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The Road to an Urban China

Volume 5, 2013

By Janine Coughlin

When he addressed global thought leaders gathered at the opening ceremony of the Summer Davos Forum in Dalian, Premier Li Keqiang highlighted just how important urbanization and domestic demand are to the new leadership's plans for transforming China's economic development model.

"In readjusting the structure, the most important aspect is to expand domestic demand, and a major task is to pursue a balanced development between urban and rural areas and among different regions," he said in his September speech.

China's urbanization rate reached 52.57% by the end of 2012, according to figures released by the National Bureau of Statistics. China's 2013 National Human Development Report, released in August by the United Nations Development Programme (UNDP) and the Chinese Academy of Social Sciences (CASS), forecasts that by 2030 the country's urban population will grow by an additional 310 million to reach 976 million people.

However, as CEIBS Professor of Economics Zhu Tian explains, "Urbanization is really an outcome, rather than a policy. For most countries, urbanization is never really a policy tool, but just an outcome of economic development. So in that sense, as China develops further, of course there will be more urbanization as a result, because China's urbanization rate is still low."

Urbanization has been a buzzword closely linked to the new government's drive, led by Premier Li, to shore up the Chinese economy. CEIBS Associate Dean (Research) and Professor of Economics and Finance Xu Bin cautions that urbanization, which he sees as an integral part of Premier Li Keqiang's reform agenda, can be easily misunderstood. "This is because when we talk about urbanization, it's usually associated with government investment in infrastructure, real estate, and so on. This kind of 'old style' urbanization is actually following the old model of economic growth in China. That's not what is in the mind of Li Keqiang. I think he is thinking about a new type of urbanization, a people-centred one."

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China, with its unique characteristics, is being closely observed to see how it will pull off this mammoth task and what lessons it could potentially provide for other countries. "If somehow urbanization itself could be a policy measure, then economic development itself would be so easy. There would be no poor countries at all; we could just make everybody an urban resident. That would be really simple. Or in China you might think, okay, just abolish the hukou [household registration] system, then everything would be perfect," says Prof Zhu. "Most countries don't have a hukou system, but many of them are still underdeveloped. China has a hukou system, but also has the fastest growth rate in the world."

He stresses that urbanization in China is not simply about moving people from the countryside into the city. It involves reforms in a variety of complex policy areas that have lately been under discussion, including the household registration system, healthcare, real estate, land rights, local government debt, the financial system and the service sector. The contours of China's urbanization will therefore be shaped by how the country's new leaders handle policies in these and other areas, coupled with the impact from economic development.

"If you want to promote urbanization, I think hukou is the first thing you need to touch. But we cannot expect the hukou system to be abandoned overnight because it's a very complicated problem," says Dr Gary Liu, Executive Deputy Director of the CEIBS Lujiazui Institute of International Finance (CLIIF). "In the long run, we must reduce the importance of the hukou, but it must be done gradually."

A Chinese citizen's hukou determines where he can access social benefits such as healthcare and where his child can go to school. Rural residents who have migrated to urban areas for jobs must return to their hometowns for government-subsidized medical care, and their children cannot attend school in the city unless they pay a hefty fee that is usually far beyond their financial resources.

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Besides the hukou's regulation of access to affordable healthcare services, Director of the CEIBS Centre for Healthcare Management and Policy Prof John Cai says that the biggest bottlenecks in the healthcare system today are a lack of physicians and clinics, and too much regulation.

"I do see that the government wants to open the door to private and social capital to build more hospitals. But in my opinion a hospital is just a building, you need more good physicians," he says. "Chinese physicians today are not well paid and they have a lot of restrictions regarding employment. They have closed the door to physicians to be able to open up their own private clinics. So that's the bottleneck. It will become a bigger problem under the new urbanization."

Prof Cai says that clinics can be more efficient than hospitals at providing a large patient population with simple medical services and treatment for many types of chronic illnesses. He also explains that because the government controls access to market entry, planning, and social insurance, it is challenging for private and social capital to enter the sector.

"For urbanization, there are many bottlenecks and many important challenges – the education system, housing system, infrastructure, medicare and many others," says Dr Liu. "What the government needs to do is to break or cancel the barriers to entry for private capital. You need to encourage [private capital] in these important areas. Secondly, the government needs to change the way the economy is managed. The government should ensure we have rule of law and a transparent system, and then transaction costs will be lowered."

Prof Xu says it is his understanding that some aspects of the upcoming round of reforms will aim to create a more market-oriented economic system and reduce the barriers to private capital investment. "Reducing the role of the government and expanding the role of the market, that's the overall direction of the new round of reform," he says. "This will really make funds more available to small companies, to start-up entrepreneurs. And this will become a new engine of growth for China."

 

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Developing China's service sector is another area Premier Li has said the new leadership is working towards. Prof Xu explains that there are two distinct aspects to the service sector – one comprises traditional, labour intensive jobs, such as restaurant workers. The other is what he termed "modern service" which includes financial services, such as consumer car loans, that can also help another plank in the new leadership's economic transformation plans – boosting domestic consumption. But China's reforms to the financial sector, which is currently dominated by state-owned banks, have not yet been robust.

"I think the service economy is not only a solution to employment, since China's manufacturing sector is slowing down and the traditional service economy can be another place to absorb the labour force, but also because it is at the core of China's transition towards a real high-income country in the future," Prof Xu says. "China is trying to avoid the so-called middle-income trap. One way to do it is to drive up the service sector, which is also associated with innovation, since a lot of service is actually driven by entrepreneurs."

Though there is no one single policy that can promote urbanization, boost consumption, and increase GDP growth, as the country becomes more urbanized, it will naturally help promote development of other areas, explains Prof Zhu. "As the economy becomes more urbanized then of course the per capita GDP will increase at the same time because productivity in urban sectors is much higher than in rural sectors," he says. "So urbanization will help to increase the country's level of productivity, which means people's incomes will increase as well. Consequently, people's consumption level will increase – but that's the result of an increase in people's productivity and income, not the other way around."

Prof Zhu suggests that fundamentally urbanization goes hand in hand with economic development, and to achieve sustained development, the government needs to maintain macroeconomic stability in the short run, and to maintain economic growth in the long run. Beyond that, he said, increasing efficiency – particularly investment efficiency and financial market reforms, rebuilding the country's social welfare system, improving income equality, and addressing environmental issues, are all important. The distributional and environmental issues are of particular concern, as change in these areas, "will not come naturally as a result of economic development," he says.