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China’s Phoenix Seeks a White-Collar Rebirth

Apartment prices are about a fifth of those in Shenzhen, home to internet behemoth Tencent Holdings Ltd.

China’s Phoenix Seeks a White-Collar Rebirth
Scaffolding covers sections of the T Plus residential property, developed by Jiayuan International Group Ltd., center, as it stands in Hong Kong, China. (Photographer: Anthony Kwan/Bloomberg)

(Bloomberg Opinion) -- Wuhan is the happiest city in China, according to the country’s state-run broadcaster. It isn’t hard to see why.

The capital of the central province of Hubei has positioned itself as a Chinese version of Phoenix, Arizona – an inland technology hub with a young, educated workforce and a far lower cost of living than its glitzier coastal rival. As Phoenix is to Silicon Valley, Wuhan is to Shenzhen, the southern city that’s at the forefront of China’s tech industry.

Apartment prices are about a fifth of those in Shenzhen, home to internet behemoth Tencent Holdings Ltd. Wuhan is also less crowded by the standards of Chinese metropolises, with a mere 8.7 million residents, versus 12.5 million for its southern rival.

That all adds up to an attractive proposition for white-collar graduates – and Wuhan has plenty of those. The city is home to one of China’s most prestigious engineering schools, Huazhong University of Science and Technology. Roughly 9% of the population are university students, well above the 3% level for Beijing and Shanghai. 

The local government is eager to retain them: In its latest five-year plan, the city sets a target of keeping 1 million college graduates by relaxing its hukou system, the residency permits that allow people to settle permanently and qualify for public services such as schools, health care and pensions. With a hukou, city-dwellers are condemned to migrant status and excluded from such benefits.

Wuhan’s relaxation reflects a push at the national level to encourage growth of smaller cities. In April, China’s state planning agency said it would ease residency restrictions for people who live and work in cities with a population of less than 3 million. While 60% of Chinese live in urban centers, only 43% have a hukou. In Shenzhen, 65% of  residents are temporary migrants.

Cities outside the big four of Beijing, Shanghai, Shenzhen and Guangzhou began to loosen hukou requirements for university graduates as early as 2017. Xi’an, the ancient city known for its terracotta warriors, allows anyone with a university degree to settle there, regardless of age. In Chengdu, capital of the western province of Sichuan, all local university graduates can qualify for residency, even if they don’t have jobs.

China’s Phoenix Seeks a White-Collar Rebirth

The motivation is primarily fiscal. China’s local governments, which are perennially short of funds, have become even poorer since President Xi Jinping took office in 2012. As other income sources dry up, smaller cities are competing for the upwardly mobile young workers who have the potential to earn higher salaries, buy property and drive economic growth. 

On average, local authorities rely on central government handouts for 36% of their total fiscal revenue, up from 29.6% four years ago, Moody’s Investors Service estimates. An educated labor force can help municipalities sell more land and close a glaring gap in social security funding. 

Land sales are still the major contributor to revenue for cities. Wuhan, for instance, plans to raise 122 billion yuan ($17.7 billion) this year; that’s about 80% of the city’s entire tax and fee revenue last year.

For smaller cities, the winding down of a recent fiscal bonanza has provided an added incentive to change tack. Since 2015, China has spent more than 6 trillion yuan tearing down dilapidated homes and replacing them with new ones, in the world’s largest redevelopment project. While the shantytown program propelled a real estate boom in these cities, it also started to saddle China’s policy banks with potential bad loans. 

Once the government scaled back this experiment late last year, the real estate booms quickly deflated. Cities such as Xi’an that preemptively lured white-collar workers have withstood the bust better than others, such as the northeast rust-belt center of Shenyang.

China’s Phoenix Seeks a White-Collar Rebirth

Even for China’s Phoenix, though, the white-collar influx isn’t enough to make ends meet. Last year, the city’s pension fund saw 69 billion yuan of cash inflows, but only 54 billion yuan was collected from workers and their employers; the rest came in subsidies from Beijing.

The competition for graduates has become so intense that some cities are resorting to gimmicks, such as offering new homes at big discounts. China’s working-age population has been declining since 2011, and even local governments recognize the truly scarce resource these days is human capital. Wuhan and Xi’an are both lucky to have had some success getting migrants to settle. 

Whether the craze will last is open to question. An entry-level graduate may earn only 5,500 yuan a month at Shenzhen-based Huawei Technologies Co., barely able to cover the rent. That can increase quickly, though. For those hoping to make it big may still have a better chance in China’s Silicon Valley than an inland backwater that develops more slowly.

In that light, even Phoenix isn’t that sunny. 

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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