How to Assess China’s G20 Presidency

Xijinping G20Noe van Hulst, Ambassador of the Netherlands to the OECD

It was a unique event, for sure: China hosting its first G20 summit in Hangzhou on 4-5 September. The city where Chinese leader Mao Zedong half a century ago regularly met with Third World guerrilla leaders to discuss the battle against US “imperialism”. China has come a long way since then, now leading the G20 push to escape from the “low-growth trap”, stalling globalization and the tide of rising protectionism. With growth persistently too low and trade even lagging this low rate, it is time for more decisive policy action. The overall result in the final communique has been coined The Hangzhou Consensus: linking a vision based on innovative, sustainable economic growth and a well-balanced policy mix with forcefully tackling inequalities and promoting an open global economy.  It is encouraging to see China make the case for a rules-based global system of open trade and investment. Of course, this commitment also should have important consequences for domestic policies in China, as well as in other G20 countries. In this context, it’s a remarkable step that G20 leaders have now agreed to tackle the excess capacity in the steel market.

What was striking in China’s approach to the G20 presidency is the welcome focus on medium- and long-term structural economic policies, in combination with an orientation on policy-action. Trade and investment moved up on the policy agenda, resulting in a G20 Strategy for Global Trade Growth and G20 Guiding Principles for Global Investment Policymaking. Completely new was the emphasis on innovation, digital economy and the New Industrial Revolution, nicely brought together in a G20 Blueprint on Innovative Growth. In addition, there was a drive to deliver an Enhanced Structural Reform Agenda, identifying priority areas for structural reforms and monitoring a new set of quantitative indicators.

As always, implementation will be key, especially on reversing adverse trends in trade, investment, structural reform and Internet control. Although these elements were in my view the most remarkable, of course many other policy areas have also been advanced:  taxation, finance, employment, entrepreneurship, sustainability, energy, green finance and climate change. The announcement by both China and the US of their ratification of the Paris Agreement on Climate Change was widely welcomed as an important step in the transition to a low-carbon economy.

Another remarkable factor about China’s G20 presidency is the continuing important role of the OECD Secretariat. Although China is not a member of OECD, it nevertheless relied substantially on the analytical support and assistance of the OECD Secretariat in a substantial number of key areas, e.g. innovation, trade and investment, structural reform, employment, inequality, green finance and taxation. This can be interpreted as an important sign of appreciation for the quality of the work. We can observe a welcome rapprochement between China and the OECD Secretariat, as well as with the IEA in the energy field. The OECD Secretariat also showed laudable flexibility and adaptability in responding timely to the G20’s call to pull together a new Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which now has 85 countries, including many developing countries, committed to the BEPS roadmap.

Of course, much work is still ahead of us. Apart from the existing work streams, the OECD is tasked with taking forward the work on innovation/digital economy, overcapacity in the steel market (within a new Global Forum led by OECD) and designing tax policies for inclusive growth, among other things. The Netherlands views the supporting role of the OECD Secretariat in the G20 as very useful, as it provides non-G20 OECD countries an important window on and bridge to the G20.

Where is the G20 heading? Created as a mechanism for crisis management, it is now moving in the direction of a “steering committee” of the global economy. China’s emphasis on medium- and long-term structural policies has been helpful in this respect. Some observers express disappointment with the G20’s effectiveness in the face of persistent weak growth and a widely proliferating G20 agenda. This is partly understandable, in particular where it comes to insufficient implementation of agreed G20 commitments, like on trade and structural reform. That’s why structural policy measures following the 2014 G20 commitment to raise global GDP by an additional 2% by 2018 have so far only resulted in 1% according to OECD and IMF calculations. And it has been widely reported that G20 protectionism has been on the rise, contrary to what has been agreed. However, as the G20 expert Tristram Sainsbury (of the Australian Lowy Institute) says: “if the G20 did not exist, we would have to invent it”. With so many global problems requiring coordinated collective policy responses or new global standard-setting, not even big countries can go at it alone. At the same time, it is in the G20’s own interest to find constructive channels of engagement with non-G20 countries, some of whom are at the vanguard of policy innovation, implementing first what later often becomes mainstream in the rest of the world.

After the successful G20 summit in Hangzhou, we already start looking forward to the German presidency of the G20 in 2017. We would expect Germany to further advance the G20 attention for structural policies, including on topics like the digital economy, health care and responsible business conduct in global value chains. Undoubtedly, the OECD Secretariat will again provide the presidency useful analytical support. Wir werden bald sehen!

Useful links

OECD to help put innovation at heart of G20 global growth strategy

OECD and the G20

Corporate respect for human rights in the Chinese context

RBC ForumKatryn Wright, Programme Director, Outreach and Capacity Building, Global Business Initiative on Human Rights (GBI). The views expressed here are the author’s and do not represent the views of the GBI member companies or partner organisations.

With China’s growing importance in the global economy, increasing overseas foreign direct investment, and very real human rights impacts, Chinese and international companies face greater imperatives at home and abroad to address human rights. In China and internationally, there are greater pressures and incentives to address business and human rights – from rights-holders, governments, business partners, investors, consumers and civil society. In this context, Chinese approaches to responsible business will be discussed as part of the agenda of the OECD’s 3rd Global Forum on Responsible Business Conduct in Paris on the 18th and 19th June 2015.

How are Chinese policymakers and business leaders responding to increasing pressures to prevent business-related human rights harm? And what is needed to support business to live up to standards and prevent adverse human rights impacts?

The baseline international normative standards on business and human rights are clearly articulated in the UN Guiding Principles on Business on Human Rights (UNGPs) which clarify the respective duties and responsibilities of State and business actors. The UNGPs outline that the corporate responsibility to respect human rights entails developing a policy commitment, implementing human rights due diligence processes, and providing or cooperating in remedy when the business causes or contributes to human rights abuse. Increasingly the UNGPs are being integrated into other international standards, including the human rights chapter of the OECD Guidelines for Multinational Enterprises. The Chinese government expressed its appreciation and support for the UNGPs at the UN Human Rights Council in 2011.

Recent years have also seen a shift in Chinese government policy in relation to business and human rights and corporate social responsibility. The China Chamber of Commerce of Metals Minerals and Chemicals Importers & Exporters (CCCMC) Guidelines for Social Responsibility in Outbound Mining Investment call for companies to ‘observe the UN Guiding Principles on Business and Human Rights during the entire life-cycle of the mining project’. Other policy developments include: the incorporation of human rights in social responsibility guidelines for the electronics industry that refer to the UNGPs; the mandating of social impact assessments for large footprint projects; and the drafting of a law on public participation in environmental protection and impact assessments. In parallel, a recent draft law relating to foreign NGOs has been the subject of concern, with the European Chamber of Commerce in China expressing particular challenges as it pertains to partnerships between businesses and NGOs.

Within this context, there is therefore growing urgency for companies – including Chinese-headquartered private and state-owned companies, multinational companies operating and investing in China, and companies that have business relationships with Chinese companies around the world – to develop knowledge, tools and experience to implement respect for human rights in practice. This was apparent when in 2013, a coalition of Chinese and international organisations convened 200 predominantly business representatives in Beijing to discuss (for the first time) human rights within the framework of the UNGPs. There are a number of complementary avenues that should be pursued in order to build learning, capacity and practice on the corporate responsibility to respect human rights by Chinese business leaders – with crucial roles for the Chinese business community, along with OECD companies and business partners, civil society and other stakeholders.

One avenue that has clear value is the creation of learning forums on human rights, tailored to Chinese business needs and impacts. This may require safe-space forums for companies that may be competitors to collectively address human rights impacts. Companies should leverage their business relationships to engage joint venture partners, suppliers and customers to increase scale and momentum around commitments to progress. Safe-space forums established so far have enabled learning and exchange between Chinese and OECD companies on human rights issues such as community engagement, community grievance mechanisms, local content issues in Africa, indigenous peoples’ rights and collective bargaining. There is strong interest from business leaders in exploring how to address a range of human rights issues, good practices and lessons learned. Yet there are currently few platforms for companies to turn to for support and expertise.

Another avenue could involve constructive and innovative engagement between diverse stakeholders, including companies and business associations, civil society and international organisations. One example is the collaboration between CCCMC, Global Witness and the OECD to deliver guidelines for overseas Chinese mining companies which incorporate human rights and the UNGPs. Further collaboration between CCCMC and the OECD in developing due diligence guidelines on responsible mineral supply chains will encourage alignment with international standards. Such collaborations are productive ways to utilise expertise, meet standards and expectations and improve business practices. Dialogue and collaboration between multiple stakeholders on human rights is also needed in order to consider how to interpret standards, identify good practice, create transfer of expertise and ideas, and work together to innovate and find creative solutions, particularly in complex situations and across business relations. Civil society can also play important roles by acting as key interlocutors for stakeholder and rights-holder engagement on the ground in locations where Chinese companies are operating overseas.

There is a clear need for more concerted and collaborative efforts by all stakeholders to advance business and human rights in the Chinese context. This will require commitments and collaboration by business and other stakeholders. Some companies are beginning to take action, but increased support is needed from multiple stakeholders to achieve scale. Shared standards and norms need to be aligned to the UNGPs, and good practices need to be identified. Capacity-building, behaviour change and relationship-building are needed now and will require commitment and support from all stakeholders.

Useful links

GBI member companies had combined revenues of over $1.5 trillion in 2014 and have 1.75 million employees operating in diverse industries and in over 190 countries including China. Since 2012 GBI has been working in partnership with Chinese and international organisations to engage business leaders on the corporate responsibility to respect human rights in the Chinese context. For more information visit: http://www.global-business-initiative.org/work/china1

Third Global Foru‌‌m on Responsible Business Conduct, 18-19 June 2015, Paris, OECD

Counting cranes, hidden debts

How many cranes can you see?
How many cranes can you see?

When visitors to Chinese cities are trying to take the pulse of the local economy, they often do a very simple thing – they look out the window and count the cranes.

Crane counting is a trick used by analysts from London to Sydney to get a real-time sense of economic activity: Cranes mean construction, construction means jobs, jobs mean people have money to spend, and so on. In China, however, crane counting can be hard – sometimes there are so many you lose count. That was especially true in the years following the financial crisis, when China launched a massive investment programme, estimated at the time at around $560 billion, to stimulate the economy.

Much of the money went into infrastructure. The result? Even more cranes. Less visible, however, were the sources of some of the money to pay for all that building. That was particularly so when it came to financing from local governments, which often resorted to highly convoluted methods to raise funds. The result today is a legacy of local-government debt that, in some places, is as muddy as a building site.

Why is local government borrowing in China so opaque? There are many reasons. One is that, unlike their counterparts in many other countries, local governments in China can’t raise funds directly by issuing their own bonds. Instead, most have borrowed through specially created arms, usually known as local government financing (or investment) vehicles (LGFVs). These entities are owned or controlled by local governments but operate at arm’s length. As a result, much of local government borrowing has been kept off the balance sheet.

Another reason is that, as well as borrowing from banks and issuing bonds, many of these financing vehicles raised funds through shadow banking. That’s a term used to describe the whole host of financial institutions that provide loans but, unlike traditional banks, don’t rely on deposits to finance their activities. Crucially, and this explains the “shadow” bit, they’re not regulated like normal banks.

Shadow banks are found all over the world, not just in China. Despite their sinister-sounding name, they are not “fearsome, toxic creations,” say Andrew Sheng and Ng Chow Soon of the Fung Global Institute. However, as they also point out, some shadow banks in China, as in other countries, have promoted “opaque, usurious lending and cross guarantees that bundle shadow banking credit risks with the formal banking system, with significant moral hazard issues”.

Chinese investors got a taste of what can go wrong last year, with the default of a “trust product” created on behalf of Jilin Province Trust Company, an LGFV. As the Financial Times (paywall) notes, such products “lie at the heart of China’s shadow banking sector”. They’re complicated beasts, but essentially trust products represent a security backed by a bundle of assets – such as property, loans or shares. They can be attractive for wealthy investors because they can pay a high rate of interest. But they’re also distinctly risky.

So, how big is the local government debt pile? According to the OECD’s recent Economic Survey of China, it was approaching 30% of GDP in mid-2013. However, the numbers are reported irregularly, so the figure by now is probably higher. Estimates are complicated by the opaque nature of local-government borrowing. Indeed, it isn’t arguably the scale of the borrowing that matters so much as the fact that it’s hard to say with certainty where the risks lie.

There’s no question that local government finances – and, indeed, rising debt more widely – are a concern in China. In March, for instance, the central government sent a strong signal by announcing a debt-for-bond swap programme to help ease the repayment pain of local governments, and further action seems imminent. Despite the concern, there also seems to be a feeling that the risks are – as both the OECD and the consultancy McKinsey & Co put it – “manageable”.

However, the OECD survey also urges reforms to transform local government financing, including improving budget management and introducing greater transparency, for example by allowing local governments to raise funds through bond issues. It also advises that debt should be added to the indicators used to evaluate the performance of officials in local governments “to reduce incentives to borrow unwisely”.

Useful links

2015 Economic Survey of China

20 years of China and the OECD working together

中国和OECD迎来20年合作伙伴关系

OECD work on China

网站 【中文】 (The OECD’s Chinese-language site)

China meets the ‘new normal’ (OECD Insights blog)

The OECD Policy Framework on Investment

China meets the ‘new normal’

China Survey 2015Anyone who takes even a passing interest in China can’t have failed to notice a shift in mood of late. Gone are the decades of soaraway growth, when the economy expanded by an annual average of 10%, enabling around half a billion people to lift themselves out of poverty.

Instead, at the annual “two sessions” gatherings of legislators and political advisors this month, Premier Li Keqiang announced a growth target for this year of “around 7%”. That’s slightly down on the past two years’ target of 7.5% (although still pretty stunning for most countries). If that forecast holds true, it would see China recording its smallest expansion in a quarter of a century. But, as Premier Li also said (paywall), “it will by no means be easy for us to reach this target”. That’s the reverse of how things used to be. Throughout much of the long boom, the official growth target, typically 8%, was routinely overshot.

There’s a phrase for this change in pace in China – the “new normal”. These days, it’s rarely off the lips of Chinese leaders, from President Xi Jinping on down. What it essentially means is a shift towards slower but more sustainable growth.

As the OECD’s 2015 Economic Survey of China discusses, reaching this new normal will require some long-term transitions. Notably, the reliance on exports will need to give way to a greater role for domestic consumers. And the state will need to step back to allow more room for innovation and entrepreneurship. That will require reforms that Premier Li has dramatically described as “not nail-clipping” but “like taking a knife to one’s own flesh”.

There are shorter-term challenges, too – most notably, ensuring that the slowdown in growth is kept under control. This is not unlike a driver touching the brakes of a car on an icy road – in other words, not without risks. Part of this immediate challenge is the need to cope with some hangovers from the boom years. There are signs of these in many areas of the economy, but two areas are perhaps of particular interest.

The first is overcapacity in industry – in other words, too many businesses, especially in the state sector, have invested more in plant and production facilities than could be justified by their potential market share or profitability. The impact of this is evident in fierce price competition and industry inefficiencies.

It’s also evident in China’s hazy skies. What China’s own National Development Reform Commission has described as “blind” investment in steel mills and smelters has contributed to the air pollution estimated to be causing about 1.3 million premature deaths a year. The issue is attracting growing public concern. When Under the Dome, a documentary about air pollution by journalist Chai Jing, was released last month, it was reportedly watched by more than 150 million people online.

Unwinding overcapacity in industry will be tricky. Rationalising too quickly risks disrupting existing production and employment. Waiting too long only risks exacerbating current problems. And while the state has signalled that part of the solution will lie in a greater role for the private sector, this, too, is not without risks. “Private firms reportedly pollute more than their state-owned counterparts, in particular in the cement, steel and flat glass industries,” the OECD report notes.

A second hangover is to be found in China’s property market, where there is substantial overcapacity – the famed “ghost towns” are just one sign of this.

Over the past couple of years, China’s property market has been cooling, especially in smaller cities, many of which now have an excess of housing. The slowdown reflects a number of factors, including the broader economic cooling and measures by the government to restrict purchase. More recently, some of these restrictions have been eased, likely reflecting official concern that the market may be cooling too quickly.

The Economic Survey of China sounds a note of caution, suggesting that the “price correction ought to continue until the inventory overhang is worked off”. More affordable housing, it suggests, would allow more Chinese to realise their dream of owning a home – a possibility only since the 1990s. There are, as the Survey readily acknowledges, risks to such a strategy. But, it argues, the relatively low levels of household debt in China, among other factors, should help to contain these.

Still, there’s no doubt that the property market will continue to weigh on China’s economy for some time to come, perhaps especially in the provinces, where there are concerns about the level of debt built up some local governments to fund real estate and infrastructure projects. We’ll come back to that subject soon.

Useful links

The OECD’s 2015 Economic Survey of China is launched today in Beijing ahead of this weekend’s China Development Forum, where OECD Secretary-General Angel Gurría will be speaking.

A number of other OECD reports are also being released this week to mark 20 years of China and the OECD working together, including All on Board: Making Inclusive Growth Happen in China and China in a Changing Global Environment.

中国和OECD迎来20年合作伙伴关系

OECD work on China

网站 (中文) (The OECD’s Chinese-language site)

China and the OECD mark 20 years of partnership

China 20The past few decades have seen developing and emerging economies playing an ever-larger role in the world economy. According to OECD estimates from a few years back, in 2011 China and India accounted for 24% of the global economy; by 2060 that was forecast to rise to 46%, overtaking the combined total for current OECD Members.

These shifts have been reflected in changes in the governance of the global economy, for example the expanding role of the G20, of which the OECD is an active partner. They are also reflected in the deepening co-operation between the OECD and non-Member economies and, in particular, with a number of Key Partners – Brazil, China, India, Indonesia and South Africa. This year brings a significant milestone in this process, with China and the OECD marking 20 years of partnership.

The relationship between China and the OECD began modestly enough, with the organisation of a workshop in 1995 on trade and investment. In the years since, it has blossomed: “Today, over 30 Chinese ministries and agencies have been engaged in co-operation with the OECD,” writes Gao Hucheng, Minister of Commerce, in a brochure marking the 20-year anniversary. Areas covered by the OECD-China partnership include economic policy, trade, investment, development, finance and taxation, science and technology, environment, education, agriculture, statistics, anti-corruption, competition and global governance, to name just a few.

Among the more visible aspects of this co-operation are the OECD’s regular surveys of China’s economy, China’s active role in key OECD/G20 initiatives such as the Base Erosion and Profit Shifting (BEPS) project, as well as the participation of Shanghai in the Programme for International Student Assessment (PISA). In 2012, Shanghai students topped the global rankings, maintaining their strong performance from the previous round. China’s participation in PISA is set to deepen, with the addition of Beijing, Jiangsu and Guangdong to the 2015 round.

For both China and the OECD, the benefits of the partnership have clearly been substantial. Writing in the anniversary brochure, Minister Liu He from the Office of the Central Leading Group on Financial and Economic Affairs, describes the partnership as “a mutual learning process [that] has been instrumental in enhancing China’s policy-making capacity”. Lou Jiwei, Minister of Finance, says the “pragmatic and effective” co-operation has “helped China better understand development policies and practices applied by advanced economies.”

On the OECD side, Secretary-General Angel Gurría says China’s active engagement with OECD bodies “enriches the discussion and makes the work undertaken by the Organisation more relevant and valuable”. He adds that China’s adherence to certain OECD instruments “can reinforce the efforts made by countries at different stages of development to address common challenges.”

The importance of China to the OECD is also underlined by William White, Chair of the OECD Economic and Development Review Committee (EDRC): “If it is welcome that China is learning from the experiences of others, China is teaching as well. Its remarkable advances in recent years hold many lessons for others and these are often referred to in the EDRC Reviews of other countries.”

One practical example of how OECD Members are learning from China’s experience comes from the United Kingdom, which has launched a maths teacher exchange with Shanghai. “Our teachers can identify the most effective teaching methods from Shanghai, bring them back to the UK and share them through our maths hub network so all schools benefit,” writes, Nick Gibb MP, Minister of State for School Reform.

Building on the success of the past 20 years, the partnership between China and the OECD looks set to grow even stronger in the coming decades. Last November, the OECD signed a Memorandum of Understanding with the Ministry of Commerce. That agreement, says the OECD, “maps out a common blueprint for future co-operation, taking OECD-China relations to a whole new level of collaboration”.

Useful links

中国和OECD迎来20年合作伙伴关系

OECD-China: 20 Years of Partnership

China and the OECD

网站 (中文) (The OECD’s Chinese-language site)

Visit of OECD Secretary-General to Beijing, March 2015

China Development Forum 2015

Can China solve its migrant puzzle?

Hukou
Every home should have one

If crowds are not your thing, this is not a good time to be travelling in China. As the new Year of the Horse gallops in, hundreds of millions of people across the country have headed home to spend time with their families. It’s estimated that around 3.6 billion trips will be made on trains, planes, cars, ships and even motorbikes in the 40 days surrounding the annual Spring Festival.

The “Spring Festival rush,” or chunyun, is probably the world’s largest annual migration, and every year it generates some memorable moments. A few years back, one frustrated traveller stripped down to his underpants to protest against not being able to board his train. This year, a young teacher in Beijing has been earning environmental kudos for cycling the 2000 kilometres back to her hometown in Sichuan.

The annual rush on its current scale dates back to the 1980s, when workers from the countryside first began moving to the cities in large numbers. That movement helped drive China’s dramatic economic growth and, as we noted in the previous post, turned China from a country that was overwhelmingly rural to one where just over half the population is now urban.

But it also helped create a range of problems that, even today, are proving hard to resolve. Most notable, perhaps, is the uncertain status of the many rural migrants who have failed to secure an official residence permit, or hukou, for the cities in which they now live. Their number is not insubstantial: It’s estimated that around 260 million Chinese find themselves in this situation.

Systems of family registration go back thousands of years in China, but the modern hukou system dates from the 1950s. The system created a division between rural and urban residents and linked people’s place of registration with access to education, health-care insurance and social housing. Hukou reforms began in the 1980s and have continued since. However, their practical impact has been variable. As a result, the hukou system continues to affect the lives of many migrants who have moved to China’s booming cities.

Take education – an issue that attracted a lot of discussion when the OECD released its most recent PISA results in December, which showed Shanghai as the world’s top-performing education system. Some observers argued that the city’s performance was boosted by children from some poorer migrant families not being included in the assessment. This, they argued, was in large part because the children had to return to their families’ place of registration to complete their education.

In response, the OECD’s Andreas Schleicher argued that critics were ignoring major hukou reforms in Shanghai in recent years. Indeed, as Helen Gao wrote recently in The New York Times, “Shanghai has made remarkable progress in integrating migrants into its education system.” That’s true of many other Chinese cities, too. Nevertheless, as Ms Gao also pointed out, substantial problems remain.

According to a recent OECD paper on urbanisation in China, in the major cities of Shenzhen and Beijing, only 30% of migrant children attend state schools. There is evidence, too, to suggest that migrant children are underrepresented in elite schools. The hukou system also means that young people – not just migrants – with registrations outside Beijing and Shanghai face “severe” obstacles in winning places in those cities’ elite universities, which apply a lower acceptance mark for locally registered students.

These obstacles matter not just for the migrant and rural families, but also for China’s capacity to invest in people’s skills and education. Indeed, hukou reforms are seen as essential if China’s cities are to develop their role as engines of growth. “Land and hukou reform is the cornerstone for future economic growth and political-system reform,” according to Yuan Xucheng of the China Society of Economic Reform. So, if full hukou reform is so important, why hasn’t it happened yet?

For one thing, local governments in Chinese cities are reluctant to take on the cost of providing education and health care to migrants. According to some Chinese estimates, the cost of settling a single rural migrant in a city is about 100,000 RMB (about $16,500). “Behind household registration reform is money,” Ma Li, an official with the State Council, or cabinet, told Caixin.

Reform is also intimately tied up with the tricky issue of land reform. Migrants can gain much by getting an urban hukou but, by leaving their rural registration behind, they risk losing their rights to use residential and agricultural land in the countryside. Many appear unwilling to make that sacrifice.

Useful links

Policies for Inclusive Urbanisation in China (2013, OECD Economics Dept.)

OECD work on China

网站 (中文) (The OECD’s Chinese-language site)

OECD Insights: International Migration

Looking for ghosts in China

A friend in Kunming laughed when we told her our travel plans: “Chenggong? But there’s nothing there!” More accurate, perhaps, if she’d said there’s no one there.

Chenggong-housing

Under construction since 2003, Chenggong is a satellite city of Kunming, capital of mountainous Yunnan province in southwest China. Such projects are not rare in China, and they tend to follow a familiar pattern: Universities and government offices are relocated, students and officials move in and, eventually, so do other people.

Chenggong is different: Yes it has students and, as far as we know, bureaucrats but – so far at least – pretty much no one else. Its wide-open highways and empty estates have won it plenty of attention in the blogosphere and earned it a reputation as one of Asia’s biggest “ghost cities”.

In truth, the place is not as quiet as all that. Around the spacious university campuses there’s a noticeable buzz. A few small streets are filled with shops selling student necessities – cheap grub and trendy clothes. On one campus, an English-language student, Tina, showed us around and enthused about the quality of the facilities. When we asked her if she liked Chenggong, she nodded enthusiastically: “Oh yes, the air is so clean.” That, too, is often a novelty in China.

Chenggong-campus

But, elsewhere, it’s hard to escape the feeling that Chenggong lacks people. Cars bowl along six-lane highways at speeds unthinkable in most of China’s congested cities, while passengers seem sparse on the light railway that will eventually link the city to the provincial capital. Driving back to Kunming in the evening, we passed housing estates where not a single light seemed to be shining. According to the World Bank’s Holly Krambeck, Chenggong has over 100,000 empty apartments.

Regardless of how many people Chenggong eventually manages to attract, the city is part of one of the most remarkable human transformations in history. In just a little over three decades, China has gone from being a country that was overwhelmingly rural to one where just over half the population now lives in urban areas.

That might sound high but, by international standards, and for a country at its level of development, China still has a relatively small urban population. That wasn’t always the case. As a fascinating recent OECD paper by Vincent Koen, Richard Herd, Xiao Wang and Thomas Chalaux notes, China was once one of the most urbanised places in the world, admittedly in an era when globally around 90% of people lived in the countryside. By around 700 C.E., the city of Chang’an – now known as Xi’an, home of the terracotta warriors – is believed to have had around a million inhabitants, levels that London and Paris would only reach in the 1800s.

By the dawn of the 20th century, however, the proportion of Chinese living in cities hadn’t changed much in 400 years and, throughout that troubled century, it grew only very slowly. By 1949, urban dwellers accounted for just 12% of the population, around a third of levels then typical in the world.

Today, China is playing catch-up. In the last decade, the urban population rose by about 20 million a year; by 2020 the government expects around three out of five people to be living in urban areas. And by 2040, it’s estimated that around one billion Chinese will be living in cities.

China’s government believes cities are essential to building a modern economy. For one thing, cities make it easier for companies to do business, making them hubs for growth. For another, city dwellers tend to spend more than their country cousins, which should help China meet its goal of relying less on exports and more on domestic demand. So, cities will be key to China’s economic and social future. But planning them will require careful thinking about their “hardware” and “software”, to borrow a metaphor.

For an example of the hardware, take transport. By international standards, Chinese cities have relatively low levels of public transportation. That’s evident even in a new town like Chenggong, where, as urban planner Luis Balula notes, “the wide streets and superblocks […] continue conveying the image of a car-oriented urban environment waiting to be populated by cars.”

Chenggong-six-lane-highway

According to the OECD paper, China would need to invest the equivalent of around 11% of its GDP just to bring transport provision in its ten biggest cities up to international standards.

As for the software, think of that as the people who will live in China’s cities. Many will be rural migrants and, so far at least, the legal situation in China’s cities hasn’t worked in their favour. And that’s a topic we’ll return to soon.

Useful links

Policies for Inclusive Urbanisation in China (2013, OECD Economics Dept.)

OECD work on China

网站 (中文) (The OECD’s Chinese-language site)