Off to the City

China’s rapid urbanization promises a higher quality of life for millions of rural residents but only if urban governments implement and enforce the right policies

by Shahid Yusuf

China’s urbanization rate is not extraordinary. It is approaching 50 percent, which is the average for the world as a whole, but far less than the 78 percent rate reached by Latin America and 75 percent by the United States. Much more striking, however, is the sheer number of people involved and the anticipated rates of increased urbanization over the next two decades. If urban migrants are included, more than 650 million Chinese resided in urban areas in 2008, compared with 191 million in 1980. On average, 16.4 million people moved from rural to urban areas annually from 1982 to 2000, and barring a significant slowing of economic activity, this trend will add up to 240 million more to the urban population by 2020. (Even the current global recession and temporary return of many of China’s migrants to the countryside are unlikely to change this trend over the long term.) With the urban sector accounting for 80 percent of China’s gross domestic product (GDP) in 2007, and agriculture for just 11 percent, mass migration to urban areas is inevitable and will help fuel China’s economic growth.

The transfer of workers from less productive jobs in rural areas to more productive jobs in cities adds value in urban areas, enhances productivity, and enlarges the purchasing power of the urban economy. According to research conducted by Barry Bosworth and Susan M. Collins, China’s productivity averaged 4 percent growth annually between 1993 and 2004 and contributed roughly 40 percent of GDP growth. In recent years, six of the largest cities—Beijing, Chongqing, Shanghai, Tianjin, and Guangzhou and Shenzhen in Guangdong—have produced nearly 20 percent of China’s GDP. If their productivity advantage and that of other large cities is sustained, the share of the major urban centers will continue to grow. Moreover, the influx of young workers into the urban job market has been a source of energy, entrepreneurship, and consumer demand that has contributed to economic momentum.

Dynamics of urban change

The number of China’s cities climbed from just 69 in the late 1940s to 651 by 2007, according to the PRC National Bureau of Statistics. Most of China’s cities are small (population under 1 million), but 119 have populations of more than 1 million. China’s medium-sized and large cities—with populations of 1-4 million and more than 4 million, respectively—owe much of their growth impetus to the industrial sector. As was the case in Europe and the United States from the mid-nineteenth through the mid-twentieth century, China’s manufacturing has driven growth and generated one-third or more of its urban GDP. Even in megacities with populations of more than 10 million, such as Shanghai and Tianjin, industry is a leading sector, though services are gradually expanding as a share of output. (For example, services contributed 50 percent of Shanghai’s GDP in 2000 and 52 percent in 2007.) This economic composition is advantageous for China at its per capita income and development levels because technological assimilation tends to generate the greatest productivity increases in manufacturing. In China, manufacturing is registering the highest productivity gains and has the most promising export prospects. As many of China’s industrial cities are discovering, however, certain lines of manufacturing are facing national and global market saturation. Moreover, manufacturing is subject to cyclical swings, and the global economic downturn is proving especially painful for subsectors dependent on exports.

Despite the speed at which China’s largest cities have been expanding, all but a handful are well short of realizing the potential benefits from economies of scale and agglomeration (the concentration of activities in a city), which expand labor markets, induce technological spillovers, encourage innovation, and facilitate market and information exchanges among people and companies.

As Chinese cities expand, many are diversifying their industrial base by attracting services companies. Such diversification will help them realize “urbanization economies,” or cost savings that derive from the productive interaction of a mix of activities in a concentrated area. Some of the largest cities are already beginning to reap the benefits of cross-fertilization from diverse industrial capabilities and the range of skills and suppliers associated with them. Size and diversity will also stimulate innovation because international experience suggests that large cities with deep pools of expertise, many knowledge-producing entities, and the opportunities to absorb and exchange ideas are generally more innovative, particularly if they embrace a culture of openness.

Urbanization will fuel continued growth in the size of China’s middle class, with significant implications for consumer demand. The middle class, defined here as those earning roughly $12,500 per year, numbered nearly 100 million people in 2006 and is the principal market for consumer goods of all types, from cars to cosmetics. It will also continue to generate demand for a wide range of business and personal services as incomes rise. Traditionally high urban household savings rates suggest that there is more room for urban consumption growth, and a more sophisticated, affluent middle class will offer domestic and foreign producers opportunities to expand their businesses well into the future. As consumption’s share of China’s total GDP, which is less than 40 percent, increases, China’s urban markets should offer firms growth prospects that are drying up in the industrialized countries.

Improving quality of life

In recent years, China’s urbanization has drawn momentum from vast expenditures on urban infrastructure and housing. Before the economic crisis, close to 10 percent of China’s GDP was invested in housing and an equal amount into physical infrastructure annually. This outlay has helped accommodate urban population growth and enlarged the urban living area from 6.7 m2 per person in 1978 to 27.1 m2 in 2006. Urban inhabitants have access to better public transportation, and more can afford cars of their own. Compared to the early 1980s, or even the early 1990s, the quality of life as measured by per capita consumption has improved significantly.

In the early 1980s, China’s cities lacked a modern retail infrastructure, business services were scarce, and recreational amenities were few. In the larger cities, and in many of the smaller ones, much has changed. Retail outlets and restaurants have proliferated; opportunities for recreation are plentiful; and cities have shed the gray, cheerless facade of two decades ago. Cultural activity is varied and brisk and buildings of considerable aesthetic distinction dot China’s urban landscape. Cities are also taking to heart the importance of livability—for example, green areas in China’s cities increased from 1.8 m2 per capita in 1990 to 9.0 m2 in 2007.

The face of urban China has been transformed in little more than 15 years, mostly for the better. The cities have experienced economic growth, while controls on migration and heavy investment in urban infrastructure have managed to limit or avoid the emergence of slums. Though the quality of housing varies and there is still not enough of it for migrants, much more exists than in the past. Because of the spread of mortgage finance, 85 percent of urban residents owned their homes in 2005, according to Gallup, Inc. New infrastructure and the quality of life for the average urban Chinese person are much superior to what they were only two decades ago.

Challenges for policymakers

Great strides in urban development notwithstanding, urbanization presents several serious challenges. Chinese policymakers at the national and sub-national levels must address these to ensure that the full measure of gains that normally accompany larger cities can be realized. None of the challenges can be addressed sufficiently by quick policy actions; instead, they require sustained attention supported by public investment.

• Migration restrictions One key reason why Chinese cities have partially avoided the problems of overcrowding and slums is China’s residential permit (hukou) system, which assigns each person an agricultural or nonagricultural hukou at birth. It is typically difficult for rural residents to change their hukou status to urban, especially in larger cities. This system of registration, monitoring, exclusion, and enforcement enables municipal authorities to restrict rural-to-urban migration by limiting the access of migrants to services available to registered urban residents and by regulating the length of time migrants can spend in the city. It has also checked flows and permitted cities to roughly match migration with the increase in absorptive capacity. The system has always been subject to leakage but has been enforced more rigorously in the larger cities. A gradual easing of hukou restrictions is expected as cities adjust to migration pressures, their own work-force requirements, and the demands of temporary residents. (For example, Shanghai lowered the hurdles to acquiring permanent residency in February 2009.) How cities balance the need to modify or abolish the hukou with their own capacity to absorb newcomers, while enhancing the quality of infrastructure and services, will be an important test. With millions of rural dwellers likely to seek permanent homes in urban centers, managing migration will be a priority for urban administrators.
• Affordable housing A related priority will be the provision of housing for urban newcomers. Low-income housing remains scarce in China’s cities, especially in larger cities, and there is an urgent need to increase supply. The government’s stimulus package, announced in December 2008, promises to provide a much-needed boost to urban housing. It allocates funds over a three-year period to construct affordable housing for 7.5 million low-income families and the 2.4 million who are currently living in the shantytowns that have appeared on the outskirts of major metropolitan centers. Once implemented, this program will ease the bottleneck, but the housing requirements of migrants will need continued attention for the foreseeable future.
• Urban governance How responsive municipalities are to the needs of urban dwellers will profoundly affect the tenor of urban development and the quality of urban life. The verdict on governance to date is mixed, as it is in all developing countries. Municipal officials are regularly accused of corruption, squandering public funds on wasteful spending, dubious land deals that have displaced farmers as city limits expand, and inattention to the needs of the urban poor and the unemployed. Yet overall, an extensive survey conducted by the Horizon Research Consultancy Group from 2003 to 2005 shows that China’s urban population is reasonably satisfied with the quality of municipal government, though the level of satisfaction with the central government is higher.
• Land use By 2007, cities had annexed about 3 percent of China’s land, much of it arable land. This is not high by comparison with countries that make up the Organization for Economic Cooperation and Development, but cities are expanding fast and urban sprawl is becoming worrisome. In recent years, well over 100,000 hectares of China’s land, much of it prime agricultural land, adjacent to cities has been lost as suburbanization and ribbon development along main roads accelerates the spread of cities. Better planning and tightened land-use standards are urgently needed because the long-term costs of low-density urbanization are significant. In addition to higher energy costs—urban residents used 3.6 times more energy than rural dwellers per capita in 2002, a statistic that is unlikely to have changed significantly—and increased expenditures on transportation, water, and sanitation infrastructure, the growth of an automobile-based culture and vast dormitory suburbs would have severe consequences for health, as advanced countries are discovering. Modifying floor-area ratios to facilitate the vertical development of cities, creating mixed-use neighborhoods, providing adequate green spaces, and strictly enforcing zoning laws that manage the spread and character of cities will test the skills and authority of China’s urban policymakers.
• Environmental factors One rising concern, especially acute in urban centers where a concentration of industry or mining exists, is pollution. The air in China’s cities is being fouled, the water polluted, and the groundwater rapidly depleted. In addition, the disposal of solid waste harms the environment. Air pollution from China’s energy plants and auto emissions, which is growing because of more vehicular traffic and congestion, has been linked to premature deaths and increased urban morbidity. Environmental issues are beginning to impinge upon urbanization in other ways as well. As the population has grown, agricultural production has intensified, industry has spread, and the pressure on China’s limited water resources has worsened, especially north of the Yangzi River. This region contains 52 percent of China’s population but only 14 percent of its available freshwater. Although water transfers from southern rivers and measures to economize on the use of water can ease shortages, the long-term solution is for China to encourage urbanization south of the Yangzi. Climate change adds another wrinkle to the desirable geographical distribution of the urban population. As sea levels rise, low-lying coastal cities such as Shanghai and Tianjin will be imperiled, and sustaining them will require expensive manmade defenses. Though solutions will be painful and costly, require protracted effort, and be resisted by those who are adversely affected, delaying decisions will only make matters worse.
• Inequality The incidence of urban poverty in China is low, with 2005 World Bank estimates of those living below the poverty line under 2 percent. Inequality in China’s cities is also relatively low, with Gini coefficients for most large Chinese cities below 0.35 compared to around 0.50 and higher for Hong Kong, Sao Paulo, and Singapore. (Gini coefficients measure degrees of inequality in income distribution on a scale of 0 to 1, with 0 being complete equality and 1 being complete inequality.) This relatively low level of inequality exists because of legacy factors—wage and salary compression—and because cities that rely on industry generate many mid-level jobs. This could change if slower growth reduces the number of well-paying jobs for the swelling urban population. An increase in services sector growth as a share of GDP could lead to greater income inequalities, as is happening in cities across the post-industrialized world. Maintaining higher growth rates would lessen the risk of urban poverty, and expanding urban safety nets would help to support the aged, vulnerable, and unemployed. Industrial competitiveness and dynamism will be a means of sustaining an egalitarian urban society as the number of relatively well-paid services jobs increases.

Urbanization continues

China’s urbanization has taken long strides in the past quarter century. No country has seen its urban population grow by 460 million in such a short period, and no country can claim to have compressed so much urban development into three decades. China can take pride in its achievement in urban industrialization, the creation of a modern services economy virtually from scratch, and in many cities, the construction of a world-class urban infrastructure.

Yet progress has been uneven, and there are areas where substantial improvement is badly needed. The future shape and geography of urbanization needs to be reassessed to reverse environmental degradation and address climate change and resource constraints, focusing on energy and water. Because China is urbanizing rapidly and urban investments are long lived, delays in modifying policies and deferring difficult choices that affect the efficiency, livability, aesthetics, and location of urbanization could be extremely costly. The country’s future hinges on how cities navigate difficult challenges and profit from the opportunities unfolding before the urban economy.

Though China’s near-term economic growth is clouded by the global recession, prospects remain bright in the long run in part because much of China is still developing and has a vast pool of under-employed workers in rural sectors. Urbanization will continue for decades; along with technological catch-up, it will further spur economic growth. Growth will focus on urban sectors through industrial deepening and diversification into new areas, technological advances, maturing of business services, and building of infrastructure. China’s cities will lead the economy forward as they have since the mid 1980s.

[author] Shahid Yusuf is economic advisor, World Bank Institute, the World Bank. This article was adapted from Urban China: Trends and Challenges, by Shahid Yusuf, copyright 2008, The International Bank for Reconstruction and Development/The World Bank, with permission. [/author]