By Curtis Yibing Che & David A. Parker

Workers arrive at a factory in Bozhou City, Anhui province, China. Rapid urbanization has created complex challenges for China’s leadership. Source: Daniel Gorecki’s flickr photostream, used under a creative commons license.

Beijing-based Caijing Magazine and the China Center for Urban Development recently cohosted the 2013 China Urban Development Forum, an event where high-profile domestic and international experts gathered to publicly debate the future of China’s ongoing urbanization drive. Meanwhile, the real action was happening behind closed doors in the beach resort of Beidaihe, where top Chinese leaders and invited experts were huddled together working on a much-anticipated economic reform package due to be unveiled during the Third Plenum this November.

For China’s new leadership team, turning the migration of 250 million Chinese from a public policy nightmare into an engine of consumption and economic growth has emerged as a top priority. However, the obstacles to realizing their ambitions for “human-based urbanization” are daunting. While China’s earlier model of hard infrastructure-intensive urbanization played to China’s strengths, funding, coordinating, and delivering the high-quality social services the country’s urban dwellers need represents an entirely different kind of challenge.

Cost is one major barrier. A recent estimate by the Chinese Academy of Social Sciences puts the price tag for urbanization at 650 million yuan annually, or a whopping 5.5 percent of total government revenue last year. A large share of this will go towards providing migrant workers with urban hukou, legal registrations that provide holders with increased access to social services. But how to divide the cost of these services between the central and local governments is a thorny issue. Right now, local governments account for the majority of public spending and are responsible for providing most social services, but a longstanding mismatch between their share of tax receipts and their share of tasks has left local officials consistently in the red – and anxious to avoid another unfunded mandate from on-high.

A further challenge, complicated by China’s notoriously byzantine institutional landscape, is crafting a viable urbanization plan. Under the leadership of the National Development and Reform Commission (NDRC), over a dozen different ministries are involved in generating the new urbanization policy. But as the NDRC works to shoehorn its compatriots into line, overcoming bureaucratic turf wars and the inevitable substantive disagreements will not be the only issue on Chairman Xu Shaoshi’s mind; Premier Li Keqiang has also sought help from the World Bank to produce an urbanization plan in cooperation with the Development Research Center, a think tank directly under the control of the State Council, China’s cabinet. After being forced to deny rumors that the State Council had rejected a draft version of its urbanization plan earlier this year, the NDRC is no doubt working hard to avoid a repeat performance and maintain its role as chief coordinator and implementer of any nationwide reform.

There is also the question of how national leaders will create the right incentives to ensure cooperation from local administrators responsible for implementing any major policy reforms. China’s central government has long struggled to bend lower level administrators to its policy design, but as persistent questions over high levels of local government debt demonstrate, there remains a significant gulf between central policy dictates and actual implementation. Building hard infrastructure, often financed through socially-disruptive land auctions or property-backed borrowing, helped local officials generate the high rates of gross domestic product growth seen as key to future promotions (though evidence suggests a more complicated story). But effective social service provision requires a different incentive model and set of capabilities. Indeed, many local government bureaus currently see social services as a source of revenue, having embraced a fee-for-service model as part of their never-ending quest to supplement scarce budgetary resources.

Observers expect China’s leadership to provide more details on “human-based urbanization” at this November’s Third Plenum, but whether they will act boldly and put forward a comprehensive reform package or take a more gradual approach remains to be seen. Whatever blueprint the plenum reveals, important questions concerning implementation and impact ensure this latest reform package will only be one step in China’s continued long march towards urbanization.

Mr. Curtis Yibing Che is a researcher with the Simon Chair in Political Economy at CSIS. Mr. David A. Parker is a Research Associate with the Simon Chair.