Urbanization is both a natural result of and an important driving force for economic growth. The agglomeration effect of population and industry, technological progress, and increased total factor productivity and income all come about through urbanization, serving as significant driving forces for high-quality economic growth in China. Urbanization will lay the foundation for China’s capability to prevent external risks and deepen reform and opening up.
Following the reform of the household registration system and the development of the urban social security system and basic public services, China’s urbanization will speed up notably. Based on historical data from the United Nations and China’s National Bureau of Statistics, we estimate that by 2025, China’s urbanization rate will increase to 66%, and by 2035, the number will be somewhere between 75% and 80%. This means that in just over a decade, another 300 million people will move from rural areas to urban areas in China.
Clearly these changes will be important forces driving China’s high-quality economic growth. Urbanization will transfer labor forces from sectors with low productivity to sectors with high productivity. Large numbers of laborers in agriculture will be relocated in the secondary and tertiary industries. This transformation will bring a notable increase of productivity, significantly affecting China’s economic growth.
The agglomeration effect of urbanization can be maximized through careful planning of the population scale in certain cities. The city structure in today’s China is irrational. City scales are generally small and there are few large cities. According to theories of urban economics, every city has an optimal population scale. Empirical research indicates that in 2010, about 88% of China’s prefecture-level cities have populations that are only about 40% of their optimum size. Meanwhile, Beijing, Shanghai, Shenzhen, Tianjin and Chongqing should have smaller populations. It is noteworthy that in coastal areas in the east, the Yangtze River Delta and Pearl River Delta in particular, cities have begun to develop into city agglomerations with fitting scales and structures.
According to theoretical analysis, most cities with populations larger or smaller than optimal will suffer from a notable loss of potential public welfare. The optimization of the scale and structure of China’s cities will notably increase the per capita income and enhance the efficiency of the entire economy. In the future, megacities like Beijing, Shanghai and Shenzhen may also optimize their city scales by developing more satellite towns and sub-centers.
Urbanization stimulates consumption. Larger local markets will bring trade advantages to these cities and increase local demand as a driving force. The urbanization process, particularly the rural population migrating into cities, will create enormous local consumption markets. As of 2017, the new generation of rural migrant workers who were born after 1980 account for half of the entire migrant workers population. This new generation of migrant workers has a strong desire and demand for urbanization. Increases in the income and welfare of these migrant workers will boost consumption. Changes in consumption behaviors will bring changes to their lifestyles. Increased local market potential will bring trade advantages, contributing to local economic growth.
In general, it is anticipated that China’s urbanization will accelerate through deepening reform. In addition, urban infrastructure construction in China over the past three decades has advanced rapidly, and the real estate market has risen notably. All of this provides the material conditions to support urbanization. In the future, cities should be guided towards appropriate population scales. City agglomerations should be developed to maximize the agglomeration effect, increasing productivity and per capita disposable income. This will help boost China’s domestic market and drive China’s transformation from high-speed economic growth to high-quality economic growth.
This article was edited and translated from Guangming Daily. Zhang Qinghua is a professor of economics from the Guanghua School of Management at Peking University.