Urbanization in Focus

Might urbanization be the leading theme of China’s 5th generation CCP administration? The background to this question is the process of Chinese urbanization itself. Over the three decades of Reform and Opening, China’s urban population rose from 20% to 53% of the (rising) total, resulting in over half a billion new urbanites. The economic and geostrategic consequences of this transformation have profoundly re-structured the world. (It is the central fact of the Pacific-centered Modernity 2.0.)

In the Atlantic, Matt Schiavenza communicates the basics:

In China, economic growth and urbanization have gone hand in hand. When Deng Xiaoping initiated Reform and Opening in 1978, the vast majority of the population lived and worked in the countryside — just as Chinese people had for centuries. But over the past three and a half decades, as special economic zones churned out exports and China modernized its cities, hundreds of millions of people migrated to urban areas seeking work in the manufacturing and service sectors. This … has made China — and the Chinese — much wealthier.

The guideline themes of China’s 4th generation CCP leadership – ‘harmonious society’ and ‘scientific development’ – were no doubt sculpted by the stresses and policy challenges of massive urbanization, but they addressed the phenomenon indirectly. There are numerous indications that a more specifically-focused emphasis upon urbanization is now emerging. In particular, China’s new Premier Li Keqiang envisages the topic as a nexus, where many of the country’s development and governance issues meet.

The Chinese journal Qiushi published an article on urbanization by Li Keqiang in its Winter 2012 issue (translated into English by He Shan and Chen Xia here). Framed by the expectation (attributed to “Foreign economists”) “that China’s urbanization and U.S. high technology would emerge as twin engines of the global economy in the 21st century,” it rewards close scrutiny.

The analysis of Michael Pettis, who identifies insufficient domestic consumption (by households) as China’s pre-eminent economic obstacle, is a valuable preparation for this discussion, which begins: “Urbanization has the greatest potential for boosting domestic demand.” Li argues that China remains relatively under-urbanized, so the propulsion to “exponential urban growth” continues, with at least partially predictable implications. Since “urban residents spent 3.6 times more than rural dwellers in 2010” it can be confidently anticipated that consumer spending will rise as a function of urbanization, contributing automatically to economic re-balancing.

… it is estimated that every rural resident who becomes an urban dweller will increase consumption by more than 10,000 yuan (US$1,587). And each one percent increase in the urbanization rate in only one year will see more than 10 million rural residents absorbed into the cities. This will, in turn, translate into consumption totaling more than 100 billion yuan (US$15.9 billion) and correspondingly create more investment opportunities.

Full realization of these opportunities, Li argues, will require reform or abolition of the country’s hukou system of residence registry, with its “urban-rural dual structure.” In other respects, too, vigorous government action is recommended, as long as it achieves “conformity with the objective law of urban development.” (Investigating “the objective law of urban development” is the primary mission of this blog, so it is a concept we shall obsessively return to.)

Core government responsibilities are taken to include the mitigation of social conflicts and problems, infrastructure investment, and administrative intervention to constrain housing-market instability. Urbanization management is thus recognized as a governmental priority. Given the complexity and the global significance of this task, which amounts to the integration of another quarter-billion Chinese into the economic mainstream in a little over a decade, there is really no decent alternative to remarking – with an absolute minimum of smugness or sarcasm – good luck with that.

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Even when direct construction expenditures are ignored, by systematically raising the level of household consumption, Chinese urbanization dominates the country’s macroeconomic landscape. It is no great exaggeration to see the emergence of the world’s most dynamic consumer economy as a side-effect of a three decade-long urbanization process, although – as in any such complex development – the causality is turbular, and self-stimulating.The Chinese consumer is a creature of the new urban epoch, and an incitement to its further elaboration.

As noted in the first part of this post, the centrality of urbanization to China’s macroeconomic predicament has been explicitly addressed in a significant article by China’s new premier, Li Keqiang. The conversion of rural folk into urbanites (or ‘citizens’ according to strict etymology) is accompanied by a 3.6-fold rise in per capita consumption. In addition to the purely quantitative impact upon the level of domestic economic demand, the rise of urban consumers also drives a qualitative transition, characterized above all by the expansion of the service sector (in both absolute and relative terms). Li seeks to align administrative action with this trend:

Escalating the growth of the service industry is critical to adjusting the industrial structure. Effective measures should be taken to build a favorable environment for the growth of the service industry, both in terms of its size and quality. The government should promote the development of production-related service industries such as modern logistics, e-commerce and scientific research and design. It should also ensure that consumption-related services such as tourism, recreation, care of the elderly and domestic services receive a boost, and the development of small and mid-sized service companies gets support.

Urbanization promotes a more service oriented economic structure, which in turn promises to lower the energy-intensity of economic output; raise total factor productivity (TFP); proliferate entrepreneurial small and medium-sized businesses (SMEs); accelerate the emergence of knowledge-based and creative industries; and increase employment opportunities. In other words, a predictable series of dependencies – from urbanization, through consumerism, to service-orientation – subordinates economic policy to “the objective law of urban development” which alone makes its goals realizable. The expansion and improvement of cities will decide whether China works.

The orchestration of central policy questions under an urban theme is also strikingly seen in the area of regional development. Here, too, the country’s most intractable problems are to be unlocked by an urban key:

Regional development is closely related to urbanization. Less-developed regions lag behind in terms of growth, especially in urbanization. In areas which boast mature development conditions and large environmental capacity, the government should actively and steadily facilitate urbanization by reasonable allocation of resources, centralized layout of businesses and encouragement of intensive land usage to fire up new engines of growth and enhance the local capacity for self-sustained development. The government should tailor its regional, industrial and land policies to different regions and sectors, rather than adopting general and all-inclusive policies.

The infrastructural investment and social policy tools that have been employed to ‘Open up the West’ since the turn of the millennium are now specifically envisaged as ways to catalyze, accelerate, and guide urban development in backward regions. Cities are to be the solution.

Some extra links:

Mi Shih’s excellent introduction to chengzhenhua (城镇化) — and why ‘urbanization’ isn’t the right word

For a more hostile take on the Chinese urbanization agenda, see Gordon Chang here.

Nin-Hai Tseng at Fortune: “[Stephen] Roach offers an interesting statistic: China’s services sector requires about 35% more jobs per unit of GDP than do manufacturing and construction.”

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Capital Absorption: On the topic of Michael Pettis, this superb recent article is sure to become an indispensable reference point for China economy watchers. Pettis has long argued that Chinese investment levels exceed the country’s absorption capacity, and the new article places this argument in a broader theoretical framework, which he explains with extraordinary lucidity. If he is correct in his basic assessment, some widely-held assumptions of development economics will require drastic revision, with cultural and institutional factors (“social capital”) acquiring far greater prominence.

Pettis has a deserved reputation for bearishness on Chinese growth prospects, but this article makes a guarded case for optimism in regards to the country’s development strategy, which he sees shifting from an investment-driven growth model to something more institutionally-sensitive. This political sub-forecast predicts significant movement in the direction of market-oriented reform during the Xi-Li period.

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Opening Moves: At the South China Morning Post (via): Premier Li Keqiang fought open opposition from financial regulators in his bid to push through a landmark plan for a free-trade zone in Shanghai. It is the clearest sign yet that the nation’s new leadership is determined to deliver long-delayed economic reforms. […] The new Shanghai free-trade zone plan, officially announced at the beginning of July, is expected to be the testing ground for major policy reforms. It would promote cross-border commodity and capital flows, with key experiments in freeing foreign exchange markets and liberalising domestic interest rates.[…] Within two months, Li made an initial proposal covering 21 initiatives, whose details were not officially announced. These included shortcuts for foreign banks to set up subsidiary or joint venture operations and special permission for foreign commodities exchanges to own warehouses in the free-trade zone in Shanghai … […] … other mainland cities, facing unemployment and slower growth, are also keen to follow Shanghai’s move to lure foreign capital. But Li is not understood to be interested in rushing to copy the Shanghai model for other mainland cities.

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Handle_MZ commented: “it can be confidently anticipated that consumer spending will rise as a function of urbanization, contributing automatically to economic re-balancing.”

I read “The Great Rebalancing” and I think this prediction strangely contradicts Pettis’ main narrative. Pettis says that the consumption share of Chinese GDP is a necessary function of both the populations propensities to save and consume and the whole of Government economic policy to include the PBoC’s interest rates, capital
controls and stabilization of the dollar exchange rate.

The objective is sustainable high GDP growth through high levels of investment, stable wages, and productive factor capital accumulation — especially in the export and tradables sector. A corollary objective is improved global competitiveness in markets farther up the value chain.

If household consumption is a product of means which seek the above end, then any increase in consumption (i.e. from urbanization) that disrupts this end will only be met with compensatory government moves that push
it back down. Policy is the unmoved mover of consumption levels. Well, slightly moved, but by that aforementioned sustainability criterion. But rebalancing cannot occur under the current system unless the
government is wise enough to support it.

And at any rate, urbanization creates a surplus of labor which suppresses the growth rate of average urban wages. The more urban consumption rises (from rising wages, for example), the more attractive it is the move from the
countryside, which also pushes urban wages back down. This helps China’s global competitiveness, but may actually reduce domestic consumption relative to the less-urbanization counterfactual.

Admin response: As you know from previous discussions, there are numerous assumptions that need straightening out before pushing far with this. At this point, I’m satisfied with the conclusion that urbanization is being conceived as a solution to the country’s most pronounced economic quandary (at the highest level of the new leadership). I think this is quite solid, irrespective of the issues that Pettis and you raise. On the latter, though, it seems hard to believe that urbanization is incidental to “social capital” formation, of the kind that — Pettis argues — raises capital absorption capacity, and thus directly contributes to the amelioration of the consumption deficiency problem. That’s in addition to the direct consumption effects emphasized by Li Keqiang.

This isn’t intended as an adequate response to your argument, just a provisional rejoinder.

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