Congestion and long commutes would lower the livability of cities. To curb such externalities, various policies have been adopted to limit urban sprawl. However, the empirical relationship between urban sprawl and traffic externalities is ambiguous. This paper investigates this issue by examining state-built new towns (a particular feature of China's urbanization processes) and congestion delay indices (measured from the data for urban trips). The results show that the number of new towns was positively correlated with intra-urban congestion and negatively correlated with traveling speed. Further, the congestion effects were severe during rush hours. Cities with more new-town projects have more residents choosing long-distance commuting modes, and greater average commuting time and distance. This finding shows a worse job–housing balance in the city. Moreover, these traffic externalities were primarily caused by new towns built since 2008, which have a larger scale and longer distances to the urban center.