Summary

China’s urban population may grow by as many as 230 million people in the next 15 years. But most growth will take place not in metropolises like Beijing, Shanghai and Chongqing but in the myriad small- and medium-sized satellite cities around them. And as residents flock to these cities, China’s working-age population will begin to decline, and its elderly population will grow dramatically.

Together, these processes will underpin major changes not only in China’s overall economic structure, but also in the financial, fiscal and political relationship between central and local government. The added burdens facing small- and medium-sized cities, especially those located deep inside China that are sequestered from mainstream global trade, will be substantial and perhaps socially and politically destabilizing.

Analysis

In July, the Chinese government announced that a revision to the one-child policy had been implemented throughout the country’s provinces and regions. The announcement of the revision, which allows couples in which either partner is an only child to have up to two children, heralded the end of the controversial policy. More relaxed family planning measures have long been in place for rural and ethnic minority communities, and most urban Chinese of childbearing age now were the only children in their families, so the revision dramatically narrows the portion of China’s population to which the original one-child policy still applies.

The purpose of the one-child policy — limiting the population shaping demographic trends — was superseded many years ago by the far more fundamental forces of industrialization and urbanization. Two decades ago, China’s fertility rate fell below 2.1, the generally accepted population replacement rate. Since then, it has dropped to roughly 1.5 or, by some measures, as low as 1.4. These are comparable to fertility rates in Russia and Italy but well below those of the United States, Australia, the Netherlands and many other more advanced economies.

It is a coincidence, but a symbolically loaded one, that China’s fertility rate fell below the population replacement rate in the same year that the Chinese government enacted new fiscal policies and other measures that would necessitate and drive the housing construction booms of the 1990s, early 2000s and post-global financial crisis era. The almost continuous two-decade property boom cycle underpinned rapid growth in the portion of China’s population living in cities — from less than 30 percent in the early 1990s to the current 54 percent. In doing so, it introduced hundreds of millions more Chinese to urban life, with all its associated costs. Far more than the one-child policy, these costs have shaped family planning practices in China in recent years, as have rising education levels and the transition from an agriculture-based economy to one based on manufacturing and construction.

The urbanization of the past two decades has altered the country’s demographic balance rapidly and profoundly. The change has hastened the decline in fertility and population growth rates, particularly those of China’s working-age population, as the size of the country’s elderly population has risen.

China Urbanization

In the next two decades, these trends will only grow as the Chinese government attempts to push the country’s urbanization rate above 70 percent, thus bringing the proportion of China’s rural and urban populations more in line with those of advanced industrial economies with robust domestic consumer bases. If the government achieves its target, China’s urban population will grow by more than 230 million between now and 2030, reaching approximately 975 million.

China Urbanization

One-Way Street

For China’s leaders, further urbanization on a significant scale is not optional: It is imperative. China is in the early stages of an effort to rebalance toward an economic model grounded in robust domestic consumption and characterized by greater economic integration between, and equality across, its diverse regions. Because of its large population, China has one of the world’s largest domestic consumer markets, but relative to the country’s economy as a whole, private consumption remains weak. In 2013, China’s household consumption was equivalent to only 34 percent of its gross domestic product, compared with 70 percent in the United States, 61 percent in Japan, 57 percent in Germany and 52 percent in South Korea. Even if private consumption is somewhat stronger than official statistics show, it is nonetheless far from enough to support China’s current rates of growth. As a result, too rapid a drop-off in housing construction activity before domestic consumption has had time to grow would likely cause a dramatic decline in China’s overall economic activity and employment.

Moreover, private consumption is highly concentrated geographically and socially in more heavily urbanized coastal provinces and in a handful of major inland urban centers. Much of China’s population, not only in rural regions but also in the hundreds of small cities that dot China’s interior, does not participate meaningfully in the country’s consumer economy.

The Chinese government wants to change this. It is experimenting with several reforms and tools to boost domestic consumption, including financial liberalization, expansion and modernization of the country’s logistics industry (to more efficiently transport goods from the coast to the interior and back), and expansion of social security and health insurance programs. These measures are intimately tied to urbanization: Their success will depend on the progress Beijing makes with efforts to urbanize and integrate the country’s interior, along with less developed parts of coastal provinces, into its more developed and largely coastal urban industrial economy.

Whatever form it takes, continued urbanization will have important implications for China’s overall demographic balance and its political and economic structure for the next two decades. But how it affects Chinese demography, and how this in turn plays into major underlying issues in Chinese political economy, will depend very much on how China urbanizes.

After three decades of focusing on coastal urban development to suit the needs of China’s heavily export-oriented economy, Beijing has redirected its attention to the interior in the past five to seven years. Now, with major inland metropolises like Chengdu, Chongqing and Wuhan approaching levels of development and population comparable with top-tier coastal cities, the government’s attention appears to be shifting once again, this time to smaller cities in the interior and, to a lesser extent, along the coast. These cities are satellites of larger metropolises, once-forgotten river towns along the Yangtze and its tributaries, and other minor outposts on the rail and highway trunk lines that connect China’s north and south and its coastal and interior regions.

It is these smaller cities that Beijing expects to drive future urbanization in China — to house, employ, care for and educate most of the new urbanites China hopes to create by 2030. In the government’s vision, these cities will serve not only as manufacturing bases and lower-end service providers for consumers in China’s wealthier top-tier cities, but also as sources of marginal but rising consumer demand.

The government has made clear its intent to limit immigration into top-tier coastal cities, and it will continue to use tools like the household registration (hukou) system to make it harder for all but the most established non-resident workers to live and raise families in these cities. Meanwhile, it will use those same tools —

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