Economy, Talking Point

A plan set in concrete

Why urbanisation remains the China bulls’ strongest argument

A plan set in concrete

Growing cities: one of the new buildings under construction in Hefei

“First, the young people left, then the villagers in their forties and fifties, and finally even the elderly and the children were taken away too,” Zhong Zhaowu, a 64 year-old, told New Express Daily last month.

In fact, the exodus from Zhong’s home village of Nankeng in the mountains of Jiangxi has been so great that he is now its sole remaining resident, bar a couple of hens and the village dog.

Great human migrations in the past have often been prompted by periods of famine or conflict. More than a million Irish crossed the Atlantic to the United States during the Irish Potato Famine in the 1840s, while at least 15 million were uprooted in the wake of Indian independence a century later. Fortunately, the great migration of our own times – from China’s countryside to its cities – has been a more peaceful one. In scale it also dwarfs all those before it, with hundreds of millions moving from rural to urban life over the last generation. Nor does the pace show much sign of slowing. In August, a single relocation project in rural Guizhou, one of China’s poorest provinces, was launched with the goal of moving more than two million people. “I want to go to the city to experience a different life,” an elderly villager told the UK’s Daily Telegraph, and most of her neighbours seemed similarly eager to make the same journey.

What’s the background to China’s urbanisation drive?

China already has the world’s largest number of city dwellers. But in share-of-population terms, its urban population places a little below average in the international rankings and well beneath the levels of more developed economies. In fact it was only last year that more Chinese were reported to be living in cities and towns than in the countryside (for the first time ever). The news was greeted with great fanfare: around 690 million citizens now reside in urban environments or just over 51% of the total population.

How much further could China’s urbanisation rate climb? The average for developed economies is about 80% of the population, although 60% of the total would be closer to the standard for countries with similar per capita income levels to China’s.

Either way, the expectation is a further surge in the numbers of Chinese moving from rural areas to urban ones in the years ahead. Looked at today the transition has already been startling. Less than 20% of the population was classed as living in towns and cities in 1980. But with at least 200 million more people expected to relocate to the cities over the next 15 years, China’s urbanisation story is a compelling force for change.

So urbanisation is a central plank of government policy?

Not under Mao Zedong’s rule, when China remained a predominantly agrarian society. Many of Mao’s political campaigns involved sending people from the cities into the countryside, rather than in the opposite direction. In the years after Mao’s death official policy continued to focus on holding China’s population in place – either rural or urban – through the hukou, or household permit system, which aimed to prevent people from moving en masse into cities. In part this stemmed from a focus on self-sufficiency in food production, although it also aimed to avoid the creation of a rootless class of workers in urban slums.

After Mao, urbanisation began to pick up speed. Early market reforms under Deng Xiaoping saw local enterprises spring up in the countryside, with fresh towns and cities emerging in the rural areas where new enterprises were most active. Then there was another wave of migration to the towns and cities in the 1990s, following land reforms and the rise of more sophisticated manufacturing industries often backed by foreign capital. In this phase, the movement of people from the countryside to cities became more pronounced. Although the hukou still served as a kind of domestic passport in determining where migrant workers were expected to live, officialdom was ready to turn a blind eye as millions of rural hukou holders flocked to the factories for work. Much of the migrant labour force ended up in coastal provinces in the export processing zones, including ‘new’ cities like Dongguan, Shenzhen and Zhongshan in Guangdong.

In this regard, urbanisation in the early years after Mao could be seen more as a by-product of China’s rapid economic change than a deliberate policy aimed at achieving specific goals like poverty alleviation (which makes it different to the current efforts to move two million people in Guizhou, for instance, which officials describe as a “final offensive” against poverty in the province).

Nor was urbanisation even prioritised as a specific policy goal until 2001, when it was written into the 10th Five Year Plan. Since then, there has been a change of emphasis. Urbanisation is now presented more as an outcome worth pursuing in its own right, especially as a factor for deepening and widening economic growth.

But why should it matter to the rest of the world?

Because it is going to provide a crucial boost to China’s future economic performance, says economist Stephen Roach, a longtime Sinophile who now teaches at Yale.

For Roach, the urbanisation story is an essential ingredient in the transition to what he calls “the next China”, or an economy less reliant on external demand. Investment in town and cities also provides an important lever for propelling the economy forward during periods of slowdown. If growth wanes owing to a slump in demand for Chinese goods overseas or if the economy splutters after a contraction in the domestic housing market, policymakers can always open the taps on their urban investment schemes as a fall back.

Fortunately, there is still plenty of scope for rural residents to move into urban environments. Roach claims that headlines about apparently empty cities already constructed in some Chinese provinces (see WiCs 163 and 168) miss this point, and that these new conurbations will soon be filled with willing residents. “With rural-to-urban migration averaging 15 to 20 million people per year, today’s so-called ghost cities quickly become tomorrow’s thriving metropolitan areas,” he suggests. “Shanghai Pudong is the classic example of how an ‘empty’ urban construction project in the late 1990s quickly became a fully occupied urban centre, with a population today of roughly 5.5 million.”

How does urbanisation boost the economy?

The first fillip comes from the investment required to house, transport and educate the influx of new residents, as roads, railways, power stations, housing and hospitals are built.

Longer term, the benefit is expected to come from a spike in domestic consumption. People living in towns and cities earn more and spend more than their rural counterparts, making the urbanisation theme an important element in China’s transition towards greater reliance on domestic spending as the driver of growth.

The numbers back this up: HSBC’s chief China economist Qu Hongbin says that urban consumer spending in 2010 was more than three and a half times greater than in rural areas, at Rmb15,900 ($2,546) per head. That means the wider economy can hope for a boost of Rmb100 billion in spending – yes, every year – if ten million more Chinese move to the cities annually, Qu estimates.

Industrialists agree. Ulrich Walker, the CEO of Germany’s Daimler this week told the China Daily that he had every reason to believe the country would continue to grow at a “relatively rapid pace”. He said that’s because “China still has to urbanise more than 25% of the population at least, something like 300 million. That will generate higher demand for housing, transportation, household appliances and other items.”

But others have questioned some of the figures behind the urban boon?

Yes, one objection is statistical, and refutes the view that urbanisation is going to provide quite the boost that its proponents claim. Previously, China’s demographers chose to classify an area as urban if it had a population density of more than 1,500 people per square kilometre, a much higher threshold than in most other countries. Of course, this meant that areas with population densities below this level were still termed officially as ‘rural’, potentially overinflating the population estimates for the countryside – and suggesting China was already more urbanised than the numbers indicated.

Counteracting this view is that the demographers began using a more qualitative list of determinants for their urban count six years ago. Their more granular approach, which no longer relies on population density data in the same way, has been delivering population counts that haven’t differed hugely from their former estimates. Additionally, there are suggestions that the current totals for some urban populations could actually be too large, rather than too small. China has a sprawl problem – as cities get bigger, enclaves of rural land are being trapped amid newly metropolitan landscapes – and one result is that many people still employed in agriculture are being classified as city or urban residents. In fact, the census taken in 2000 suggested that a little over a fifth of workers living in areas classed as urban were actually working on farmland. The ratio may have diminished over the past decade but it still leaves grounds to argue that there may be more scope to encourage rural folk to adopt an urban lifestyle than previously thought.

How else is the urbanisation story being challenged?

Another snipe is that the investment argument is overstated. Here the premise is that China isn’t going to need the full quotient of infrastructural spending that some envisage.

As WiC has reported before, this view has been countered strongly by HSBC’s China economics team, which has shot down any notion that investment levels are approaching saturation point. Although there is a wider acceptance that the intensity of the stimulus spending of three years ago is unlikely to be repeated, HSBC also argues that China is “only half way through” its urbanisation story and that plenty more investment in fixed assets is going to be needed. Key to this view is that China’s capital stock trails most others by some distance (on a per capita basis, it is still at only 8% of US levels, for instance). More literal examples are easier to grasp, like the length of China’s rail network today being similar to the United States in the 1870s, or the fact that at least 80 of China’s top 100 cities are still without subway systems.

What about the view that urban residents spend more, too?

This is another key theme in the debate on China’s future, supporting the notion of a future ‘rebalancing’ of its economy as a vast new consumer class begins to take shape. It is also a debate given a boost by news last week that the China Institute for Reform and Development – a respected think tank – believes that rapid urbanisation will see China’s ‘middle class’ grow by 7-8% a year to at least 600 million people by 2020.

How to best define the income level of the middle classes or their propensity to spend is often controversial, of course. And it would also be a mistake to rely too heavily on urban population numbers as a direct corollary for consumer spending in future. Here, we need to go back to the hukou system, which continues to draw a distinction between rural and urban citizens. Despite living in the cities, many holders of rural hukou lack the same access to housing, education and healthcare as their urban peers. Kam Wing Chan, a demography expert at the University of Washington, has estimated that only 460 million out of the 666 million residents counted as urban in China in 2010 actually had urban hukou status. The rest were migrants, lacking the same welfare benefits.

This matters because rural migrants are less likely to become higher spending consumers without a similar level of income or comparable sense of economic security as that held by the urban hukou holders. China’s leadership knows this too and has talked repeatedly about its ambitions for hukou reform. But so far, the reform effort has advanced only on a piecemeal, provincial basis. The central government did publish plans in February for a broader programme in which more migrants would be allowed to apply for urban hukou. But critics say the proposals look limited in scope because they will not apply in China’s 40 largest cities, where most of the migrants work.

Even if the hukou system does undergo substantial reform, there is also the question of how the overhaul is going to be paid for. There will be huge costs in building the hospitals, housing and schools that the formerly rural hukou holders will need. Wu Jinglian, a respected academic who is also a member of the Chinese Academy of Social Sciences, has estimated that at least $8 trillion in funding will be needed to provide social security for China’s new urban residents over the next two decades. That leaves Beijing with a financial headache. Many local governments are already wilting under the financial strain of the spending on infrastructure initiated over the last three years. So reforming the hukou will also require a wholesale reform of the tax system, enabling local governments to pay these new welfare costs. That’s a complicated process, which most economists think will require cities to levy property taxes. So far only a few local governments are experimenting with this.

One thing that’s not in doubt: the urbanisation trend is not going to reverse. It’s one of those megatrends that continues to keep industry executives salivating about China’s medium-term growth prospects.

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