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Comment/ Opinion

Three reasons China cannot count on urbanisation to boost consumption and bolster its economy

  • China is looking to increase domestic consumption from rapid urbanisation to spur economic growth. But an ageing population, and local government and household debt complicate the picture
Donghu Lake in Wuhan, the capital of central China’s Hubei province, is flanked by high-rise buildings in July. China is undergoing rapid urbanisation, with nearly 60 per cent of the population living in cities. Photo: Xinhua

Over the past decade, while China’s traditional sectors have undergone a cycle of re-leveraging and deleveraging, domestic consumption has remained a stellar point of the economy. This is not only reflected in the skyrocketing sales on Singles’ Day but also indicates the direction that China can take in transforming its economy.

If we connect the consumption story to China’s rapid urbanisation, the picture looks brighter. China’s urban population was close to 60 per cent of the total population by the end of 2018. It stood at below 50 per cent in 2010, and was only 18 per cent in 1978, when China was poised to reform and open up its economy.

A simple projection illustrates that China’s urban population will exceed 70 per cent of the total population by 2035, versus an average of around 80 per cent in urban areas among Organisation for Economic Cooperation and Development countries in 2018. Put simply, China still has tremendous potential if it continues to urbanise at the same speed as it has in the past four decades.

However, this is not the whole story. At the moment, many of the migrant workers living in cities do not have full access to public services, including health care, education and pensions – unless they can obtain a hukou or household registration. It is generally understood that the percentage of people holding a hukou is actually more than 10 points lower than China’s official urbanisation figure.

Chinese policymakers are clearly aware of this issue. In April, the National Development and Reform Commission announced plans to cancel the hukou policy for cities with a population of between 1 million and 3 million.

And, on December 25, Xinhua News Agency reported that the central government was cancelling the mandatory hukou system for residents in cities with fewer than 3 million people. Apart from eliminating hukou requirements for these cities, the central government also plans to ease permanent residency requirements for large cities.

This move is in line with China’s ongoing efforts to unleash the potential of urbanisation by granting migrant workers full access to a city’s public services. There are an estimated 266 Chinese cities with fewer than 3 million people – about 40 per cent of all cities – on the mainland, according to the latest government statistics.

However, while the future for China’s urbanisation looks rosy, there are at least three obstacles planners will have to face.

First, as China’s population ages, the workforce might not be as mobile as it has been so far. Official data suggests that China’s working-age population (those between 15 and 64) peaked in 2009 and began to shrink thereafter. In the meantime, the proportion of elderly people in the population has been increasing.

For instance, in 2017, the number of people aged 65 or above increased to 11.4 per cent of the total population of 1.39 billion people, up from 10.8 per cent in 2016.

While an increasing number of cities have become more accommodating to migrant workers, there may in fact be fewer people moving to urban areas simply because the working-age population has been stagnating, affecting local policymakers’ projections.

Elderly people rest in Sanya, Hainan province, whose balmy climate has become a magnet for retirees, on February 15, 2017. People over 65 now comprise 11.4 per cent of China’s population. Photo: AFP
Elderly people rest in Sanya, Hainan province, whose balmy climate has become a magnet for retirees, on February 15, 2017. People over 65 now comprise 11.4 per cent of China’s population. Photo: AFP

Second, local governments need to invest massively to improve infrastructure and the social welfare system to provide the necessary services for the new residents. However, this will be difficult, if not impossible, because of the debt overhang, particularly at the local government level.

While China’s government debt looks acceptable, at around 38 per cent of GDP as of 2018, the off-budget debt for local governments, which is not included in the official budget, presents a financial risk for these administrations.

The International Monetary Fund calculated that augmented debt, which includes local government financing vehicles and other off-budget activity, was 72.7 per cent of GDP as of 2018, indicating that the contingent debt pressure for local governments could potentially be huge.

So the road ahead may not be so rosy, given that local governments seem unable to finance large long-term investments to accommodate newcomers.

Finally, household debt is already a serious concern in China; as a share of GDP, it has risen rapidly in recent years. According to the IMF, China’s household debt amounted to 54 per cent of GDP in 2018, compared with only 35.8 per cent in 2014. This rapid debt accumulation suggests the potential for domestic consumption probably remains limited in the immediate future as middle-income families will face increasing debt-servicing pressure.

From this perspective, encouraging people’s mobility is unlikely to generate a great deal of sustainable consumption.

Given these challenges, we should take a cautiously optimistic view of the economic boost that urbanisation can bring to China in the near-term at least. Greater urbanisation has potential, but the benefits cannot be unleashed without a clear strategy and careful execution.

Hao Zhou is senior emerging markets economist at Commerzbank

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