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LONDON, Jan 10 (Reuters) - 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 cities?
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 growth."
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 reform.
"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."