China’s Next Urban Revolution

In the medium-term, China’s new urbanization plans, including the impending reform of the hukou household registration system, will make or break the mainland’s growth prospects.

When I recently visited Chongqing, the megapolis of China’s Southwest which already has more than 30 million inhabitants, the sprawling urban mammoth was filled with massive construction projects.

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 – particularly the impending comprehensive urbanization plan, and the highly-anticipated reform of the hukou household registration system.

Demise of unsustainable urbanization
For three decades, China’s reform and opening-up policies have contributed to world-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 footprints.

Nonetheless, there is a growing consensus that the old urban growth path is unsustainable. 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.

The proposed “new type urbanization” is also likely to mean greater recognition for some 230 million migrant workers as urban residents. The issue can no longer wait. By 2030, the overall floating population, most of whom are rural migrant workers, could exceed 300 million.

The new plan hopes to accelerate the reform of the hukou household registration system, especially in small and medium-sized cities.

The proposed initiatives are predicated on substantial administrative, land and financing reforms.

What is at stake is China’s medium-term future.

The impending hukou reforms

Some 15 million rural people come to Chinese cities annually. Each wave contributes a massive injection to growth in the mainland. The attendant integration costs amount to RMB 1.5 trillion ($240 billion).

Today, urban China is expected to expand by some 350 million people between 2005 and 2025. It will take an estimated RMB 100,000 ($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 RMB 25-35 trillion ($4-$5.7 trillion).

In the mainland, the hukou system is seen as increasingly unfair. In the West, the hukou system is often perceived as a human rights issue and thus the demand is that it should be changed swiftly. In view of current realities, a rapid end of the hukou system – say, urbanizing all current migrants within a single year – would cost most of China’s annual GDP and wreck the economy. And due to the mainland’s driving role in global growth, it could trigger a worldwide depression.

Unsurprisingly, pragmatic reformers advocate a gradual approach. In that case – say, in 10-20 years – 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; that is, new job-creation, increasing prosperity, and rising middle-class consumption.

If, however, the transition from investment-led growth to consumption moves too slowly, or new job-creation proves inadequate, the new urbanization would have to cope with urban slums, as Latin America, or instability, as the Middle East.

What kind of megacities?

In the past few years, China’s state council has explored policies that would encourage migrants to reside in small and medium-size cities, whereas permanent residency would be made difficult in the largest cities.

While the goal is to avoid urban over-expansion, such proposals ignore the fact that most migrants are in big cities because that’s where most jobs are.

So how should China urbanize? Should Beijing support large urban agglomerations or small ones? Or is the optimal approach somewhere in the middle?

Recently, McKinsey and other consultants have extrapolated an array of possible urban futures for China. Typically, these scenarios seem to rely on the interplay of concomitant positive agglomeration effects and cost efficiencies. These, in turn, suggest four generic alternatives, I would argue.

In the “fragmented whole” scenario, growth would be highly distributed. With minimal central coordination, both cost efficiencies and agglomeration effects would be low. In that sense, it could represent the worst of the possible urban worlds.

In the “small is beautiful” scenario, the goal would be townization; a big China of medium-sized cities. For all practical purposes, agglomeration effects would be high, but cost-efficiencies low. To many in Beijing, it is a socially attractive option, but its economic costs could prove prohibitive.

In the “big is beautiful” scenario, the big megacities would drive China’s urban expansion. This scenario would be characterized by high cost efficiencies but lower agglomeration effects. That would ensure economic cost-efficiencies, but it might come with the kind of social costs that big cities in the West know only too well.

Finally, the “strong center, strong local” scenario would translate to a hub-and-spoke model. In this case, both agglomeration effects and cost efficiencies would be optimal, ideally. In practice, it would be challenging to implement.

By early fall, Beijing is expected to launch the “new type urbanization” plans. In order to ensure relative strong growth prospects in the mainland, these plans should be sustainable, include a practical hukou reform, and provide an actionable urban future for China. It’s a tall order.

A slightly different version of this commentary first appeared in the South China Morning Post print edition on June 22, 2013 as “Dreams of an Urban China” It is based on a part of his keynote at the International Real Estate and Construction Conference by RICS (Royal Institution of Chartered Surveyors), in Chongqing, China, on May 22, 2013.

4 Responses to "China’s Next Urban Revolution"

  1. jack straw   June 25, 2013 at 7:39 pm

    wow i can't wait. "the people have already move so here's the plan." hmmmm. "Shanghai we have a problem" comes to mind. Obviously the most obvious solution is for Japan, Korea and Taiwan to start taking in "some of the excesses." Call it the "Mariel Boatlift method" http://en.wikipedia.org/wiki/Mariel_boatlift needless to say there's no shortage of boats in the world. "that's why they call it Shanghai'ing"! besides "both sides agree some new blood is in order." legality and "normative forms of behavior" aside of course. hey man, sometimes you gotta boogie. http://www.youtube.com/watch?v=7pSw6Dz3-8E i mean who knows why ten…million…people just decide "they want to there instead of here." http://en.wikipedia.org/wiki/London

  2. Tom   June 26, 2013 at 6:03 pm

    I fail to understand the theory that abolishing hukou could cause a global depression. Unless the point between the lines is that subservience requires silliness.

  3. george harter   July 2, 2013 at 4:38 am

    Why are there so many Western boot lickers???? 200 million people will be uprooted, whether they want to be or not! No matter where they are stored, it will not be pretty. But, hey….they're just Chinese, so..anything goes and there are plenty of Western toadies to stand around applauding the Chinese autocracy!!!!!