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
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.
China's hukou reform plans will improve the lot of millions, over time
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.
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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.
Relax. China’s spenders are not borrowing their way into trouble
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