Small, medium-sized cities to drive China's consumption growth: economist

BEIJING - Small and medium-sized cities will play a major role in driving China's consumption growth in the coming decade, according to a Morgan Stanley economist.

Robin Xing, the investment bank's chief China economist, predicted on Wednesday that national annual consumption will rise to $9.7 trillion in 2030 from last year's $4.4 trillion on the sidelines of the Morgan Stanley China Summit in Beijing.

"Third- and fourth-tier cities will contribute nearly two thirds of the increase," Xing said.

The proportion outshines the 9 percent from megacities such as Beijing and Shanghai, and the 21 percent for second-tier cities. Consumption in rural areas is expected to reach $400 billion, accounting for 7 percent of the total.

Personal consumption in such cities will grow the fastest at 8.7 percent year on year from now to 2030, according to Xing.

The economist, who has headed Morgan Stanley's research team in China for a year, said the promising prospects are based on the rapid population growth in smaller cities and a closing income gap with large cities.

"In contrast with dawdling first-tier cities, the number of permanent residents in smaller cities will see robust growth thanks to higher birth rates, relaxed household registration control and cheaper living expenses," Xing said.

The combined registered population in smaller cities is predicted to rise 2.5 percent each year throughout the 2017-2030 period, faster than 2 percent and 0.6 percent in second- and first-tier cities, respectively.

Xing also expects people living in smaller cities will have deeper pockets as the rapid urban development will boost incomes. Moreover, tame home prices and an improved environment will allow diminished precautionary savings and more money to be used for consumption, he added.

The rise of small and medium-sized cities is likely to push China's ongoing economic shift from industry to services and from investment to consumption. In the first quarter, consumption contributed 77.2 percent of the GDP increase.

Xing remained bullish on the outlook for the world's second-largest economy, predicting continued growth momentum and ruling out the possibility of a hard landing or a cash crunch in the money market.

He cited more flexible regulation on the yuan's exchange rate, well-managed financial tightening, robust exports, recovering private investment, and a more stable property sector.

However, he believes the GDP growth has peaked after a strong start in 2017, and the slowdown will likely resume in the next quarters.