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China's Emerging City Clusters

China“Cluster” is the new buzzword in classifying cities. We are living in a world when cities no longer grow as standalone silos but in clusters, which experts say can have a substantial impact on China’s sizzling property market — and how investors approach it.

To investors in China today, few would ignore these big names: Yangtze River Delta (including Shanghai and Nanjing), Pearl River Delta (including Guangzhou, Shenzhen and Hong Kong) and the Beijing-Tianjin-Hebei region — all well-developed economic clusters with easy access to infrastructure and transport networks. But is that all about China?

Indeed, “along with freer trade and improved production synergy, the relationship between the larger metropolis and the surrounding smaller cities is becoming much closer,” states a recent report published by DTZ, a global real estate advisor. “City boundaries are increasingly blurred. City clusters, as the new form of China’s urbanisation, are burgeoning,” the same report points out.

DTZ has identified seven emerging city clusters with enormous growth potential in the years to come. They are central and southern Liaoning province, Shandong peninsula, Wuhan in Hebei province, Changsha-Zhuzhou-Xiangtan in Hunan province, west coast of the Taiwan Strait, Guanzhong-Tianshui of western China’s Shaanxi and Gansu provinces, as well as Chengdu-Chongqing cluster in Sichuan province. Earlier McKinsey research also forecasts China will have 25 major city clusters by 2025.

City centres or core cities in the emerging clusters will be the first take off. So will its real estate sector, which is supported by improved infrastructure and robust economic growth. So what makes these frontier markets a sound investment? David Ji, head of greater China research with DTZ, explains: “Unlike their mature counterparts, emerging markets demonstrate huge growth potential and steady growth in property prices.”

Property prices in core cities of emerging city clusters, including Shenyang, Qingdao, Wuhan, Changsha, Xi’an and Chengdu, are still lower than those of mature city clusters, the DTZ report shows. Average prices of a new flat in first-tier cities including Beijing, Shanghai, Guangzhou and Shenzhen range from RMB13,000 to RMB22,000 (HK$16,100 to HK$ 27,400) per square metre, compared to that of a western city cluster’s RMB6,700 to RMB9,200 per square metre — roughly half. Prices in more remote central China can be as low as RMB5,600 to 6,500 per square metre.

But that’s not the end to the economic miracle. Even peripheral cities and hinterlands of emerging city clusters are going to benefit from a housing boom. Rapid urbanisation is contributing to continued lateral expansion of business and job opportunities, creating housing demand in a dozen lesser-known Chinese cities. Among them: Yantai, Jinan, Weifang, Zibo, Dongying and Weihai in Shangdong province; Anshan in Liaoning province; Quanzhou, Zhangzhou in southern Fujian province, Wenzhou in Zhejiang province; Yueyang, Changde, Hengyang and Zhuzhou in Hunan province.

In a planned economy, it’s almost an old tenet that government policy and signal is gospel. City clusters, “a more advanced form of urbanisation” according to DTZ, will continue to be a dominant feature of China’s landscape. “The emergence of city clusters in China is unique in the sense that it’s largely policy-driven. This scale of rural-city migration in China [has] never been seen in the western world,” Ji theorises.
From the Pearl River Delta to the Yangtze River Delta, the designation of special economic regions along coastlines by the Chinese government in 1980s has been a catalyst for the rise of city clusters. “Proximity of cities allows them to better utilise infrastructure and resources, and benefit from each others’ comparative advantage.”

Recently, the State Council unveiled a blueprint outlining some 20 emerging city clusters around China. This is part of the country’s proactive urban strategies to alleviate housing pressure on mature city clusters and achieve an urbanisation rate of 50 percent. Most of these clusters are already well linked by the country’s fast-developing intercity rail network, expressways and 200-kilometre per hour high-speed railways.

An example is Chongqing’s “one-hour development circle” in Sichuan province. The idea is to allow surrounding suburbs to reach the southwestern municipality within an hour, with the ambition that the entire urban region will become an “all around well-off society,” with an annual per capita income of RMB 77,300 by 2015.

Asia is not stranger to the concept of city clusters. The urban corridor, largely a product of Japan’s bullet train network linking Hachinohe and Kagoshima, is most emblematic on the Shinkansen line that serves Greater Tokyo. “Just look at Tokyo and Yokohama. They are so well-developed that when you look out from the train, you hardly see a suburban area in between the two,” Ji says.

The development of city clusters is often compared to the megalopolis. A typical example is found along the eastern seaboard of the United States, extending from Boston through New York City, Philadelphia, Pennsylvania and ending in Washington. Unlike China, densely populated city clusters is less common in modernised western countries. A relatively decentralised policy has a role to play. “There’s little sense of central planning in more liberal countries,” Ji explains. “You can’t say this city has to merge with the other. Individual states enjoy a lot more autonomy in this regard.”

Looking ahead, while tightening polices and market correction is likely to target major cities like Beijing, Shenzhen and Shanghai, where home prices have gone insane, it’s perhaps common sense for investors to give emerging markets a rethink. “While housing prices in core cities are already very high, emerging cities still have plenty of room to grow,” Ji concludes.