New buildings in Huaxian county, Henan Province of Central China. Urbanization will play an active role in keeping the country’s investment and growth stable.

 

Urbanization is a natural course of a population shift from rural to urban areas, the gradual increase in the proportion of people living in urban areas, and the ways  each society adapts to the change. What are the challenges behind the great opportunities confronted by China in urbanization?  Stephen Roach, a senior fellow at Yale University’s Jackson Institute for Global Affairs, recently shared with CSST his opinions about China’s new model of urbanization.

 

CSST: What are the uncertainties and threats, both global and domestic, facing China’s new urbanization agenda?

 

Dr. Roach: I would prefer to frame my response to this question in terms of challenges rather than threats. In that context, I would highlight three such challenges:

The first is environmental. Urbanization on the scale that China is currently contemplating must entail shifting to eco-friendly models of new city construction. That implies making increased use of alternative materials, new local transport systems, green space, alternative energy, electric vehicles and new modes of light transport. A failure to shift to the eco city model of urbanization spells heightened risks of further environmental degradation and pollution, which is inconsistent with China’s core development strategy.
 

The second is hukou reform. China is committed to hukou reform, a significant relaxation of the residential permit system that will allow portability of social safety benefits to follow workers from their places of birth to their places of steady employment. To the extent that such implementation lags or becomes fragmented by municipality, the possibility of a “splintered” urbanization outcome could become a reality, with some cities benefiting from well-supported population bases and others still reliant on the mixed model of residents and transient workers. China must make every effort to treat its some 270 million migrant workers uniformly and fairly. Otherwise a coherent urbanization strategy may stall.
 

The third is education. China’s prospective urban development will be increasingly services-led—a characteristic pattern of all major urbanization trends around the world over the past 150 years. Initially, the employment requirements for services-led urbanization will not require major investments in human capital.

The services-led development will instead be focused more on  “infrastructure” type occupations—workers in wholesale and retail trade, supply chain logistics, water and power generation and distribution, domestic transportation, back-office processing in finance and healthcare, and hospitality (hotels) and leisure activities.
 

Eventually, however, services development will move up the value curve, drawing increasingly on well-educated knowledge workers in the professional occupations such as medical doctors, lawyers, financial analysts, software programmers, consultants, actuaries and the like. Such knowledge workers can be viewed as the engine of the innovation culture of a modern services society. China will need to invest heavily in higher education to equip its knowledge workers with the skills required of its service-based urbanization strategy. It will also need to align its new universities with innovation incubation labs as well as small and medium-sized start-up communities along the lines of America’s Silicon Valley. A failure to focus on this key aspect of the urbanization strategy would have serious and lasting consequences for sustainable Chinese economic development.

 

CSST:  In what ways will China’s new urbanization agenda benefit various industries in developed economies?

 

Dr. Roach: China’s urbanization strategy should be viewed less as a major urban development construction project and more as a building block to a modern consumer society complete with ample opportunities to benefit foreign economies.

The link between urbanization and consumer-led growth is two-fold. First, since urban workers earn about three times the income of their counterparts in rural China, urbanization boosts personal income and consumer purchasing power. Second, urbanization and services-led development go hand in hand. New and expanded cities need basic services ranging from electricity, water and telecommunications to wholesale and retail distribution, all of which boost employment opportunities in newly urbanized areas, which in turn contributes further to the growth in personal income and consumption.
 

Significantly, the urbanization-induced impetus to Chinese consumption provides a vast new source of global demand that a growth-starved world desperately needs. That’s not just true of the likely expansion of Chinese demand for consumer goods, but also for consumer demand for services. In my recent book Unbalanced: The Codependency of America and China, I estimate that the expansion of tradable Chinese services could total between $4 trillion and $6 trillion between now and 2025. For developed economies, such as the United States, Europe, and Japan, this is an enormous opportunity in a broad range of services industries ranging from retail trade and transportation to healthcare and professional services, such as medical, legal, accounting and consulting.

To the extent that urbanization plays a vital role in supporting China’s rebalancing toward consumer-led economic growth, this is an enormous opportunity for competitive and high-quality service providers around the world. The key will be market access, i.e. the ability for foreign services providers to set up and control subsidiaries and joint ventures in China. In the latter respect, progress needs to be made in passage of bilateral investment treaties that foster such cross-border openness, especially between the United States and China.

 

CSST:  Could it help address the pernicious trade imbalance between China and developed countries in the West makes mutual trust and friendship impossible ?

 

Dr. Roach: To the extent that urbanization is seen as a building block to a new source of Chinese demand, there is certainly the potential for foreign producers to source a significant portion of that new demand provided, of course, that China remains committed to open markets and low tariff and non-tariff trade barriers. That could well be important in reducing the overall trade imbalance with the United States, the most contentious trade imbalance in the world today. But there is an important caveat to that conclusion. If the United States does not boost its domestic savings rate, then it will need to continue importing surplus saving from abroad in order to grow, and it will still need to run massive current account and trade deficits in order to attract foreign capital.
 

As the world’s largest surplus saver, China is likely to remain an important source of funding for savings-short America, suggesting that it will take more than urbanization-led consumption to narrow this pernicious trade imbalance. A realignment of savings—more of it in the US and less of it in China—in conjunction with an urbanization strategy that is aimed at boosting domestic consumption would be the best recipe to reduce the outsized trade imbalance between the world’s two largest economies.

 

 

Sun Mengxi is a reporter at the Chinese Social Sciences Today.