China’s Urban Slowdown; Fewer Chinese are moving to cities, which threatens Beijing’s plan to raise GDP through urbanization

October 10, 2013, 1:25 p.m. ET

China’s Urban Slowdown

Fewer Chinese are moving to cities, which threatens Beijing’s plan to raise GDP through urbanization.

PHILIP BOWRING

The latest International Monetary Fund World Economic Outlook predicts a sustained fall in growth rates in developing countries, including China. But many a China bull continues to find solace in the prospect of stepping up urbanization as a means of sustaining China’s medium-term GDP growth. In principle it is an attractive proposition. Cities have sprung up over the past two decades and, judged by the rise in prices, there is apparently an insatiable demand for housing. Yet demographic shifts, including the slower rate at which young people are moving into cities, threaten to derail China’s grand urbanization plan.China’s official urbanization level is currently only 51%, though there are estimates above and below this. In line with President Xi Jinping’s push for urbanization, 70% of Chinese could be living in cities in 2030. Since China needs to improve its highly skewed income distribution by moving people to more productive urban jobs, the addition of some 280 million urbanites sounds exciting and looks straightforward.

As a result of direct migration from rural areas and the expansion of urban areas into the surrounding countryside, rural population has been declining at a steady rate of roughly 1% a year for the past two decades. However the annual percentage fall in rural population does not accurately reflect the actual pace of urbanization. That has, in fact, been steadily declining. The urban population was growing at 3% a year early this century but this fell to 2.5% in 2010 and is projected to grow by only 1.5% at best as overall population growth hits zero by around 2020.

The pace at which Chinese are moving to cities may fall faster for very simple demographic reasons. Those who migrate to the cities are mostly young Chinese under 30 years of age. But their number is contracting steadily, from 347 million in 2010 to 266 million by 2020 according to U.N. projections. A gender imbalance among the urbanizing young means that the number of marriages and new households will decline even faster once young workers reach marrying age. The trend to later marriage may also continue.

Urbanization is itself adding to China’s demographic challenge. The fertility rate has been falling continuously even as the one-child policy has in practice been relaxed. The high costs of urban living and the difficulties of obtaining a hukou registration are now more to blame for the low fertility rate than the one-child policy. The number of children between the ages of five and nine have fallen from 109 million in 2000 to 78 million today. According to an official report, 13,000 primary schools closed in 2012.

Worse still from the point of view of migration is that the number of rural young between 15 and 29 years of age available to migrate to the cities is declining even faster than the overall number of 15 to 29 year olds. This is crucial because this group has been the main driver of urbanization: Of those now 30 years old who were born in rural areas, 75% have become urban.

Future urbanization in China must reflect not just its ability to create productive urban jobs—at which it has been stunningly successful so far—but its ability to raise rural productivity in the face of a rapidly aging rural population. With so many rural young having already left, those over 60 now account for some 30% of rural residents. Productivity gains on the farm are needed if China is not to be forced to provide massive farm subsidies which would be a drag on the broader economy.

Urbanization should not be a goal in itself but the outcome of positive developments in the economy, the impacts of education and industry in particular. The sheer number of city dwellers is not a reflection of positive development. The Philippines, for example, at 48% is almost as urbanized as China. But with few jobs available in manufacturing, migrants mostly find only low-income employment in the urban informal sector.

Migrants’ lot in China is set to gradually improve under the impact of labor shortage and growth of small cities with more liberal policies. The hukou system of household registration seems likely to be phased out within five years. This may both attract more urban migration and increase demand for urban housing as the migrant population gains the means to acquire property. But drawing productivity out of this group will also mean more spending on health and education instead of just construction.

For sure there are others drivers of urban construction than demographics. Housing standards are still inadequate, old buildings are in need of redevelopment, cities still need transportation and hospitals, among other things. But government attempts to raise GDP growth through infrastructure spending will run up against slowing urban growth. The pace of urbanization as measured by need for urban infrastructure and housing construction will fall, not rise.

That would be no bad thing if funds are better invested in raising wages and consumption, and improving standards of health, welfare and education. But first the government and the China growth bulls must recognize demographic shifts, and then spend accordingly.