This opinion piece presents the opinions of the author.
Global economists, Wall Street investors and politicians worldwide are growing concerned about the pace of growth of China’s economy. Absent a robust U.S. economy, trapped on a slow-growth path by structural and government policy challenges, and saddled with political sclerosis in Western Europe, the world economy is searching for the next driving force for growth. That force is supposed to be the developing Chinese economy, which had been growing at double-digit rates for the past several decades. Lately, China’s economic growth has slowed to high single digits rates but now appears to be slowing more. Recently, the World Bank cut its 2013 growth forecast to 7.7% from its prior 8.4% estimate. Other financial institutions have issued new Chinese economic forecasts that call for even slower growth this year and barely any increase next. The latest economic data from China appears to be confirming the slowing and highlighting the challenge the government faces in boosting the growth rate.
The problem for China is that its economy’s rapid growth in the past was due to it becoming the low-cost manufacturing center for the global economy. China’s economic growth came via expansion of its export sector. To handle that new role, which resulted from China’s large pool of unskilled, thus cheap, labor, the country invested in plants and infrastructure to foster export growth. That expansion also meant significant increases in consumption of raw materials and energy. To feed its low-cost labor pool, the country encouraged migration of rural residents to manufacturing centers located near large cities in the coastal provinces. There are estimates that 17% of China’s population currently living in its cities does not have official urban status allowing them to register for schools and social benefits. These migration trends and growth policies have contributed to the major pollution problems that impact the livability of major Chinese cities. Estimates are that every year China experiences 400,000 premature deaths from respiratory diseases due to air pollution.
As a possible way to reorient China’s economy and boost its sustainable growth, the government is engaging in a kind of populist urbanization, which is really focused more on “small city-ization” rather than traditional “urbanization.” This policy is meant to focus on developing emerging cities rather than expanding large existing ones. The policy is being implemented by bulldozing farms and villages and moving the people into newly constructed cities with high-rise residential towers. By 2025, China is expected to have over 200 cities with populations of more than one million people. What lies behind this new strategy? According to Chinese Premier Li Keqiang, city residents spend more than rural residents on services such as schools, healthcare, leisure and financial advice. This spending would help boost the country’s services sector and reduce the economy’s dependence on exports. Premier Li also cited the reality that the services sector is “capable of absorbing the largest number of new employees and is an important driving force behind scientific and technological innovation.” In a nutshell, the plan is to bring rural citizens to where their children can obtain better educations, health care and training that will make the future Chinese labor force more skilled and productive, able to compete on an international scale rather than to be limited to competing only based on low cost labor and manufacturing capacity.
According to China’s 2010 census, 51.3% of the country’s population resided in rural areas, down from 63.9% in 2000, when a different counting system was employed. In 1970, the rural population represented 70% of all citizens in China, down from 95% in 1920. Projections call for China’s rural population to represent less than 40% by 2030. To understand the scale of this government urbanization effort, there are about 800 million rural peasants and migrant workers. Of that total, 500 million are farmers and 300-400 million are excess unskilled rural laborers. The government’s target is to move 250 million rural residents to these newly constructed cities. The big impact of this urbanization program will be to boost average annual family incomes and spending, and change spending patterns. Studies show that migrant rural workers tend to maintain their historical spending patterns and send most of their money home. Their new urban domicile is just a place to sleep and eat according to Nielsen Greater China.
Urban household income is significantly higher than rural incomes, which helps support the increased spending on services, but also boosts spending on appliances and gadgets, all of which will have an impact on China’s future energy needs. Studies show that every 100 households in rural areas own on average 89 color televisions, 22 refrigerators and 62 cell phones. The same number of urban households own 137 color televisions, 92 refrigerators and 153 cell phones.
The growth in household incomes and the disparity between rural and urban incomes is a long standing issue, which the government attempted to address in the past. An article from China Daily in 2010 cited income statistics from China’s National Bureau of Statistics showing that in 2009 annual urban household disposable income was 17,175 yuan ($2,515) versus rural incomes of only 5,153 yuan ($758), or a ratio of 3.31:1. In 1978, China introduced the household contract responsibility system in rural areas. As a result, the then urban to rural household income ratio of 2.56:1 declined to 1.82:1 by 1983, its narrowest ratio in modern times. The income gap widened starting in 1985 as the focus of the reform shifted to cities. A projection from McKinsey & Company shows that if the government’s urbanization measures go as planned, by 2022, 75% of urban Chinese will have annual household disposable income between 60,000 yuan and 229,000 yuan ($9,000-$34,000) a year. A key aspect of the government’s new plan is that when relocating rural citizens, they will be provided new apartments cost-free plus the state will pay the farmers for their land, or provide a monthly stipend or dividend stream from the payment for the land taken.
Land reform, such as now, has been a key aspect of past economic and political programs. During the 1950s, the Communist Party gave small plots of land with the encouragement for people to farm. A few years later those same farms were collectivized by the Party, but the peasants’ rights to use land were restored at the start of the reform era. Now, the government is trying to obliterate small landholders to help re-orient China’s economy and growth prospects. By boosting the percentage of urban residents, China hopes to lift per capita income.
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G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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