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Urbanization, China’s New Driving Force

Mar 30 , 2013
  • Ding Yifan

    Deputy Director, China Development Research Center

The new Chinese administration is facing a complex economic situation: economic growth is slowing down; export growth is slowing down; and an aging society is leading to labor recruitment difficulties in coastal cities and provinces. Under the new circumstances, what measures will the new administration take to ensure the sustainable and balanced development of the Chinese economy? Premier Li Keqiang has recently emphasized urbanization, which will become the focus of China’s economic growth in the future, and will become a new impetus for the development of China.

According to Chinese news reports, urbanization could add 400 million more people to the current Chinese urban population in the next decade, which will involve a capital investment of 40 trillion Chinese RMB. The government is also said to be expanding the bond market to support urbanization. This will objectively promote the further liberalization of China’s domestic capital markets, driven by comprehensive reform.

Around the world, when the level of urbanization of a country has reached 30% to 70%, the urbanization process is in an accelerated phase. As China’s urbanization rate in 2011 is 51.27%, China is likely to enter the second stage of urbanization. If the first stage of accelerated urbanization is characterized by the rapid expansion of cities, the second phase may be slower than in the past half, but the quality will be more important than the quantity. The most important task is to improve the quality of urbanization, so as to absorb cities’ new immigrants, help them become modern citizens, and improve cities’ planning and construction.

To prevent the next phase of urbanization from being a new “Great Leap Forward” into real estate investment, it is important to focus on the human nature of urbanization. That means that urbanization should be for the benefit of the people. Both settlements in cities and the improvement of farmers’ conditions in the rural areas should be taken into consideration. On the other hand, the construction of new infrastructure should lay the foundation for a new development model characterized by energy-saving, environment-friendly and intensive development. Recent government documents clearly indicate that the construction of centralized settlements of farmers is not encouraged.

Urbanization is not only the result of industrialization but it also provides a platform for industrial development. At the current stage of China’s development, urbanization without the support of industry would be dangerous and unsustainable. Urbanization and industrialization are two faces of the same coin – a supply side and a demand side. Both sides complement each other. If urbanization needs industrial development to create jobs and promote entrepreneurship, industrial development could meet newly released domestic demand through urbanization. The key point is, thanks to urbanization, the new trend of industrial development can offer more opportunities for service industries, and also for new industries.

The government often plays a very important role in urbanization. But this time, more attention should be given to the role of market in the allocation of resources.  Private enterprise investment and financing channels should be more market-oriented. The 40 trillion RMB cost of this urbanization process should lead to the birth of a large number of small and medium enterprises, or even to help some of the existing firms become economic giants. Government-led investment often prioritizes state-owned enterprises, which may exacerbate the unfairness of the economic environment; not only hampering the development of private enterprises but also rendering state-owned enterprises too lazy or too inefficient, because of a lack of competition.

Local governments will inevitably try to take advantage of such large-scale investment, to build new urban infrastructure. Given the large number of corrupt officials involved in inefficient government spending, people are wondering whether public money would be better for urbanization and under the stricter eye of public opinion.

New urbanization should pay attention to the interests of the 260 million migrant workers, including through the reform of income distribution system, household registration system, land system, central and local fiscal and taxation systems, college entrance examination, pension, etc, in order to enable migrant workers to benefit from equal public services.

Firstly, urbanization should be focused on human development. If we allow immigration, we should provide job training, funding for small businesses, and eliminate all hurdles that could cause new citizens trouble.

Secondly, we should coordinate urbanization and rural area restructuring.  While a proportion of the rural population will be moved into cities, the modernization of the countryside should not be neglected. The formation of the joint development of urban and rural areas will lay the foundation for healthy and sustainable development.

Third, new urbanization should avoid imitation. Each city or town should have its own characteristics, or should build its own brand. Every city (including small towns) should plan according to its local competitive advantages, focusing on the development of specific industries or services.

Fourth, new urbanization should focus on green and low carbon development. Resource-saving and environmentally friendly technologies should be promoted so that land resources can be used in an economical way, and production can be used intensively. New urbanization should also strengthen energy conservation, reduce carbon dioxide emissions, and try to avoid the destruction of the existing ecological environment. If possible, it should also try to restore the ecological environment by reforestation.

Fifth, cluster development should be prioritized in this new round of urbanization. Not only are industrial clusters rational, but town clusters can also be very significant. The difference between towns would allow the formation of a reasonable division of work, enabling them to develop their own advantages in order to enhance the overall competitiveness of the urban system.

Sixth, urbanization should let the market play its role. Although government should play a guiding role in this new round of urbanization, the market should never be replaced. Urbanization is a natural development process to meet people’s needs, so peasants, citizens, and enterprises should play a main role in urbanization.

During the first decade of this century, China’s growth has been driven by the growth of its manufacturing sector, especially the processing industry and trade. However, since the international financial crisis, the traditional Chinese export market, namely the US and EU, has been seriously affected. A shrinking of external demand has hit China’s exports, and affected China’s growth.

Chinese urbanization could partially offset China’s economic slowdown due to investment in infrastructure and construction, as well as sectors producing goods and services that are not internationally tradable.

This may have some major consequences on the world economy:

• China’s imports, mostly related to industrial activity, may stagnate, so China will no longer be a locomotive for resource-producing countries;

• China’s trade balance will improve due to the low level of imports, while China’s overall growth remains fairly strong. This could lead to an appreciation of the RMB, causing a further deterioration of China’s competitiveness;

• China’s demand for commodities will continue to increase due to its urbanization projects, but it will grow far less rapidly than international investors have expected so commodity prices will likewise be lower;

• China’s trade surplus declines, compared to its GDP, which deprives the US from the pretext of exerting further pressure on China to revaluate its currency;

• As the US external deficit decreases (as a result of shale gas and reindustrialization), the US dollar will probably revaluate, leading to a further commodity price fall;

• As most Asian countries currencies are more or less pegged to the US dollar, currency revaluation will hurt their competitiveness, while they may benefit from a decrease in commodity prices;

• China will open its service market, which could benefit overseas firms, but also enhance the competition in Chinese domestic market. Thus, Chinese consumers may expect a further improvement in service quality;

China’s urbanization will be a major driving force for China’s future development, so will be beneficial to global growth as well. But, China must be careful not to erode public finances through a massive investment in urban infrastructure. Its manufacturing sector should also find a way to upgrade its products or the sophistication of its production, so that China can continue to provide sound products to the world market in a time of economic difficulties.

Ding Yifan, Deputy Director, Research Institute of World Development, China Development Research Center (DRC)

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