Can China Really Urbanize?

Plenty of ideas for driving China toward being a modern economy are on view in the run-up to the Party Plenum – interest rate liberalization, rural land rights, abolition of the hukou system, competition for state enterprises, etc., showing that top advisory bodies know what should be done even if vested interests stand in the way.

Meanwhile, however, the modest uptick in China’s growth seems yet again mostly due to the traditional stimulus mode – urban infrastructure, railways and highways and public buildings, all guzzlers of steel, cement, copper and other raw materials. Commodity prices, notable iron ore, have risen sharply again, as has that most China-sensitive of currencies, the Australian dollar.

This new surge of infrastructure building is not even just viewed as a short term stimulus measure. A faster pace of urbanization is regarded as underpinning growth in the medium term. Statistics show that another 280 million people might move to the towns and cities over the next 17 years, bringing the urban population from around 52 percent of the total to 70 percent. At present China is only slightly more urbanized than the Philippines while Malaysia is already at 70 percent.

That sounds like a big number but 16 million a year is actually slightly less than that of recent years. The goal also implies that the percentage decline in the percent of the rural population will have to rise from the annual rate of which has held steady at around 1 percent for two decades.

There are a number of reasons in practice to expect the process of urbanization to fall. The first is the simple one that the increase in total population is grinding to a half. This is already reflected in the fact that while the urban population was growing at 3 percent a year early in this century and at the end of the last one but had fallen to 2.5 percent by 2010 and is now probably 2 percent at best.

The second is that it is mainly young people who migrate to the cities. Older ones mostly only become urbanized as towns expand into rural areas. The number in the potentially mobile age bracket is in steep decline. The number of people in the 15-29 age cohort rose from 322 million in 2000 to a peak of 347 million in 2010 but is now falling steadily and by 2020 will be only 266 million.

Even worse is that the number in these age groups in rural areas is falling even faster. Of those now 30 years old who were born in rural areas, 75 percent are already in the cities, a reflection of the role of the youth bulge, now passed, in enabling cities to grow so fast.

Meanwhile in rural areas those over 60 will soon account for some 30 percent of the population and rising. Thousands of schools have closed because of lack of pupils.

It is possible that ending the hukou system, which seems likely to be complete within five years, will give a temporary lift to urbanization as migrants acquire rights to schools and welfare, buy housing and bring their families left behind in villages. On the other hand, with migrant workers becoming residents, cities will be pressured to spend more money on education and welfare at the expense of public projects. he very low rates of fertility in cities will slow the demand for housing, as too will late marriage and gender gap which is hold down new household formation.

Urbanization is also a matter of demand as well as supply. The focus is decreasingly on low-skilled, labor-intensive manufacturing and more on higher value-added capital and knowledge-based industries. These may have high capital requirements but they are very different from the concrete and steel dominated construction of recent years. Of course there is still plenty of need for new urban railways, redevelopment of old urban areas etc. But unless the government is set on following the abysmal Japanese example of trying to sustain growth by building unneeded bridges, airports and stadiums, the urban construction phase of China’s growth has passed its peak.

Meanwhile the nation at large and the rural areas in particular face another challenge: how to raise agricultural manpower productivity in the face of a rapidly aging rural workforce. China generally has very high land productivity but raising that further is tough given water and other constraints. Raising manpower productivity is essential if China is to become a much bigger net importer of foods, and is rural incomes are not to fall even further behind urban ones, forcing the government to spend tens of billions on subsidies – as Thailand is now doing for rice farmers.

The bottom line for urbanization is that it should not be a goal in itself but a consequence of economic development. Nor is it always an indication of progress. Sometimes it is a consequence of desperation in the rural areas not the pull of regular jobs in the city. In South Asia and the Philippines for example many migrants live hand to mouth with very low income from informal employment scavenging, selling on the streets, and doing casual menial jobs. The hukou system largely prevents such things in China but thereby keep the rural-urban gap wider than it would be if all citizens could move freely.

It might indeed be better for China if more young people could see a future in remaining in rural areas and being able to enjoy reasonable incomes without excessive back-breaking toil. For that a new era of land reform is needed to give alienable property rights to the tillers and so encourage amalgamation of farms, investment in machinery and inputs required to raise manpower productivity. China cannot afford to ignore that fact that rural issues are now critical both for the nation’s well-being and for continued urbanization.