Caixin
Jan 16, 2021 01:00 PM
WEEKEND LONG READ

Weekend Long Read: Why China’s Underperfoming Cities Need a Level Playing Field

The outbreak of Covid-19 in 2020 plunged the global economy into a recession, but China’s economy has shown resilience, in part thanks to what we see as a new kind of relationship between government and business, as well as a steadily improving business environment in China.

In December, the National Academy of Development and Strategy, based at Beijing’s Renmin University, released its Government-Business Relations Ranking List 2020. The list sheds light on the domestic business environment, with the goal of encouraging healthy competition. There are more than 290 cities included on the list. The report uses two indicators to gauge the health of a region’s relations between government and business. One is “closeness” (亲近指数), a measure of services that local governments offer enterprises. The other is “integrity” (清白指数).

In the Health of Government-Business Relations Index, Shenzhen, Beijing, Guangzhou, Shanghai and Jinan, capital of East China’s Shandong province, comprise the top five. Shenzhen topped the list in 2020 after spending two years at No. 2. There weren’t any cities in western China in the top 10, and only one was in the top 20, suggesting there is a much bigger gap between East and West than between the North and South.

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Beijing and Shanghai have each taken a turn at the top of the list, which is now in its third year. Jinan has been improving fast. It reached the top 10 in 2019 after just breaching the top 20 the previous year.

If we disregard the metropolises and just focus on midsized cities, the top five are Dongguan, South China’s Guangdong province; Zhuhai, Guangdong; Wuxi, East China’s Jiangsu province; Jinhua, East China’s Zhejiang province; and Zhongshan in Guangdong. Dongguan has been at the top for three straight years. Note that the majority of the top five midsize cities come from South China. That has been true from three years running.

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In terms of closeness, Chongqing is the only municipality under direct control of the central government that didn’t make the top 20. Generally speaking, the Yangtze River Delta and the Pearl River Delta regions enjoy a higher level of closeness between government and business.

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Regarding the integrity index, half of the cities in the top 10 are in the Shandong. And most of them are midsized cities.

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The higher administrative level, the better relations

According to the report, one interesting conclusion is that cities with a higher level of administration boast healthier government-business relations. Specifically, these cities get better scores both in the closeness and integrity subindexes — and the combined health index. That is, municipalities directly under the central government enjoy top scores in the indexes, followed by sub-provincial cities, provincial capitals and prefecture-level cities.

We compared the ranking lists of the past three years and found that they follow the same pattern: the higher administrative level of a city, the better business environment it has.

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This has become something of an iron law. Furthermore, the trend has only grown stronger over the three years.

The iron law fits the trend of the population migration in recent years. Beijing, Shanghai, Guangzhou and Shenzhen are the four so-called first-tier cities in China. Most young people prefer to move to these cities, according to the 2019 What Makes a Good City report, a product of the Chinese business news outlet CBN Weekly. The populations of these cities skews young, with people between the ages of 19 and 34 making up 62.9% of the population of Shenzhen, 56.2% of Guangzhou, 49.4% of Shanghai and 43% of Beijing.

Why are more and more young people choosing to stay in big cities? A popular online meme offers a simple explanation, referred to as the “Matthew Effect,” in which current advantages lead to even more advantages.

Higher administrative-level cities are typically larger, have better infrastructure, higher quality education and more health care resources, as well as a lot more jobs available. Such resources make it easy to attract young talent, who then make big cities more dynamic and efficient, widening the gap between small to midsize cities. That’s what the Matthew effect tells us.

This, however, is not the whole truth. What allows big cities have more useful resources? If it arises from fair market-based competition, the view explained by the Matthew effect is perfect. Yet Chinese cities do not compete on an equal playing field. Rather it is regional market-based competition led by the central government.

Let’s start with some basics: Chinese cities are divided into five administrative levels. Four municipalities, like Beijing or Shanghai, are placed directly under the central government and make up the highest level. They are followed by 15 sub-provincial cities, which include some of the country’s larger provincial capitals. Then there is the provincial capital administrative level, which consists of the provincial capitals that didn’t make the cut as sub-provincial cities. After that, China has 294 prefecture-level cities and 363 county-level cities.

Resources controlled by governments, such as funding, state-owned enterprises, hospitals, schools and transportation facilities, are allocated from top to bottom. That’s unrelated to market competition.

For example, there are 39 universities designated as part of the 985 project (a Chinese project for founding world-class universities in the 21st century). Most of the universities in the project are in first- or second-tier cities — basically the municipalities and sub-provincial cities. Of these prestigious universities, only four are in cities in the third administrative level. And only one is in a lower-level city.

In contrast, Harvard University and the Massachusetts Institute of Technology, two of the most prestigious U.S. universities, are both located in Cambridge, Massachusetts, a town with a population of around 100,000. Can Chinese people imagine its prestigious Peking and Tsinghua universities being located in a small town?

A Chinese city’s economic status depends on its political status. That economic status, in turn, reinforces its political one. Once a city’s political status slips, it is difficult to maintain its economic position.

The story of the capital of Hebei province provides a classic example.

After the founding of People’s Republic of China in 1949, the capital of Hebei was first Baoding and then Tianjin. After Tianjin became a municipality directly under the control of the central government, Baoding was again designated the province’s capital until it was changed to Shijiazhuang in 1968. Baoding’s economic status declined with its administrative level. It struggled to catch up with Shijiazhuang. In terms of GDP, Shijiazhuang’s was the second-highest in the province in 2018. Baoding came in fifth.

Government-led competition among cities can lead to a misallocation of resources in many ways.

First, a higher administrative level typically brings abundant resources. Cities are highly motivated to compete with each other for an elevation of status. Second, cities with higher administrative level will exploit their political status to squeeze other cities’ development, resulting in distorted efficiency. In the name of “bettering primary cities,” some provinces concentrate projects and financial resources in their provincial capitals that are supposed to be given to cities with lower level. Naturally, this curbs the natural growth of cities with a lower administrative level.

So, what can be done?

Firstly, there should be better coordination between the development of northern and southern cities, as well as greater vigilance toward the widening East-West gap. Based on both the health and the closeness index, the gap is apparent.

Secondly, to improve the business environment, central and western regions should use digital technology to leapfrog. Jiangxi province’s health index rose rapidly in 2019, with its capital Nanchang surging to 45 from 110 in 2018. The sharp rise was driven by promoting e-governance in that city.

Thirdly, it is feasible to improve government-business relations and the business environment from the top down. Over the last few years, Shandong has made major changes in shifting its drivers of economic growth and creating a better business environment. The effects are starting to show, with the cities in the province topping the integrity list.

Fourthly, we should encourage more competition among cities. Right now, the gap between municipalities, provincial capitals and prefecture-level cities is widening. To make migration more orderly and avoid “big city diseases,” we should ensure fair competition among cities and give full play to the decisive role of the market in the allocation of resources. Governments should reduce administrative intervention as much as possible.

In our view, we should ensure market-based allocation of financial resources in the short term. That means we should allow resources drift to regions with higher economic efficiency. The Communist Party and the State Council, China’s cabinet, issued guidelines on May 11 calling for allocating public resources based on the actual size of the population a city contains rather than its administrative level. We hope the new step will be put into effect as soon as possible.

In the long run, we should make it so all cities have the same administrative level. This can be done gradually, for example, by removing the administrative level from sub-provincial cities first, and then gradually promoting county-level cities to a higher level. Eventually, all cities should be treated as equals.

Nie Huihua, Han Donglin, Ma Liang and Zhang Nan Diyang are research fellows at the National Academy of Development and Strategy at Renmin University of China.

Translated by Guo Xin.

Contact editor Michael Bellart (michaelbellart@caixin.com)

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