China's plan to build $290 Billion new urban city

China’s plan to build a new city about two hours drive from Beijing has raised hopes it may catalyze better urban design across the nation, enhancing economic efficiency and cutting air pollution.

The potential for gains is huge in a country where tens of millions of rural residents will move into urban areas by the end of the decade. The nation’s cities are afflicted by urban sprawl and designs that force millions of people to rely on cars to get around, exacerbating chronic traffic congestion and choking air pollution.

Xiongan New Area, announced April 1, has been lauded by state media as a demonstration project for a new model of optimized development in densely-populated areas. It’s also intended to ease the pressure on Beijing, the capital city that plans to cap its population at 23 million by 2020. Morgan Stanley expects the investment in infrastructure and relocation to run about 2 trillion yuan ($290 billion) in the first 15 years.

"China’s really pushed the idea in the last five years that it’s done the rapid urbanization process, and now it’s going to look at quality," said Austin Williams, author of "China’s Urban Revolution: Understanding Chinese Eco-Cities." "A lot of people are now aspiring to a quality of life beyond quantity."

China’s shift to greater consumption and services-led growth will be led by cities, says the World Bank, making them key to rebalancing away from a reliance on investment-led expansion. The way things are, traffic congestion and environmental damage may be holding back Beijing’s economic output by 7.5 percent to 15 percent, according to the Energy Foundation, a San Francisco-based non-profit organization that promotes clean energy.

Xiongan is backed by President Xi Jinping, whose long-range vision is to transform what’s now a sleepy backwater known for its orchard and lotus flowers into a gleaming, teeming hub of innovative companies, world-class universities and transportation.

It spans three counties. The infrastructure build-out will cover 100 square kilometers initially, expand to 200 square kilometers and eventually occupy a space of about 2,000 square kilometers, similar to Shenzhen in the south now, the government says. It will have 5.4 million people in 15 years and boost China’s investment growth by 0.33 percentage point and its gross domestic product by 0.13 percentage point to 0.19 percentage point per year, according to Morgan Stanley’s base-case estimate.

Still, some analysts are skeptical that the experimental city will trigger change elsewhere.

"It’s unlikely to be a catalyst for a sea change in the way China builds" cities, said Tom Miller, author of "China’s Urban Billion: The Story Behind the Biggest Migration in Human History" and managing editor of the China Economic Quarterly at Gavekal Dragonomics in London. "There’s a well-established pattern for building new urban areas, which I suspect will be hard to break. They all need to have a big government building, a grand square, boulevards and over-sized university buildings."

The new city can only succeed if an environment is created that spurs market forces to support it, says Fang Yiping, assistant professor at the PSU-China Innovations in Urbanization Program at Portland State University in Oregon.

While some universities in Beijing and the headquarters of several state-owned enterprises are expected to be moved to Xiongan, a region now accounting for less than 1 percent of the capital’s economic output, Fang says it’s hard to imagine their employees would easily relocate as their families still have strong connections with Beijing.

The World Bank has urged China to rein in urban sprawl, increase the population density of its cities, and improve intercity connectivity. This would improve economies of scale and efficiencies as well as stimulate greater innovation and curb carbon emissions, it says. 

Urbanization "will act as another powerful driver of growth, although much will depend on how well urban development policies are are designed and implemented," the lender said in its China 2030 report.