In the first part of our two-part series, we will look at the drivers behind China’s urbanization, how it will impact the country’s economic structure in the coming years, and why you should familiarize yourself with the government’s plan.
Why is China urbanizing?
China’s turbo-charged growth engine, reliant on investment and exports, is overheating and running out of steam. If China wants to achieve Xi Jinping’s “China Dream” of building a “moderately prosperous society” by 2020 and avoid decades of Japanese-style stagnation, it must take the next step by transitioning to a consumption- and services-based economy.
The government recognizes that the greatest potential for expanding domestic demand lies in bringing tens of millions of rural farmers into the cities where incomes are more than three times higher. In time, these new urbanites will become middle-class consumers, who will demand an ever-greater number of services.
To facilitate the process the government has put together a comprehensive blueprint calling for “people-centered, quality” urbanization. The plan lays down quantified key targets, such as having 60% of the population living in cities by 2020, up from 54% in 2014, and increasing the proportion of urban hukou holders from 35% of the total population in 2014 to 45% by 2020.
Reforms will be required
China has set itself a goal of moving 100 million farmers from the countryside to its urban centers by 2020. By 2026 it wants to have moved 250 million people, or more than the entire population of Brazil.
To achieve the orderly implementation of such an ambitious urbanization drive, a number of key reforms will be required. Take the country’s internal passport system, the hukou, as an example. This determines where families can access subsidized education and healthcare as well as the value of the pension they receive.
Until now, migrant workers with rural hukou could not settle with their families in their host cities, stifling consumption. While the government does not want people flooding into the more developed cities on the east coast (this would likely lead to overcrowding and slum development), it does want them to go to the so-called second- and third-tier cities. To control where migrants settle, the government will vary the ease with which urban residential status may be obtained.
Infrastructure will be required
If cities are to become the engines of China’s new consumption-based economy, a huge infrastructure outlay will be required in addition to the necessary reforms: People will need to move around, get to work, get to shopping centers, educate their children in schools, and care for their sick in hospitals.
The government plans to spend 42 trillion yuan (US$ 6.8 trillion) to connect cities and regions by road and rail, as well as to provide public transportation facilities, schools, hospitals, drainage, and utilities in cities to accommodate the incoming rural migrants seeking a higher standard of living for their families. According to its targets for 2020, the government plans to construct an additional 3,000 km of new urban rail lines and 30,000 km of new expressways, and expand the high-speed rail network to cover 80% of major cities.
Why does China’s urbanization matter?
Walt Whitman Rostow, an American economist, postulated that economic growth occurs in five basic stages, of varying length. He called the fifth and final stage of his “stages of economic growth” model the “age of high mass consumption.” This final stage is characterized by urban society and the widespread and normative consumption of high-value consumer goods, whereby consumers typically (if not universally) have disposable income, beyond all basic needs, for additional goods.
If China is to transition to this stage (i.e., from a middle-income, developing economy to developed-country status), it must take the next step and move to a consumption-based economy. The government sees urbanization as critical to achieving this aim. Given China’s top-down political structure, it is probably no surprise that it wants to actively manage and implement this process itself.
If historical precedent is anything to go by, the government has shown enormous capacity to drive change. It has proven adept at control and mobilizing its considerable resources over the years. This is why we are so confident that urbanization will continue and should be a fundamental driver of business strategy.