Urbanisation is a key driver for the mainland's economic growth, as people from the rural areas, especially farmers, move to the cities to find better jobs with higher pay. At a Politburo meeting in December, China's incoming leaders unveiled a plan to promote urbanisation.
Everything on the mainland tends to happen on a large scale, and investors might wonder if there is a way to play this urbanisation initiative.
To get a sense of the scale of this plan, consider first that 160-200 million migrant workers live in cities but have no formal residency status, or hukou.
Without hukou, these workers have no entitlement to most social and public services, including education, health care, and retirement benefits, effectively raising their cost of living and lowering their income.
One way to encourage more people to move to the cities, therefore, is to grant hukou to migrant workers. This would raise the rate of urbanisation as the workers are joined by their families. The programme would also increase consumption, as the workers gain access to social programmes, leaving more money for discretionary spending.
Moreover, city residents consume more than their rural counterparts, given differences in lifestyle and income. The annual consumption of an average urban resident in the mainland is about 19,000 yuan (HK$23,300), while that of an average rural resident is 6,000 yuan. If the urban population grew to 65 per cent in 2030, the country would have 300 million more people living in urban areas.
Perhaps more important than boosting consumption spending, urbanisation also changes consumption patterns, making spending more services focused. Compared with rural residents, city residents tend to invest more, own more insurance, travel more and spend more on education and health care.
To be sure, the mainland's cities will need more investment to meet the needs of 300 million new residents. One estimate puts the total investment at 40 trillion yuan, or about 80 per cent of the mainland's gross domestic product in 2012. The government has a plan to extend the mainland's rail network by 2,500 kilometres at a cost of at least one trillion yuan. The Ministry of Housing and Urban-Rural Development also estimates that the mainland needs eight million new apartments a year until 2020 just to achieve its own urbanisation target.
With fewer farmers, the mainland needs a more efficient agricultural sector to feed its population. Increasing agricultural productivity, therefore, should be a key element of urbanisation. This means urbanisation should come with more, not less, investment in rural areas. In the meantime, the government is raising the compensation for its compulsory acquisition of rural land. This would allow the farmers to lease or sell their land and move to the cities.
But as described above, the hukou system makes it financially less attractive for rural residents to move to urban areas. Without hukou, migrant workers could not enjoy the same social and public services that registered residents do, leaving them with less take-home pay. This, in turn, could be enough reason for some rural workers to stay in their low-paying jobs, ultimately limiting urbanisation.
Because it limits labour mobility, the hukou system also has the unintended consequence of creating income inequality. For many years, the mainland spent more resources on the biggest cities, hoping they would lead its economic growth. Indeed, Shanghai, Guangzhou, Shenzhen and Beijing have developed rapidly, perhaps at the expense of other cities, even though they support the growth in surrounding areas.
The State Council recently issued a notice relaxing the hukou system, focusing mainly on smaller cities. This will help promote social equality in the mainland and, perhaps, is only the government's first step in determining the best path towards the removal of hukou in the long run.
Patrick Ho is head of research Hong Kong, UBS CIO Wealth Management