Asia Briefing: Urbanisation seen as answer to economic questions

China’s economic fundamentals remain sluggish and the heady days of double-digit growth seem far away, but most analysts and industry leaders believe the country’s ambitious urbanisation programme means the economy is in line to keep expanding for the time being.

To ensure this soft landing, China's Premier Li Keqiang is planning to transplant hundreds of millions of Chinese from the countryside to the cities, where incomes are higher. He aims to cut the rural population of 642 million in half, basically by pushing farmers into the cities.

"Urbanisation has the greatest potential for boosting domestic demand. The promotion of a coordinated urban-rural development is a major source of domestic demand," Mr Li wrote in an article reprinted widely in China.

Like many of his vintage, the 57-year-old has spent time in the countryside working the land, after he was sent to a farm during the Cultural Revolution, like many intellectuals.

He is China's first premier to have a doctorate in economics, from Peking University.

China’s urban population exceeded 50 per cent of its total population in 2011, which marked an historic change, but China is still trailing the world.

“China currently has 240 million rural workers, about 150 million of whom have left the countryside to seek jobs. However, there remains a massive untapped labour pool in the villages, leaving great potential for domestic demand as a result of urbanisation,” said Mr Li.

The Beijing government has made strong indications that economic reform is on the cards, with policy changes planned that would open up more of the economy to private investment and upgrade a controversial household-registration system, the hukou, that is seen as impeding urbanisation.

The consultancy McKinsey has long predicted that China's urban population will reach one billion by 2030. The number is a "projection", not a certainty, McKinsey's global managing director Dominic Barton said, and the numbers coming from the countryside may be slowing, but China is still just at "the end of the beginning" of its urban transformation, he maintained.

“This thing will still move,” said Mr Barton.

Yang Yuanqing, the chairman and chief executive of IT company Lenovo, one of China's highest-profile brands overseas, agreed that urbanisation was a key trend in China.

"Urbanisation can help us to solve a lot of issues, including acting as a driver of consumption in China. More people from rural areas of China will move to urban areas, and then we will have a higher level of consumption. Then we can liberalise and free up more consumption power," Mr Yuan told the Fortune Global Forum in Chengdu earlier this month.

China’s per capita GDP is less than one sixth that of the US, and consumption is even lower relatively, he said.

“If we can use urbanisation to free up this power, the third driver, then we can extend China’s high-speed growth for decades,” said Mr Yuan.

Boosting urbanisation will not be without its challenges, he said.

Rising incomes mean rising inflation, and if labour costs rise, then the manufacturing sector, still the backbone of China’s economic miracle, will lose competitiveness.

“Of course, this will test the wisdom of the Chinese government,” said Mr Yuan.

Another major challenge involves improving the social security system.

Wang Jianlin, the founder of the Wanda property group and China's sixth richest man by some counts, reckons that in the absence of a social security safety net, the urbanisation process, even what has gone on so far, is not complete.

"Over 200 million did not enjoy any hukou, or social security. They don't have the pension. They don't have Medicare insurance, and unemployment insurance, etc. If you deduct all these people, the urbanisation rate is only 40 per cent in China," Mr Wang said.

“Therefore, we need to embark on a new type of urbanisation,” he said, which would include ensuring people have jobs, housing, entertainment, food. “So it’s a huge market there. Therefore I believe China’s economy will maintain a high growth rate of around 8 per cent, for the next 20 years because of urbanisation,” said Mr Wang.