China’s urbanisation rate is already advanced at 64.7%, close to the government’s target of 65% by 2025, following successive liberalisation of the household registration system in recent years. Still, we also expect some rural to urban migration to continue over the long term.
Hong Kong/Shanghai:
China’s urbanisation policies are likely to support continued population flows from rural to urban areas and from lower- to higher-tier cities, says Fitch Ratings.
Many lower-tier cities of less economically advantageous regions may face net resident outflows over an extended period, which could pressure their revenues and the need to adjust expenditures to match lower revenue or increase reliance on external debt financing and transfers from higher-tier governments to support spending.
The detailed urbanisation framework under the 14th five-year plan published by the National Development and Reform Commission in July 2022 stipulates that government will relax household registration thresholds further for cities with a population between three and five million, and streamline the points-based admission system and encourage abolishment of the quota limits for ‘mega-cities’ with a population over five million.
“We believe the ultimate objective is likely to be the removal of restrictions for all large urban centres, although the process could take time,” said Fitch.
The relaxation for large cities carries significance because this might suggest more flows over the medium term from smaller cities to the medium and large cities that generally offer better job opportunities and public services, rather than from rural areas. This is because China’s urbanisation rate is already advanced at 64.7%, close to the government’s target of 65% by 2025, following successive liberalisation of the household registration system in recent years. Still, we also expect some rural to urban migration to continue over the long term.
Accelerated reform of the household registration system could also reduce the gap between temporary and permanent urban migrants by enabling newcomers to settle down in cities and access comprehensive social benefits more quickly, said Fitch.
Short-distance and intra-provincial relocations have outpaced inter-provincial moves among rural migrants in recent years, implying that rural populations tend to favour cities in their home provinces, a trend that may have been reinforced since 2020 by increased challenges to long-distance travel due to Covid-related restrictions.
“Assuming that this trend persists, we expect urbanisation measures to drive the population growth of cities that serve as key provincial economic centres, including those in inland regions. Low-tier cities that are less attractive to migrants could see outflows, especially those in economically weaker regions where social amenities are often less evenly distributed. We believe this could dampen local and regional governments’ (LRGs) revenue by inhibiting economic growth and, in turn, pressuring their tax base and lowering the realisable value of their state-owned capital, including land concessions.,” explained Fitch.
Consequently, LRGs in low-tier cities and predominantly rural counties may rely more on higher-tier governments to fill fiscal gaps. This aligns with our expectation that provincial governments are likely to assume a greater role in the medium term, following the State Council’s guidance in June 2022, said Fitch.
A crucial part of the guidance is to manage the debt burdens of lower-tier LRGs, and rectify uneven distribution among lower-tier LRGs within the region, which could improve the capacity of weaker lower-level authorities to fund their expenditures, including the ability to support their local government financing vehicles over the longer term. Nonetheless, implementation will be challenging without expanding the tax base, due to sub-provincial LRGs’ competition for resources.
“We expect provincial governments to increase the funding to lower-tier LRGs to preserve their sub-provincial LRGs’ financial profiles and contain financing contagion risk. Such assistance could be in the form of direct transfer payments or through provincial platforms’ issuance of special-purpose local government bonds (proceeds of which can be allocated to lower-tier LRGs), among other methods,” said Fitch.
However, all else being equal, increasing the use of ‘Special Purpose’ bonds could heighten the fiscal burden on local governments.