The urban question

What does China need to do to ensure that its economy keeps growing in the next 20 years as it did over the previous 30 years? Forget all the talk about currency liberalization, capital market reform and indigenous innovation – what really matters is urbanization.

All sorts of things have helped to turn China from the poor man of Asia to a middle-income country and the world’s new superpower. But nothing has been more important than moving nearly 450 million farmers out of the fields and into more productive jobs in the country’s teeming cities.

In 1980, fewer than 200 million Chinese lived in towns and cities – a paltry 20% of the population. Today, that figure has risen to more than 630 million. It is expected to swell to 1 billion by 2030, at which point a full 70% of Chinese will be urban citizens, a higher proportion than in Japan or Italy today.

The journey from farm to city will remain the story of China’s economic transformation for at least the next 20 years. Beijing views economic growth and urbanization as two sides of the same coin, and is pumping cash into creating the infrastructure needed to accommodate 350 million new city dwellers.

Yet managing this vast migration in a sustainable manner will require more than steel and cement – although it will, of course, require plenty of those. The process, and how it is financed, will ultimately determine whether the country’s current economic model continues or stalls.

Making urbanization work will require three things. First, farmers need to be persuaded to give up the security of their ancestral land. This means reforming discriminatory residence laws – which currently mean that urban residents enjoy far superior social security and public welfare benefits – and giving farmers secure rural property rights so they can trade their land.

Second, building functioning, liveable cities means creating patterns of urban growth that use resources efficiently and avoid irreversible urban sprawl. Beijing’s jam-packed roads and filthy air show what happens when cities expand around ever-widening ring roads and ever-higher rates of car ownership. It also means building thousands of new hospitals and schools, and millions of affordable new homes.

Third, integrating farmers into city life and thereby developing an urban consumer economy means extending the social welfare system to rural migrants and creating hundreds of millions of new jobs. A new middle class of consumers will not magically emerge from the ranks of the low-income rural migrants set to drive the bulk of China’s urban population growth.

If China gets urbanization right, it will play a major role in re-tilting the economy toward consumption and services – the so-called “rebalancing” question that dominates academic and political discussion of China’s economy. Historical data from China’s east coast cities and other emerging markets in Asia show that consumption levels increase significantly once annual disposable income hits US$9,000 per household. By 2020, more than 130 million Chinese households – roughly 300 million people – are expected to have that sort of spending power.

But if China manages the urbanization process poorly, it could spend the next 20 years languishing in lower-middle-income torpor, its cities ringed by giant slums. Beijing policymakers must beware the fate of another economic juggernaut – Brazil – which only recently began to climb out of the dark hole into which it fell in the 1980s and 1990s.