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Urbanisation Driving China's Growth

Every year, millions of rural Chinese residents leave the countryside to work in the Mainland's booming cities. RUBY ZHU examines the effects that this huge migration is likely to have on the country's development

Industrialisation and urbanisation generally advance hand in hand, but if one grows too far ahead of the other, then the results can be undesirable. Slums may start to appear in cities where economies grow too slowly to accommodate the influx of migrant workers, while on the other extreme, industrial growth might be stunted by a shortage of talent to drive the economy forward. This is already starting to appear in some sectors of the Mainland's service economies.

China's urban population currently contributes 39 percent of the country's total, while its rural population, which makes up 61 percent of the total, contributes less than 16 percent to the GDP.  Yet urbanisation in China is growing at a slower pace than industrialisation (52 percent) and far behind the average rate of developed countries (70 percent), implying that its urbanisation rate needs to be substantially raised. The National Bureau of Statistics of China estimates that in 2010 China's urbanisation rate will reach 35 percent, 50 percent by 2020 and 70 percent by 2050.

This translates into 400 million people moving from the countryside into cities. Such a driving force will provide a strong impetus for China's economy.   An economist who won a Nobel Prize remarked that the growth of high-technology in the U.S. and urbanisation in China are the two foremost global issues of the 21st century.

China's tremendous growth over the past two decades has resulted in significant changes taking place in its cities every two to three years. In fact, China's economic success lies in the rapid growth of its cities, as illustrated by the economic prosperity of the Pearl River Delta, the Yangtze River Delta, and the Bohai Sea Economic Rim.

An estimated 73 percent of all PRD residents now live in cities, while Shenzhen later this year will become the first Mainland city to have no rural population. This rapid urbanisation process that is taking place in China will further drive demand for products and services, and with it opportunities for Hong Kong business people.

Manufacturing

As urbanisation accelerates, industrialisation will ride on its coattails, as a swelling urban population will provide a pool of cheap labour. This growth will also boost the significance of industrial clusters which are at the moment quite fragmented.

As China's urbanisation gains momentum, it is expected that the country will ease controls on migrant workers, which will strengthen the Mainland_s low-cost advantage. Restrictions on professionals in certain sectors, which have created major headaches for Hong Kong businesses trying to find high-calibre people to run their operations there, are also expected to be eased.

Property sector

Swelling city populations herald a boom for property developers. In big Mainland cities, current and future land supply is concentrated in the countryside, and property developments in small towns are increasingly popular among consumers in crowded cities such as Shanghai and Guangzhou.

The growth of small- and medium-sized cities is also driving demand for urban design and planning. The signing of mutual recognition agreements for architects and engineers in February this year under CEPA gives related Hong Kong service providers a perfect opportunity to benefit directly from the urbanisation of Mainland towns.

Distribution and logistics sectors

All this growth needs to be effectively linked to flows of goods and people between urban and suburban areas, which has almost become a make or break issue for some businesses. As more large-scale distribution and logistics companies are established in the Mainland, Hong Kong firms will struggle to survive in China's highly competitive market if they simply apply their local expansion models to the Mainland market.

At the time of writing, out of all the applications for a Certificate of Hong Kong Service Supplier under CEPA, logistics firms accounted for 20 percent and distribution 55 percent, which clearly shows that Hong Kong logistics firms are eager to have a crack at the market.

Another effect of urbanisation will be an increasingly subdivided labour market. Sectors that focus on economies of scale will benefit from this trend, and personal and lifestyle services will enjoy more opportunities. Niches in catering and entertainment will also appear for small- and medium-sized enterprises targeting individually unique markets around the country.

Undoubtedly, the migration of the Mainland's 400 million farmers from the countryside into cities will also lead to a redistribution of city residents. As each urban district has its own advantages and disadvantages, investors should study their demographic changes before investing.

Ruby Zhu is the Chamber's China Economist. She can be reached at, ruby@chamber.org.hk