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Huang Nubo: Pros and Cons of China's Urbanization

Volume 5, 2013

By Charmaine N. Clarke

Real estate tycoon Huang Nubo (CEIBS EMBA 1996) is well known outside of China for his efforts to buy and develop 300 km of Iceland, but he still has his sights set on projects at home. His company, Beijing Zhongkun Investment Group shifted its focus, in 2009, from the housing industry to tourism-related real estate. This was a strategic move that Huang says has had a welcome side effect – positioning Zhongkun to benefit from the much-heralded plans to move China into its next round of development. He estimates that the country's current urbanization rate is now at about 50% and hopes to see that number increase to 80%. He agrees with the government's assessment that urbanization will boost economic growth, just as the past 30 years of reform and opening up have done. He also has his own views about how urbanization should be implemented, who should pay, the accompanying changes needed in the real estate and financial sectors, as well as who should and should not be allowed to benefit from the process.

One government think tank estimates that one percent of China's rural population will be transformed into urban residents each year for the next 10 years, at a cost of RMB1.4 trillion per year. While Huang believes it is impossible to predict the true price tag, he is convinced it will be worth the investment. In addition to seeing the business side of the process, which he anticipates will create opportunities for a wide swath of industries, he is also eager to see the benefits it will bring to rural residents. The focus, he says, should be on providing a life of dignity for those who will be uprooted from their homes as the country marches towards its third industrial revolution. "For this new round of urbanization initiatives, the Chinese government should put the country's inequality problem at the top of the agenda," Huang stresses. "It's not just a simple process in which people who should be urbanized are asked to give up their land in return for a good house and some money so that they can be called city dwellers. We should ensure that these people live a life of dignity."

The LINK Volume 5, 2013

Huang shares the government's view that urbanization is an opportunity to close the income gap now so evident in the country. This can only be achieved, he says, if urbanized rural dwellers have access to all the benefits now available to those already living in cities. "We can't let them just do low-level work such as construction or cleaning. We need to provide them with good medical, educational and occupational resources," he says. "We should not just build good hospitals for them without providing good doctors. We should not just build good schools for them without providing good teachers."

But all this will come at a price and there is now an on-going debate about who should pay and the source of funding. For Huang, the answer is obvious: the central government should tap into tax revenue earned over the years to cover the lion's share of the bill, and enterprises that will benefit from the trillions in anticipated earnings should be next in line. It is estimated that urbanization will generate about RMB40 trillion in investments and that the newly-urbanized will be a huge source of as-yet-untapped domestic spending. Says Huang, "In terms of who should pay, I think this should be the order: the central government should pay the bill, then relevant parties – including companies; this way we can give farmers the benefits to which they should be entitled."

The passion with which he advocates giving rural dwellers a fair shake is matched by his concern that – though urbanization is needed and should proceed – there will be an irreversibly negative impact on Chinese society. Urbanization means modernization, he says, a process that inevitably results in the 'modernity dilemma' irrespective of geographic location. "There will be turbulence within the society; it will also make people more individualistic and materialistic. It's like the German philosopher Heidegger said, people will become individuals without spiritual hometowns. But urbanization is necessary for every country's development process," he says with a tinge of sadness and sounding very much like the well-respected poet he has become. "Over the last 30 years of China's reform, people have become richer and richer, but they are also becoming more and more unhappy," he adds. "This is because the family-oriented society has disappeared, and people are becoming individualistic as the connections among individuals have been severed. With urbanization, the overall society will become more rationalized, industrialized, legally governed, scientific, technologically advanced, while we will increasingly become lacking in humanity. To some extent, people will lose their ideals and just think about their personal interests. So I'm pessimistic in that regard."  

Read on for more from Huang Nubo's exclusive interview with TheLINK:

The LINK Volume 5, 2013

TheLINK: What advice do you have for the Chinese government on how to implement its urbanization plan?

Huang Nubo: China has a very good urbanization policy and there has already been great progress for more than 20 years. However, it also faces problems and challenges. The key problems caused by urbanization so far are: environmental degradation, an investment driven-economy, the gap between rich and poor.

This new round is a very good national policy and should be implemented as soon as possible. But we should not set a specific date for the process to be implemented, or pursue urbanization just for the sake of doing it. We can't push urbanization forward just for the sake of groups with vested interests. We should have a solid plan – one that includes understanding and meeting the needs of those who will be urbanized.

This will be a good historical opportunity to address inequality, unfairness, and problems of injustice. Without effective implementation of the urbanization initiative, there is the potential danger of a wider gap between the rich and the poor, and there will be more risk of instability within the society.

 

TheLINK: During the urbanization process, which is expected to stimulate economic growth, what are some of the opportunities available for companies such as Zhongkun? Do you have any projects planned, and how do they tie into the government's efforts?

Urbanization will offer enormous opportunities to Zhongkun and other companies – and China's economists will have a new research topic. For real estate developers, it's a good opportunity to make money. In Huang Shan (Yellow Mountain), for example, if the urbanization rate increases by 1% in scenic spots, the value of property owned by Zhongkun would increase by 10%. We are also doing cultural village projects in Mentougou village in Beijing and Puer in Yunnan province. Zhongkun is well prepared to embrace this urbanization initiative. We are lucky to have our strategic goals aligned with national policies. In Puer cultural village, for example, our property in scenic spots may now be worth RMB8,000 per square meter. But after urbanization, property value there may increase to RMB 20,000 per square metre.

On the other hand, there is now an oversupply of residential property in third- and fourth-tier cities while in first- and second-tier cities, real estate developers face more policy risks. Zhongkun made the shift earlier than other companies. Now a lot of real estate developers would like to shift into tourism real estate projects like we did.

The LINK Volume 5, 2013

TheLINK: In addition to the real estate sector, what other industries stand to benefit from this new round of urbanization? What changes do they need to implement to maximize its positive benefits?

Over the last 30 years of China's reform and opening up, all industries in all sectors of the country benefited. This will also be the case in the next round. If China's urbanization rate increases from 50% to 80%, the overall society will become more modern and progressive.

To ensure that the process works well, the real estate industry needs to change our operational and business models. We can't sustain our existing model of buying a piece of land at very high prices, then selling it by building very expensive housing for residents. This is no longer sustainable. Real estate developers should focus on residential projects that put community culture first. Projects should meet people's need for cultural activities, interaction and employment.

Taking a broader view, all industries will need to change their business models. Take e-commerce as another example, they should penetrate into the communities in a deeper way. Service providers such as hospitals or schools should do the same to be more connected with the community. Industries should not only focus on big cities, but also small and medium sized ones, not just first-tier cities but also the ones at village level. This will be the real progress the Chinese society will make by leveraging urbanization.  

TheLINK: There has been some concern that with farmers becoming urban dwellers, this may impact China's agricultural industry. Do you share that concern?

That won't be a problem. The plan is to combine the small pieces of land now owned by the farmers and have larger companies operate them more efficiently. Farmers now own 5 or 10-mu plots of land which seem to be less efficiently operated. Urbanization will not turn arable land into cities; it refers to urbanizing farmers so that a very modern, more scientific and very efficient agricultural sector will take shape in China.

TheLINK: There have been suggestions that the central government will pay its share of the cost of urbanization by going to the bond market or through bank loans. What changes will be needed in the country's financial sector to accomplish this and maximize the benefits of urbanization?

We need supporting measures in promoting reforms in a number of related areas of Chinese society. For example we need a reform of China's financial systems or markets, otherwise the drive could be misused by certain interest groups to generate exorbitant profits for themselves and financial resources won't be allocated in an equitable and fair way. SOEs typically have better access to financial resources in China, but offer less job opportunities compared to the country's private companies. If there is inequality in resource allocation, the gap between rich and poor could become even wider. This is one of the problems in China's society today. Urbanization would be enhanced by more and well-designed reforms in the financial system and with markets becoming more open. But at the same time, we need guidance and clear policies from central government. We should not go to extremes. On one hand, we need openness; at the same time, we don't want over-marketization without guidance from central or local government. We don't want the so called 'state owned enterprises' or certain interest groups to control the key resources. This needs to be fully addressed.

TheLINK: How concerned are you that there will be negative effects such as overcapacity and increased inflation as a result of the massive spending that will go into urbanization?

We should not just look at the equation from the spending side, we should also think about the value that could be generated by the investment. For example, if China's urbanization rate increases to 70% with a total investment of RMB10 trillion, maybe social wealth would reach RMB40 trillion. So we should look at both sides of the equation: investment side and output side. Look at it this way: Today a flight from Beijing to Huang Shan takes almost 1 hour and 40 minutes or more than 20 hours by train. The value of land in Huang Shan is RMB1 million per mu. Local farmers earn about RMB1,000 to RMB2,000 per year. But the high-speed train is going to connect Huang Shan and Beijing. Then it will take 5 hours to get there by train and the value of the land there will be about RMB2 million to RMB3 million per mu, the farmers could make RMB3,000 to RMB5,000 per year. We need to look at how much value can be generated by making this investment in urbanization. It will increase people's income and standard of living.

We should embrace this round of urbanization.