Urbanization Is Making China Wealthy— But Is It Sustainable?

Prime Minister Li Keqiang's refusal to endorse a massive plan promoting city growth reveals a dilemma at the heart of the country's economic future.

Andy Wong/AP

Yesterday Reuters reported that a big urbanization push in China, once thought essential to the country's economic growth model, may be in jeopardy:

China's plan to spend $6.5 trillion on urbanization to bolster the economy is running into snags, sources close to the government said, as top leaders fear another spending binge could push up local debt levels and inflate a property bubble. Premier Li Keqiang has rejected an urbanization proposal drafted by the National Development and Reform Commission (NDRC), seeking changes to put more emphasis on economic reform, according to the sources, who are familiar with the matter.

First, let's stop and think a minute about the number quoted here: $6.5 trillion. That's "trillion" with a "t". To put this number in perspective, it's higher than the GDP of every country in the world, except for the United States and, of course, China. This was no modest little plan.

But the figure is more than just yet another gaudy number in a country famous for mind-blowing statistics. In fact, the sum earmarked for investment -- and Premier Li's skittishness about it -- neatly encapsulate the dilemma at the core of China's economic future.

In China, economic growth and urbanization have gone hand in hand. When Deng Xiaoping initiated Reform and Opening in 1978, the vast majority of the population lived and worked in the countryside -- just as Chinese people had for centuries. But over the past three and a half decades, as special economic zones churned out exports and China modernized its cities, hundreds of millions of people migrated to urban areas seeking work in the manufacturing and service sectors. This has, in short, has made China -- and the Chinese -- much wealthier.

(This trend, by the way, is hardly unique to China: urbanization has accompanied wealth generation practically everywhere in the  world, from India to Turkey to Brazil. There's a pervasive myth -- call it the Slumdog Millionaire effect -- that people living in urban slums have the lowest standard of living in the world. In fact, it's rural poverty that is really the problem. But back to China.)

China now has a lot of huge cities, with more on the way: the management consultancy McKinsey & Company estimated in 2009 that by 2025, the country will boast 221 cities with over a million people. But there's still a lot of room for more; in 2010, for instance, 36 percent of the Chinese population worked in agriculture, compared to just 2 percent for the more developed United States. If historical patterns repeat themselves, most of the hundreds of millions of people still working in the countryside will eventually migrate to cities, and China will grow even wealthier.

At least that's the plan. But while urbanization serves as an engine for China's economy, migration to the cities has spread worry that the country's boom is unsustainable.

That's because the problems with urbanization are numerous. China's municipal governments, which financed the fixed-asset infrastructure that enabled the economy to grow, now sit on a mountain of bad debt, which won't be easy to untangle. The construction of so many houses has led, in many cities, to a housing bubble no less troubling than the one plaguing the United States pre-Lehman Brothers.

Then there's income inequality. China's Gini coefficient eclipsed that of the United States, and  the difference between rich and poor are likely even greater than the reported figures indicate. This is an economic program with the potential to destabilize the whole of Chinese society.  And, of course, there are China's famous environmental woes. Each of these problems grow worse with economic growth -- and with urbanization.

So what can China's leaders do to resolve this thorny dilemma? Tweaking the hukou  -- a household registration system that prevents rural migrants from obtaining social services in cities -- would be a start, as this would help bring China's migrant workers in from the shadows of the country's urban areas. The government has also established new regulations intended to cool the housing market, understandably fearful of how a burst bubble would wreak havoc throughout Chinese society.

Will these moves work? This is the big question in China, and given how quickly things change in the country it'd be foolish making a prediction one way or another. But Li's apparent refusal of the NDRC urbanization proposal at least signals Beijing's unwillingness to plow forward with its usual spending binge and brings hope that the Xi Jinping administration may be more willing than its predecessor to launch needed reforms.