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China’s Urbanization Loses Momentum as Growth Slows

China has shifted more than 300 million people into cities since 1995 -- about twice the population of Russia -- and Li must find a way to accommodate almost as many again from the countryside without further wrecking the environment. Photographer: Brent Lewin/Bloomberg

The pace of migration of rural Chinese to cities, a dynamic hailed by Premier Li Keqiang as key to the nation’s development, is set to slow by a third in coming years, deepening economic-growth concerns.

A government report released this month projected a 6.3 percentage-point rise in the share of people living in cities from 2013 to 2020 -- down from a 9.4-point gain the previous seven years. Nomura Holdings Inc. estimates that slower urbanization will slice as much as half a percentage point from annual gross domestic product growth over the next half decade.

“In the past 30 years we turned farmers into factory workers, triggering massive gains in productivity and hence growth,” said Ken Peng, Asia Pacific investment strategist at Citigroup Inc.’s private-bank business in Hong Kong. “Now those gains are diminishing.”

Li, who asked an arm of China’s cabinet to work with the World Bank on an urban-planning strategy released today, is under increasing pressure to take steps to address weakening economic expansion. A private report yesterday indicated a fifth straight slowdown in manufacturing in the world’s second-largest economy.

The premier, who has advocated an urbanization-growth strategy for two decades, is up against a shrinking pool of rural workers, rising local-government debt and unhealthy air pollution in almost all big cities. Diminishing returns from urbanization make it tougher to achieve economic goals including this year’s 7.5 percent expansion target.

Denser Cities

Today’s report from the World Bank and the State Council’s Development Research Center, which helped inform the government’s plan, recommends changes including on land use to spur more-efficient and denser cities. That can save China $1.4 trillion from a projected $5.3 trillion in infrastructure spending over the next 15 years, World Bank Chief Operating Officer Sri Mulyani Indrawati said in a speech today.

“You cannot go on with the same urbanization model,” Sri Mulyani said in a separate interview.

A Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics dropped to an eight-month low in March, a preliminary report yesterday showed, after fixed-asset investment for the first two months of the year was the lowest for the period since 2001.

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The slowdown is stoking speculation that China will accelerate spending or loosen monetary policy to aid growth. “The government will have to take action soon,” and possible moves include “announcing additional urbanization-related fiscal spending,” Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd., said in a note yesterday.

China has shifted more than 300 million people into cities since 1995 -- about twice the population of Russia -- and Li must find a way to accommodate almost as many again from the countryside without further wrecking the environment. The nation’s 731 million metropolitan dwellers, already 1/10 of the world’s population, use three times more energy than their countryside peers, according to the World Bank.

The government plans to steer city migration onto a more environmentally friendly and people-focused path, saying the “greatest potential for expanding domestic demand lies in urbanization.”

Urban Population

The urbanization blueprint, issued by the Communist Party and State Council on March 16, targets having 60 percent of the population in urban areas by 2020, up from 53.7 percent in 2013 and 44.3 percent in 2006.

Today’s report projects about 70 percent of the population, or 1 billion people will be city residents by 2030, which “implies a slowdown in urbanization compared with the past two decades.” Urban real estate investment is “unlikely to grow more rapidly than GDP in the coming years,” the report said.

UBS AG says migration won’t act as a stimulus for expansion. A broader deceleration in urbanization is “part and parcel of China’s slowdown in trend growth,” said Wang Tao, chief China economist in Hong Kong. “There is less surplus labor in rural areas.”

A slowing pace of urbanization could reduce average annual growth by 0.5 percentage point in the next five years from gains in the previous decade, according to Zhang Zhiwei, Nomura’s Hong Kong-based chief China economist.

Gains may also be constrained by the plan’s emphasis on smaller cities over bigger ones. The government plans to remove restrictions on obtaining household registration permits in small cities and towns, while strictly controlling populations of cities with more than 5 million urban residents.

Markets’ Role

“I can’t think of any country except North Korea that basically tells people where they can live,” said Yukon Huang, a former World Bank country head for China. “It actually goes against the principles they have espoused” of giving markets a decisive role, said Huang, now a senior associate at the Carnegie Endowment for International Peace in Washington.

Not all the projections indicate a slowdown. City residents with household registrations known as hukou, which give access to benefits including education and health care, are targeted to increase by about 20 million annually in the next seven years, up from 13 million a year in the past decade, UBS estimates.

Today’s World Bank report proposes changes to the residency-registration system so migrants can get access to services while maintaining hukou for land rights.

Local-government debt that has leapt 253 percent since 2008, air pollution and a potential slowdown in governments’ land sales will constrain the urban strategy, Nomura’s Zhang and colleagues wrote in a Feb. 25 report.

“The idea of continued urban growth still dominates conventional wisdom, which we now regard as optimistic,” Zhang said.

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