China's urbanisation push runs into trouble before its start

It could backfire spectacularly if new urban residents are left deprived of their former ability to make a living from the land

PUBLISHED : Wednesday, 14 August, 2013, 12:00am
UPDATED : Wednesday, 14 August, 2013, 3:49am

Li Keqiang's flagship economic policy is running into problems even before its official launch.

Although the Chinese premier's urbanisation plans will not be rolled out until a party meeting scheduled for this autumn, they are already provoking opposition from local government officials and drawing criticism from economic analysts.

That's awkward for Li, who on his appointment in March made shifting more of China's rural population into cities the centrepiece of his economic rebalancing programme, declaring "urbanisation will usher in a huge amount of consumption".

At first glance Li's policy appears to make good sense, considering that China's explosive economic expansion of recent decades has accompanied the rapid growth of the country's urban population.

City dwellers are more productive than their cousins in the country, so they earn higher incomes. What's more, the holders of urban residence permits, or hukou, enjoy better access to housing, health care, unemployment insurance and pensions, while their children get a better education.

As a result, they save less of their income as a precaution against hard times ahead, and spend more. So, reason China's leaders, if we move more people into the cities and give them urban hukou, they will both earn more and spend more of what they earn, powering the next phase of consumption-driven economic growth.

But Beijing's plans have run into trouble on two fronts. First, local government officials and businesspeople have baulked at the cost involved in granting urban hukou to hundreds of millions of rural residents, asking where the money will come from.

If Beijing is to hit its target of 70 per cent urbanisation by 2030, the authorities would have to grant urban registration not only to some 230 million farmers, but also to around 250 million holders of rural hukou who currently live as second-class citizens as migrants in the cities.

With the cost of granting an urban residence permit with full benefits reckoned at about 100,000 yuan (HK$127,000), the total cost of the programme would come to roughly 48 trillion yuan. Spread evenly between now and 2030, that would amount to more than 5 per cent of current gross domestic product each year.

Inevitably, businesses would have to shoulder much of the cost in the form of higher social insurance contributions on behalf of their workers. One 2010 study estimated these would push company payroll costs up by a third.

As a result, it's little wonder that local government officials and businesspeople are leery of Li's urbanisation plans. But they are not the only ones. Economists are also questioning whether they make good sense.

The doubters make a point that should have been obvious to China's leaders, but that appears to have passed them by: it is not rapid urbanisation that has powered the country's economic growth in recent years. Rather, it is economic growth that has driven rapid urbanisation.

More specifically, China's growth has been propelled by industrialisation.

Urbanisation is merely a by-product of that industrialisation, as workers have moved to industrial centres where they can be more productive.

Forcibly moving people from rural areas to urban ones will do nothing to power growth unless they have productive jobs to go to in their new homes.

It could even backfire spectacularly, by depriving the new urban residents their former ability to make a living from the land. As a result, instead of concentrating on raising the urban population, Li and the rest of China's new leadership would be better off focusing on creating new employment opportunities, both in the cities and in the countryside.