for much of the past decade.

"A slower pace of growth might well be beneficial, because when everything is booming, no one has any incentive to do anything at all carefully," Kroeber said.

BUSINESS ELITE

If Party Secretary Guo was the force behind Gushi's feverish excess, Chen Feng was the man who did the heavy lifting. But while Guo now sits in jail, Chen has catapulted himself into the ranks of Henan's business elite.

Chairman of Xinhe Real Estate, Chen is Gushi's biggest property developer, the man who has built the homes for migrants who have returned with money and middle-class aspirations.

At the centre of Gushi stand three Xinhe developments, modern, sleek, and carefully landscaped. Chen's latest project, Golden Sun, is a 60-building housing estate.

Like most successful real estate barons in China, Chen's government connections run deep. He has been a member of the county parliament and has made Xinhe a virtual handmaiden to official development plans, building 6 sq kms of government offices and public facilities, including schools. Xinhe knows the schools are a big selling point. Each family buying an apartment in Xiangzhang Garden is promised a 20 percent discount on school fees.

Education is one of the yawning gaps between rural and urban China that have made the interior so unappealing -- a place that people aspire to leave.

"It's the pattern across all of the country," said Li Changping, the rural affairs expert. "Officials are concentrating school spending in counties and large towns, so then parents are forced to move to them for the sake of their children."

Like most successful businessmen in China, Chen has been nimble, too. Over the past year, as Gushi tried to change its development strategy after Guo was detained, Chen tried to change Xinhe's focus.

"The company has answered the government's call to build a strong industrialised county, and we have made a strategic shift in the company from a real estate developer into an industrial firm," Xinhe said in a statement in June, marking its investment in a factory for medical infusion bags.

In a sign of its growing stature in official eyes, the company was rechristened this May as Henan Xinhe Construction and Investment Group. The insertion of the province's name came with explicit government approval and will make it easier for the firm to win contracts beyond Gushi.

This potent cocktail of state power, big money and heady urban ambitions can be seen across China, especially in the rural hinterlands.

Henan is one of the poorest major provinces, with just 36 percent of its population living in cities. The province has made rapid expansion of cities a cornerstone of development.

Xinyang, the largest city in southern Henan, has built an 18-storey headquarters for its Communist Party officials overlooking a vast square. City leaders believe the imposing government buildings will attract more investors, the mayor of Xinyang, Guo Ruimin, told Reuters.

The grey expanse of concrete with low shrubs around its edge was not a public square, he said. "It's a botanical garden planted with many flowers."

In Nanyang, a city of over a million residents about two hours drive from Xinyang, multi-storey apartment and office buildings have mushroomed in the new "high-tech" development district.

"These are pretty buildings, but when you're as old as I am, you get dizzy just looking at them," said Xiao Chunqi, gazing at a cluster of four 30-story apartment buildings rising next to her village in Nanyang.

FESTERING DISCONTENT

Chinese law says farmland is collectively owned by villages. In reality, the land is controlled by local governments. They, not the farmers, have the power to decide who can turn fields into real estate. Farmers say land reclamation rules are fixed against them, giving officials and well-connected developers the power to push them off the land without fair compensation.

"The main trouble facing urbanisation is the waste of land, because in China it's just too easy to take farmers' land for a pittance," said Dang Guoying, a rural development expert at the Chinese Academy of Social Sciences who is studying the challenge of urban growth. "So our new cities have these broad roads and big parks, townhouses -- such a waste of land".

These festering discontents could stoke sharper social unrest as urbanisation accelerates, some Chinese researchers have said.

"The path of urbanisation that China has pursued over the past 30 years is no better than the slum development of Latin America and India," wrote Zhou Tianyong, an economic and social researcher at the Central Party School, a leading institute in Beijing. "Moreover, if this path of urbanisation is not adjusted and continues, the outcomes will undoubtedly create much social turmoil," Zhou wrote in a recent overview of urbanisation.

In Gushi, signs of that are not hard to find. Some protesters are demanding political and economic reforms that could challenge the top-down control of the ruling Communist Party. (Click on xxx for related story)

"The land defence movement in Gushi is like a rising wind," said one petition from disgruntled farmers. "Wherever there is oppression, there is also resistance."

Zhou Decai, a veteran protester in Gushi, disclosed plans for a nationwide campaign to link up disgruntled farmers demanding a better deal from the loss of their land. He held out pictures that he said showed battles over land involving dozens, sometimes, hundreds of villagers.

"The reckless development in my area has been slowed, but it's because of farmers' resistance, not because of government orders," Zhou said. The land system needs to be reformed so farmers can decide whether to sell their land -- and reap the benefits themselves, he said.

Yet even the discontented farmers could see no way of stopping a tide of urbanisation from engulfing the countryside. Many of their sons and daughters are moving to factories and apartments, while they stick to the barricades.

"Urbanisation is an inevitable trend. It's not whether you want it or not. There's no choice," said Zhou. "But this urbanisation path is a deformed bubble."

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