This is part of the Communist Party's attempt to raise money for its 40 trillion yuan ($6.4 trillion)
China currently relies on state banks to fund investment but the amount needed for this program can't be met by banks alone. The Chinese junk bond market is in its nascency and it doesn't have an adequate muni-bond market:
"Total debt outstanding in China's fledgling bond market was 26.4 trillion yuan as of the end of January 2013, People's Bank of China (PBOC) data shows - barely a sixth of the size of the U.S. bond market - and most of what is traded is issued by policy banks to support their lending.
"...The need for bond market reform has grown more urgent since December, when Li accelerated a commitment in China's 12th five-year plan to spend 40 trillion yuan on Urbanization by 2030. That money will now be spent over the next decade."
China has been loosening capital controls since the 18th Party Congress in November, and this would fit into that trend. From the report:
"The urbanization drive will push the domestic capital market liberalization agenda," the senior bank executive said on condition of anonymity. "Urbanization is Li Keqiang's big project. He has to get it right and he is willing to pursue innovation to make it a success."
But will urbanization really help revive growth?
Chinese policymakers are pushing urbanization as a way to drive economic growth. But analysts have warned that the impact of urbanization on the nation's productivity is decreasing.
Citi's Peter Orszag has said that China is near its Lewis turning point i.e. the point at which the shift of people from agriculture to manufacturing does not lead to productivity gains.
Societe Generale's Wei Yao had this to say on the subject:
"For an emerging economy to catch up, moving farmers to manufacturing plants is a key source of productivity gain in the early stage. China’s experience in the past three decades was a typical example.
"The 10-year average growth rate of China’s urban population growth was 4.8% in the 1980s, 4.2% in the 1990s and 3.8% in the 2000s. The impact of this rapid urbanization on total factor productivity (TFP) was particularly pronounced. We estimate that this source accounted for about 30% of the impressive TFP growth.
"However, urban population growth should also decelerate rapidly in the current decade. The UN projected China’s urban population to grow 2.5% in the 2010s, 1.3ppt slower than in the previous decade. As a result, China’s labor productivity growth, which averaged 8% in the 1990s and 9.5% in the 2000s, will normalize lower as well."
Experts warn that to make urbanization work China needs to continue pushing market reforms too.