China’s migrant energy can power sustainable economic growth

Winston Mok says shifting people from poorer areas to more affluent regions could be the best investment for a sustainable economy, to help China avoid the middle-income trap

PUBLISHED : Wednesday, 08 July, 2015, 11:25am
UPDATED : Wednesday, 08 July, 2015, 11:25am

With slowing growth, will China fall into the “middle-income trap” as Finance Minister Lou Jiwei  has warned? With a per capita gross domestic product of US$7,600, China looks like a middle-income country. But the national average masks great regional variations.  

The affluent coastal areas of the Yangtze and Pearl river deltas have achieved “first-world” status. Some cities in these regions, with per-capita GDPs comfortably above US$12,000, have  surpassed the middle-income level; at US$24,000, Shenzhen’s  is higher than Taiwan’s.

Most regions are in the “second world”, with per capita income in the US$5,000 to US$10,000 range. China’s third-world regions are not confined to remote areas; next to affluent Beijing are poor areas in Hebei  with a per-capita GDP of just US$3,000.

China’s leaders face tough choices. Do they focus on making the coastal regions more successful, which may widen the gap with inland regions, or do they  upgrade the poorer regions to achieve better balance?

China’s entry into the first world will be powered by its key economic regions on the coast. Following the lead of Shenzhen and Suzhou  , more coastal cities will join the US$20,000 club in the next few years. In the next decade, most of the Yangtze River Delta and Pearl River Delta may approach the income level of Taiwan, if not South Korea. As China’s coastal regions represent more than 60 per cent of its economy, they will play a decisive role in the nation’s economic performance. In a recent visit to Zhejiang  , the province he once led, President Xi Jinping  met leaders from key coastal provinces – highlighting their continued importance in China’s next stage of innovation-driven growth.

Some cities down the development ladder, such as Wuhan  and Changsha , are approaching the US$10,000 mark.  Below them are many cities that need to  find smarter ways of productive growth – given the rising labour, welfare and environmental costs.  

The most challenging are poor regions with a per capita GDP well below US$5,000. Some located near vibrant economic regions may be worth investing in. But it may not make economic sense for some remote regions. So the real issue is whether stagnant growth in some regions will trap China as a whole.

For China to break through the middle-income trap, there are two options. One is to upgrade its third- and second-world regions to first-world economies. The other is to shift people from poorer areas to more affluent regions. The people have chosen the latter path – a path that is also more capital efficient and market driven. It is through such sustainable growth that China may have the best chance of entering the first world.

Migration was how China’s rapid economic development was accomplished in the first place. Migrants filled the factories on the coast  and turned Shenzhen into a global technology powerhouse. Using reforms, Guangdong elevated its economy from the fifth largest to the largest in China.

However, developing selected poorer regions is also important. Beijing’s key initiatives include Greater Beijing integration and the Yangtze Economic Belt. Lou recognised that as wealthy as the country is, it does not have unlimited funds. Capital deployment can be more efficient with better labour allocation. In this context, improving labour mobility is a central theme underlying Lou’s recommended measures to overcome the  middle-income trap.

Lou has called for better implementation of residential registration (or hukou) reforms, particularly among affluent regions. The “temporary” flow of migrant workers into China’s first- and second-world regions cannot be reversed, but will crystallise into a fundamental redistribution of the population. Lou has rightly urged the central government to finance this massive migration – which may well be the best investment Beijing can make to drive sustained economic growth,  escape the middle income trap and enter the first world.

Winston Mok is a private investor, a former private equity investor and McKinsey consultant. An MIT alumnus, he studied under three Nobel laureates in economics