Recently, Chinese growth has been the subject of great speculation. The mainland’s GDP growth decelerated in the first half of the year, followed by subsequent signs of further slowdown.
Nonetheless, housing prices have begun to rise again. July was the eighth consecutive month with faster growth.
As China prepares for its second urban revolution, the Chinese are saving rather than consuming – for a reason.
Rising real estate investment
In the first half of the year, consumer confidence fell, and household spending growth slowed drastically. At the same time, the savings rate soared and investment contribution to growth rose to a three-year high, thanks to a surge in social financing and real estate investment.
After the slowdown, growth is likely to stabilize in the second half of the year. Since Chinese consumers expect no further tightening from the central government for the property market, they are saving.
In the coming months, China’s future no longer depends only on the 1st tier megacities in the coastal regions. Today, the urban growth momentum is in the mainland’s 2nd and 3rd tier megacities.
Despite substantial medium-term challenges, China’s short-term outlook will be supported by a wave of reforms that Premier Li Keqiang laid out in early May. In the long run, the most important reforms involve the impending urbanization plan.
It is a massive effort to move China’s urbanization rate from the current 50 percent to over 70 percent by 2030.
Demise of unsustainable urbanization
From the 1980s to 2012, China’s reform and opening-up policies contributed to historical growth, from Guangdong’s urban centers – Shenzhen, Guangzhou, and Dongguan – to other primary cities, such as Beijing and Shanghai.
In the past decade, the success of these 1st tier megapolises has spilled over into 2nd tier cities – from Dalian and Chengdu to Shenyang and Tianjin. At the same time, 3rd tier cities, from Fuzhou and Ningbo to Harbin and Wuxi, along with 4th tier cities, are following in the footsteps.
The urbanization plan is likely to have four core tenets. The first will seek to promote an orderly and sustainable process of urbanization. The proposed “new type of urbanization” is likely to mean greater recognition for some 230 million migrant workers as urban residents. Thirdly, the plan will provide guidance for the reasonable development of cities of different sizes. Finally, the basic framework for urbanization policies will require substantial administrative, land and financing reforms.
Led by Premier Li Keqiang, China’s leadership believes that the new urbanization should achieve lower urban density, support conservation, and attract more foreign and private investment.
Why U.S. urban experience provides limited guidance
In the mainland, the current household registration system (hukou), which limits urban-residence permits for rural migrants, is seen as increasingly unfair because it prevents their access to the same education, health care and welfare benefits as city dwellers.
In the United States, it is often perceived as a rights issue and the demand is that it should be urgently reformed or eliminated. Such guidance is based on America’s urbanization. While there are some historical commonalities between urbanization in the U.S. and China, there are also huge differences.
China is a large emerging economy in which urbanization occurs in the context of a relatively low level of prosperity. In contrast, U.S. urbanization took place in one of the wealthiest societies worldwide. In America, the process of urbanization has been a long one. Between 1840 and 1920, the rate of urbanization increased from 10 percent to over 50 percent; the current figure in China. In the mainland, a parallel shift occurred in just three decades.
In 1920, when half of the United States was urban, the population size was over 100 million—a bout the same as that of Guangdong, a single province in the mainland. In China, the comparable figure today is more than 1.35 billion. In addition to significant differences in habitable areas, the scale of population mass is very different. In the United States, population density is about 34 per square kilometer (89/square mile). In China, the comparable figure is 140 (363).
In brief, urbanization in China has occurred more than twice as fast as that in America; the Chinese population size is more than 13 times larger than its U.S. counterpart; and urban density in China is already more than four times higher than its U.S. counterpart. In other words, Chinese urbanization represents an entirely different magnitude in terms of pace, scale, and density.
The costs of new urbanization
When it was introduced in 1958, the purpose of the hukou system was to prevent farmers from leaving the land and thus creating a crisis in agricultural production. Today, it is seen more as an insurance against unmanageable migration flows, which led to impoverished favelas in Latin America, and inner city slums in the United States.
By focusing on the political side of the hukou challenge, the critics have typically failed to present a viable funding plan that would support the reforms.
Every year, some 15 million rural people come to Chinese cities, which provide a massive contribution to economic growth. However, the attendant integration costs amount to an estimated $240 billion, which, in turn, exceeds China’s projected budget deficit (2% of GDP) in 2013.
Currently, urban China is expected to expand by some 350 million people between 2005 and 2025. It will take an estimated $16,300 to urbanize a single rural resident in large cities; in small cities, the costs are only 20 percent of that total. At one extreme, then, the conversion of 350 million people could amount to anywhere around $4-$5.7 trillion.
Consequently, a disruptive end of the hukou system – say, urbanizing all current migrants within a single year – would be a political fantasy but an economic nightmare. It would severely damage not just China, but the fragile global economy.
Premier Li’s “new urbanization” is likely to give 250 million migrant workers more recognition as urban residents. However, pragmatic reformers are likely to advocate a gradual approach, with a time span of some 10-15 years.
In such scenarios, the central government might first admit university graduates as permanent residents, with a Shenzhen-like points accumulation system. In the next stage, skilled workers would gain an urban household registration. Finally, semi-skilled migrant workers would get their registration.
This gradualism is predicated on a smooth transition in which the rural-urban conversion is enabled by market-driven forces – new job-creation, increasing prosperity, and rising middle-class consumption.
In early fall, Beijing is expected to launch its “new type urbanization” plans. In order to support growth prospects in the mainland, these plans should be sustainable, include a practical hukou reform, and provide an actionable urban future for China.
It is a tall order, but a necessary one.
Dr. Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China).