To Urbanize, China Needs More People

China is famously making an effort to spur its economy by increasing the rate of urbanization, moving as many as 250 million more people from low productivity work in agriculture to city factories and service industries in what is intended to be one of the biggest social experiments in world history.

But although the package of policies just unveiled by the State Council contains reforms which should benefit both farmers and the economy, demographics suggest that reaching government goals will be tough.

The basic goal is to raise the urbanization level from 52.6 percent in 2012 to 60 percent by 2020. This implies a rate of roughly 1 percent a year, offering the prospect of another 100 million people moving to towns and cities by 2020. However it would be wrong to assume that this means that urban infrastructure and housing will need to grow faster than ever to accommodate the shift of people.

In fact the rate of urbanization has been around 1 percent a year for the past two decades. What is new now is that the size of the total population has almost leveled off, in contrast to the early years of this century when a combination of population growth and movement from the countryside caused urban population to grow at 2 percent and more a year.

Worse still, the general aging of the population combined with the earlier exodus of young people to the cities has resulted in the rural population being significantly older than the urban one. In some rural areas as much as 30 percent of the people are already 60 over while 75 percent of those now 30-years old who were born in rural areas have already migrated.

The total number of people in the 15-29 age groups – those most likely to migrate to urban areas, rose from 322 million in 2000 to a peak of 347 million in 2010 but is now declining steeply and will be down to 266 million by 2020 – and the vast majority of them will then be already urbanized.

The shortage of women in that age group caused by preference for male children may not directly slow urbanization but it will slow new household formation and hence demand for housing.

Fertility rates are also lower in urban areas and that is unlikely to change even if the One Child policy is finally abolished as urban living costs make the opportunity cost of child rearing very high.

For sure the prospect of continuing urban labor shortages now that the workforce size has reached a plateau should keep wages rising and act as a pull. But attracting middle-aged people into the mostly polluted cities will be no easy task even if the reforms outlined by the State Council are put into practice quickly.

The phasing out of thehukou system which discriminates against migrants will make the cities more attractive–and less expensive –for them by bringing them all eventually into the local housing, education and welfare systems. However this is to be a gradual process and far from complete even by 2020. These reforms now run up not only against the interests of the established urban populations but the poor condition of the finances of many local governments. Allowing the issue of municipal bonds is one solution, except that the government is already worried about the debt levels of many, with an estimated RMB14 trillion sunk into in various kinds of local government funding vehicles – and their excessive reliance on urban land sales for revenue.

The State Council is now promising to ease restrictions on the sale or leasing of land by farmers. This would encourage some to sell up and use the proceeds to establish themselves in urban areas. It would also have the added benefit of encouraging land consolidation which would raise farm labor productivity and perhaps also land productivity. Presumably too farmers would be able to borrow against their land to invest in machinery and other inputs. However, there is no timetable for these reforms which have been under discussion for several years already.

In short, China’s policies are moving slowly in the right direction of raising manpower productivity and reducing income inequality between urban and rural, migrant and non-migrant. But this will do no more than give small boost to an urbanization process that is slowing for reasons now beyond government control – demographics.