Three reasons China cannot count on urbanisation to boost consumption and bolster its economy

China is looking to increase domestic consumption from rapid urbanisation to spur economic growth. But an ageing population, and local government and household debt complicate the picture

Reading Time:3 minutes

Donghu Lake in Wuhan, the capital of central China’s Hubei province, is flanked by high-rise buildings in July. China is undergoing rapid urbanisation, with nearly 60 per cent of the population living in cities. Photo: Xinhua

Published: 3:00pm, 31 Dec 2019Updated: 12:29pm, 15 Feb 2020

Over the past decade, while China’s traditional sectors have undergone a cycle of re-leveraging and deleveraging, domestic consumption has remained a stellar point of the economy. This is not only reflected in the skyrocketing sales on Singles’ Day but also indicates the direction that China can take in transforming its economy.

If we connect the consumption story to China’s rapid urbanisation, the picture looks brighter. China’s urban population was close to 60 per cent of the total population by the end of 2018. It stood at below 50 per cent in 2010, and was only 18 per cent in 1978, when China was poised to reform and open up its economy.

A simple projection illustrates that China’s urban population will exceed 70 per cent of the total population by 2035, versus an average of around 80 per cent in urban areas among Organisation for Economic Cooperation and Development countries in 2018. Put simply, China still has tremendous potential if it continues to urbanise at the same speed as it has in the past four decades.

However, this is not the whole story. At the moment, many of the migrant workers living in cities do not have full access to public services, including health care, education and pensions – unless they can obtain a hukou or household registration. It is generally understood that the percentage of people holding a hukou is actually more than 10 points lower than China’s official urbanisation figure.

Chinese policymakers are clearly aware of this issue. In April, the National Development and Reform Commission announced plans to cancel the hukou policy for cities with a population of between 1 million and 3 million.

And, on December 25, Xinhua News Agency reported that the central government was cancelling the mandatory hukou system for residents in cities with fewer than 3 million people. Apart from eliminating hukou requirements for these cities, the central government also plans to ease permanent residency requirements for large cities.

This move is in line with China’s ongoing efforts to unleash the potential of urbanisation by granting migrant workers full access to a city’s public services. There are an estimated 266 Chinese cities with fewer than 3 million people – about 40 per cent of all cities – on the mainland, according to the latest government statistics.