The Celestial Empire Goes Urban

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China is engaging in a new urbanization spree intended to turn hundreds of millions of former peasants into city dwellers, creating a huge source of long-term economic growth based on domestic consumption.

The new urbanization

After taking office in March, Li Keqiang, China’s new prime minister, clearly indicated that urbanization was among his top priorities. The effort is completely in line with the government’s modernization plan, which will move around 250 million people from rural regions to towns. The ultimate goal is to fully integrate 70% of the Chinese population, or roughly 900 million men and women, into city living by 2025.

The primary motivation for the new urbanization push has been to lift the living standards of millions of ex-farmers, providing them with access to the job opportunities, housing, infrastructure and services that modern cities can offer, as well as to give a new boost to the Chinese economy by changing its structure, with growth based on domestic demand for products rather than on exports.

The wisdom here is quite clear.

Firstly, there will be a basic need for accommodation, both owned and rented, for the hundreds of millions of former peasants arriving in towns. This will lead to sustainable demand for construction materials, labor and expertise.

Secondly, the relocation will set up a long-lasting consumption trend due to the integration needs of the new city dwellers, as well as producing many spin-off effects in terms of household and industrial products, home decoration, healthcare, health insurance and other service industries, and education.

That said, from the investment and the consumption side there are enormous market opportunities in China that would benefit both domestic and foreign businesses. Last year, in the discussions that we had in Brussels, many people noted that the sheer size of a market of 700–900 million urban residents means quite a different consumption pattern, which will actually spur lots of domestic and international enterprises to come with their money and expertise to our country.

As Prime Minister Li Keqiang mentioned, when the enormous Chinese market combines with Western technology, what you have is not a threat of resource competition, but a pool of greater promise that brings broad avenues both for foreign exports and for rapid Chinese development.

Indeed we already see a great interest from international investors in the tapping of those opportunities. To give an example, lots of businesspeople are keen to promote the concept of ‘smart cities,’ and wonder how they can get involved in that process in China. The government’s new urbanization plan also calls for clean materials and green energy in new Chinese towns in the future, which provides a huge opportunity for international technology companies to step in.

Bubbles under control

The channeling of smart foreign money into China, along with aggressive state investment, is a part of the answer to the question of who will foot the bill for the new urbanization. We also need to allow the market to play its role. I believe future reforms will unleash another investment force, allowing private capital and enterprise to contribute to paying off the costs. But they will be paying it according to the market situation.

The government’s new urbanization plan also calls for clean materials and green energy in new Chinese towns in the future, which provides a huge opportunity for international technology companies to step in

As to the concerns that this kind of massive investment into new urban areas may inflate bubbles in China’s real estate market, I believe they are probably exaggerated. Yes, it is an undeniable fact that prices, especially in Tier-1 and Tier-2 cities, have been rising too fast. But I have to note the overconcentration of primary resources that we have had, and that we are now starting to see an even bigger gap in resource allocation.

Then we can look at Hong Kong or Singapore for why they also have high real estate prices. The answer is probably because there are large numbers of high-income people who can afford it. So in these terms China is completely within a global trend.

And finally it is worth noting that urbanization is not necessarily pushing up real estate prices. The current reality is that migrant workers are likely to start by renting an apartment instead of buying one right away; we noticed this around Shanghai. Even in Guangzhou and Beijing over 30% of the rural population’s new urban dollars go to renting around the city centers. Importantly, this will contribute to solving certain problems in China’s real estate industry, because there are a lot of vacant new city apartments that can now be rented out.

Summing everything up, I have to admit that in terms of the new urbanization we are facing multiple challenges down the road. Right now we are going through a major adjustment to the organization process. We have to strike a balance between the services and infrastructure provided in urban and in rural areas. We have also noticed that a lot of local governments are very reluctant to push or promote the urbanization process. But I believe that the central government is very clear on this issue: the future urbanization policy will be promoted, and the process is irreversible.

Li Tie is Director-General of the China Center for Urban Development.

This article is based on a speech given at the ‘Summer Davos’ (the Annual Meeting of the New Champions) 2013 in Dalian, China, organized by the World Economic Forum (WEF).

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