LONDON Jan 10 Counting on China to keep driving
global economic growth boils down in large part to a bet that
the ruling Communist party gets urbanisation right.
If it does, some 1 billion Chinese will live in cities by
2030, up from around 700 million today.
Unproductive peasants will become urban consumers, picking
up the growth baton from investment and rebalancing the economy,
Tom Miller with Beijing-based research company GK Dragonomics
writes in "China's Urban Billion", published by Zed Books.
But if the leadership gets it wrong, Miller says, China
could spend the next 20 years languishing in middle-income
torpor, its cities pockmarked by giant slums that are home to
the world's largest urban underclass.
Miller, a Briton who has lived in China for more than a
decade, frets that Beijing has yet to show the stomach for the
daunting political and fiscal reforms required. He spoke to
Reuters about what is at stake for the world economy.
Q: How critical is it for China to keep moving people into
A: "In a sense, economic development equals urbanisation as
people move out of unproductive rural jobs. The urbanisation
rate in the U.S. and UK is around 90 percent and 70 percent in
Italy and Japan. China passed the 50 percent mark in 2011 and on
the current trajectory you'd expect it to hit the 70 percent
rate by roughly 2030. If they can do that - and a lot can go
wrong - then that will certainly put a floor under economic
Q: Why is reform of China's hukou, or household
registration, system, so important?
A: "One in three people living in Chinese cities don't have
urban rights - access to welfare, schooling, social security,
etc. - because they are still legally tied to their rural homes
by the hukou system. So they tend to lead separate existences
and have to save more to spend on schooling and in case they
fall ill. If China is going to benefit economically from
urbanisation, it has to do a much better job of integrating
rural migrant workers into urban society, and that means hukou
"If you look at the last decade there's hardly been any
reform. Having said that, I'm cautiously optimistic. It's one of
incoming Premier Li Keqiang's pet projects and it would be very
disappointing if we didn't hear any announcement by the central
government at the National People's Congress (the annual
parliament meeting) in March."
Q: Who's going to foot the bill?
A: "Local governments rely on transfers from the central
government, so they constantly struggle to finance social
spending. Hukou reform means spending a lot more money on
migrants. So if the central government is serious about reforms,
it has to let local governments keep more taxes locally or do a
better job of matching funding to social expenditure. That is a
major issue: the central government now has a strong grip on the
national tax system and it is loath to give more power to local
governments unless they can help it."
Q: You worry about housing shortages in China, but some
investors point to empty 'ghost towns' to argue that China is
already overbuilding. Are they wrong?
A: "Some of the comments are foolish. They're based on a
misunderstanding of just how large China is. Hedge fund managers
like Jim Chanos look at the investment numbers, and they're so
huge they just don't seem to make sense. But they're coming at
China through the experience of much smaller countries.
"China bears don't really understand how China works.
They're constantly looking at it as though China functions like
a normal market economy. It doesn't. The government here has the
power to create markets that wouldn't exist without their
intervention. Pudong is a very good example. (Pudong, Shanghai's
financial district, was farm land until the mid-1980s.)
"If you're looking at companies that have done well feeding
off China's huge growth in heavy industry and investment, then
you can say Chanos was right to be sceptical. But he made the
broader point that the entire economy was going to hell. He made
the mistake of looking as an investor rather than looking at the
macro economy, which are two different things.
"'Ghost cities' gives the impression of cities being created
out of nothing. That is simply not the case. Normally we're
talking about ghost suburbs - big new developments on the edge
of existing cities that have been growing very fast and need
room to expand."
Q: Which companies will do well out of urbanisation?
A: "Companies that have thrived on capital investment will
do less well as capital spending slows, but there'll be more
opportunities to feed off household consumption. The domestic
competition is tough, but there's no reason why well-run foreign
consumer goods companies can't do well. A good example has been
the enormous rise over the past two or three years of companies
like Zara and H&M, selling fashionable but
reasonably priced clothing. Foreign car companies will continue
to do very well.
"Some of it will depend on policy. Financial services have
potentially a big opportunity if China decides to open up
sectors such as banking and insurance. When it comes to
strategic industries China is very reluctant to let everybody
in, but there is plenty of room over the next 10-20 years: China
will become a massive market for many western firms both in
consumer goods and services. But it will be massive market for
domestic firms too. It'll be big enough for all them."