The Chinese government is seeking to continue driving urban growth while mitigating the risks and obstacles of urbanization. To reduce some of the deep social and economic imbalances between the country's urban and rural regions and coastal and interior provinces, Beijing hopes to reorient its economy away from an overreliance on exports and state-dominated investment and toward greater domestic consumption. Promoting urban growth, especially among inland cities, is a core part of this effort.
To fund urbanization, however, China must reform long-standing institutions such as the country's household registration system, known as hukou in Chinese, as well as structural issues fiscally constraining local governments. Building a stronger domestic consumer class will require widespread wage increases and stronger social services throughout the country. Reform will also likely be necessary for inland provinces to metabolize much of the estimated $8.1 trillion that will be needed to accommodate China's ballooning cities over the next decade. For example, reforming the fiscal relationship between Beijing and local governments is needed to manage population influxes and pay for the infrastructure expansions necessary to absorb them.
In 2011, Beijing launched a pilot project testing fiscal reforms in Shanghai and Chongqing, and it announced on June 20 that local government bond issuances would be allowed in cities in Shandong and Jiangsu provinces. But expanding such reforms to the entire country will be painful at a time of worsening economic conditions, and poor implementation could backfire. Real estate markets could plummet before local governments have time to adopt new financial models, creating local debt crises and widespread unemployment. Alternatively, while allowing municipal bond markets to flourish would help reduce capital flows into property markets and alleviate some of the pressure caused by relaxed hukou restrictions and increased urban migration, it would also diminish central control over the economy. In the event of a municipal bond boom or bust, Beijing would be put in the uncomfortable position of either bailing out local governments or facing widespread bankruptcies and unemployment.
