Expert suggests caution over 'fragmented' urbanization

Emboldened by low interest rates, local governments have become too reliant on borrowing, said Lu, the result of which has been growing levels of local debt, which now pose a potential threat to the national economy.

This is the logic that dominated many parts of Europe too, he added, referring to the mounting debts being accumulated by some of the area's southern members.

"When the economy is doing fine, the debt can be repaid and everything is OK. But when the economy is not doing well, everything turns sour."

Such a development strategy, as everyone has seen, has created the classic "beggar-thy-neighbor" economic scenario, whereby one country's attempts to remedy its own economic problems tend to worsen the economic problems of others.

The US model

In developing its own internal market, China should follow the US model, Lu suggests - that is, to build up an integrated market with free flows of labor, capital and land use rights.

In China, the government should move quickly to abolish all impediments to the free movement of labor, most notably its hukou (household registration) system.

There are estimated to be 250 million migrant workers who currently work and pay tax in cities, who still have their hukou registered in their home villages, often in rural areas.

This denies them the same social security, education and healthcare benefits as registered urban residents.

Lu said the current wage increases being seen in the eastern cities are actually little more than "compensation" towards what migrant workers are being charged for their public services.

The wage increases also simply reflect the shortage of labor in many cities, because fewer migrant workers are willing to accept the terms being offering.

Those wage increases are no reflection, however, on the high level of skill and productivity being brought to the job by many migrant workers, he added, which in the long run can only be economically dangerous.

Only around half of China's population currently lives in cities. If migrant workers were given access to the same public services as city residents, the country's urbanization ratio could be lifted by at least 10 percentage points, Lu added.

He said those who oppose reform of the hukou system are shortsighted in their failure to understand that city economies would benefit hugely by more people being able to work in them, with all the benefits included.

They would spend more on products and services, for instance, and property demand will rise.