February 18, 2014

CHINA: China's Sprawling Cities Bet Their Future on Getting Even Bigger. China Cuts Down 700 Hills To Build One New City.

A mountain has been moved to make way for a housing project near the center of Shiyan, Hubei province. The construction site is a cause of major annoyance to local people. The construction site is part a project to expand the city's area by 70% and attract more manufacturing projects in the process. [source: Tim Franco for The Wall Street Journal]
The Wall Street Journal
written by Dinny McMahon and Qi Liyan
Monday December 16, 2013

SHIYAN, China—Authorities here worried a few years ago that the local economy was headed for ruin because there was no more space in this remote city, nestled among towering hills, for industry to grow.

The solution? Level the hills.

Officials launched a campaign to blast hundreds of hilltops and low mountain peaks, leaving man-made valleys through the forested slopes that surround the city of 800,000 in central China. The goal is to expand its area by 70% so it can draw more manufacturing projects.

"It's very difficult for Shiyan to attract investment," said Gong Bailin, an official of the local economic planning agency. "We've paid a high price, but there's now large scope for further development." The nearly $2 billion hill-chopping plan now is about 60% completed.

Shiyan shows the lengths to which Chinese cities are going as they increasingly rely on land, and revenue from its development, to keep growth going.

The strategy gives cities hope for ever more investment and jobs, provided they can lure enough new factories or other projects to occupy the land they are clearing.

It also loads cities with more debt, exposing them to problems if property and export markets don't keep booming. Beyond that risk is the environmental and social costs from clearing more terrain at a time when popular anger over rapid development and land seizures is growing.

Industrial parks are a particular concern because of the chance that their roads, power plants, sewage systems and other infrastructure may not draw enough projects to pay for themselves. Chinese industries from steel to shipbuilding already face overcapacity.

Occupancy rates were less than half at about 40% of 341 Beijing-approved industrial parks, according to a survey the Ministry of Land and Resources did in 2011. Analysts said occupancy could be lower still for thousands of other parks without the same high-level support.

Regardless, municipal governments continue to build. "This is what I call the cowboy economy," said Karl Hallding, head of China research at the Stockholm Environment Institute, a research center in Sweden. "Local governments have a lot of power, and the central government seems to have a lot of trouble reining them in."

The push to develop more land is driven largely by local government officials whose career advancement is tied to delivering fast economic growth, analysts say. Clearing more land stimulates economic activity in the short term and holds the long-term promise of being followed by major investments. For city leaders, having plenty of land available is a marketing tool to entice investors.

"Chinese mayors are using land as their banks," said Karen Seto, a professor of the urban environment at Yale University. "They look at the mountains and see they can literally turn them into condominiums."

To launch developments such as industrial parks, local governments usually have to borrow, sometimes heavily. To repay, they count on sales of decadeslong land leases to developers of residential and commercial buildings.

The model has kept working so far, as demand for industrial parks and housing has stayed strong. But as developments proliferate and overall economic growth in China slows, analysts say localities' reliance on land leases makes them vulnerable.

"If the land market cools, land prices drop and the volume of land transfers falls, not only will the funding of some projects experience difficulties, but it will likely produce financial crises," Ba Shusong, a researcher at the Development Research Center, a think tank under China's State Council, said in a recent article in the People's Daily.

Officials debated the issue at a party Central Committee meeting in November, called the Third Plenum. Its final document said officials aimed to "raise the efficiency of cities' use of land," but didn't give specifics.

Exactly how much debt China's local governments have piled up isn't certain, as figures aren't regularly tracked. When the National Audit Office last counted in 2010, it put the figure at 10.72 trillion yuan (about $1.76 trillion). Debt has since risen to the equivalent of $2.46 trillion to $4.92 trillion, or 30% to 60% of China's gross domestic product, according to estimates by government officials and analysts. In the U.S., state and local debt is about 18% of GDP, according to the St. Louis Federal Reserve Bank.

The head of China's National Audit Office, Liu Jiayi, recently said local government debt levels were manageable.

The Third Plenum document promised to make it harder for local governments to take over farmland, potentially threatening that aspect of the cities' strategy. Beijing already imposes some restraints on land seizures, issuing an annual limit to preserve a minimum amount of arable land, around 465,000 square miles.

But cities that have ambitions exceeding Beijing's limits—or are constrained by natural boundaries, as Shiyan is—are seeking out new land sources.

Coastal cities are aggressively creating industrial space by reclaiming land from the sea. In the Bay of Bohai in China's northeast, about 80 square miles of land has been reclaimed around Caofeidian, once a quiet fishing island. Off the coast of Shandong province between Beijing and Shanghai, the town of Longkou plans over three years to create 11 square miles by building a cluster of small islands.

The hill-leveling strategy of Shiyan is also on display in far western China's Gansu province, where about 700 hills are being cut down to make way for a new satellite city outside of the provincial capital, Lanzhou.

Yan'an, where in the 1930s China's Communists hid from Nationalist troops in mountain caves, now has launched a mountain-demolition project.

Shiyan, two hours by car from the nearest commercial airport, was just a village until the late 1960s, when worries about possible war with the Soviet Union led Mao Zedong to relocate much of China's industrial production to the relative safety of mountainous regions. Shiyan, in Hubei province, became home of the Second Automobile Works, which is now known as Dongfeng Motor Corp. and is China's second-largest auto maker by sales.

But in 2003, Dongfeng moved its headquarters to Wuhan, the provincial capital. A Dongfeng joint venture with Nissan Motor Co. 7201.TO +0.21% later followed suit.

Before moving, Dongfeng asked Shiyan for about 80 acres of land, which the city couldn't provide, according to the Shiyan Bureau of Land and Resources. The company, in a written reply to questions, said its aspirations to become an international brand prompted its move to Wuhan, which has better transportation links.

To forestall further departures, Shiyan officials in 2007 made up their mind to create 15 square miles of new land.

"After Dongfeng decided to move the headquarters of two of its units, it looked as though the motor city could become an abandoned city," the Bureau of Land and Resources said. "Leveling mountains has become the golden key to resolve the problem of Shiyan's development impasse."

Demolition crews began using explosives to take down the hills, after which excavators moved in to clear the rubble. A visit in October found excavators scraping at partially razed hilltops, filling fleets of heavy trucks with soft, yellow soil.

Dust hung low in the air throughout a broad area, giving the city a hazy feel.

In villages outside the city, farmers who used to cultivate the hillsides now try to make do with the land left to them on the valley floor. Although the city provided compensation, some farmers complain it doesn't offset their loss of farming income. Village children walk to school along dirt roads cut through the hills, shared with heavy trucks.

"At night we can't sleep because of all the noise" from the land being leveled, said Li Xuefei, a 37-year-old who lives in Qiliyacun, a tiny village at the bottom of a gully next to a residential development.

Bao Wei, deputy director of the Shiyan Environmental Protection Agency, said that "the dust from cutting down the mountains does cause some pollution, but it's not on a big scale, and afterward we restore the bare hills. So all told, the environmental impact isn't too great."

Most of the newly created level land is earmarked for industry and warehouses, with a small amount dedicated to housing.

In January, AB Volvo VOLV-B.SK -0.91% agreed to purchase 45% of a new unit of Dongfeng Motors that is dedicated to making commercial vehicles back in Shiyan.

The site is backed by a white cliff face, the remains of a hill that was split in half to create level land. This fall, workers were busy laying the foundations of a gear factory.

"By leveling the mountains, what did we dig out? We dug out a Volvo," said Pu Guolin, head of agricultural zoning at the city's economic planning agency. "If Shiyan hadn't razed the mountains, there is no way Volvo could have come here."

Dongfeng, asked why it chose Shiyan for the plant, cited the city's experience in making heavy vehicles and the company's sense of responsibility toward its traditional home. Volvo declined to comment.

Shiyan officials said they level hills only after securing industrial tenants, who they said are queuing up. They estimated the Shiyan economy is growing more than 10% this year, well above China's national growth rate of around 7.5%.

Shiyan's statistics bureau said that residential space sold was up 29% in the first half of 2013 from a year earlier.

Still, huge swaths of newly leveled land remain unoccupied. And on a recent day, one residential development built on a cut-down hill was offering free cars to people who bought apartments, while another development nearby was offering customers who were willing to buy an entire floor an additional floor free.

Some underground lenders, an important source of credit in the local economy, said they were no longer willing to lend to property developers or people looking to buy apartments in Shiyan, out of concern that demand is weakening.

Tri-Ring Group Corp., a manufacturing company, is building a factory to produce dump trucks and tractors on 120 acres of new land outside of Shiyan. The company laid the foundations in April 2010 and, according to its website, planned to finish construction in 2011.

A visit to the site in October showed just half of the planned buildings had been constructed, with weather-beaten signs marking what remained to be built. The only evident activity was a handful of workers installing wiring in the gatehouse by the main road.

A spokesman for Tri-Ring said it plans to move into the new facility in May.

Pengyuan Credit Rating, in assessing the company set up by Shiyan's government to handle construction of projects on new land, said that its debts were high, that it would be under pressure in paying the interest and that its income was exposed to fluctuations in property prices.

The government company's cash from selling decadeslong leases on land hasn't been sufficient to cover loan payments over the past two years, and additional borrowing was needed to cover the shortfall, according to details disclosed by the rating firm. The price at which land is offered to developers is only marginally more than it costs to develop land from the hills and mountains, according to city figures.

The government company said it can repay its debts in full and on time.

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