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Rising cities helping to rebalance growth

By Dan Steinbock (China Daily)
Updated: 2009-04-07 07:48

In the past few months, international media has made much about the collapse of exports from Asia, including China. China's merchandise exports plunged 25.7 percent in February, from a year earlier. It was one of the biggest plunges on record.

The latest figure, it is said, underscores the extent of the collapse in global demand for goods. According to conventional wisdom, China is the "factory of the world". As a result, the export collapse is understood as the eclipse of growth.

However, conventional wisdom is flawed on two critical counts. With recovery, trade and investment will take off, over time. But even more importantly, China's growth does not depend on exports alone.

Given the stable and peaceful international environment, China's massive and evolving market will offer extraordinary growth potential for years to come - as evidenced by sustained urbanization.

The economic ripple initiated by the huge success of the primary cities of Shanghai, Beijing, Guangzhou and Shenzhen is finally boosting a new generation of Chinese cities. In relative terms, multinational real estate investment in regional urban centers has outpaced that in first tier primary cities.

As China industrializes, the Chinese continue to leave the countryside for the cities. Never before in the history of mankind have so many been moving into new cities so fast.

The prosperous established cities (Shanghai, Beijing, Guangzhou, Shenzhen) have given rise to rapidly growing second-tier cities (Chongqing, Chengdu, Tianjin, Wuhan, Xi'an) and the new third-tier cities (Harbin, Changchun, Zhengzhou and Fuzhou). Furthermore, there are already dozens of emerging cities following in the footprints of these major urban centers.

Only a year or two ago, China began implementing several transformational policy initiatives designed to improve the quality of its economic structure and human development. Reflecting goals articulated in the 11th Five-Year Plan, these new initiatives no longer support export manufacturing, which heralded the great reforms and opening-up in the early 1980s.

Today, policymakers are less interested in labor- or energy-intensive growth which has an adverse impact on the environment. Rather, the focus is on foreign investment in R&D, regional headquarters, service industries, high and new technology, especially the efficient use of energy and natural resources.

In property markets, this transformation has meant great opportunities in high-tech and R&D in the coastal regions, while supporting a growing industrial base in the interior.

In the recent past, exports as a percentage of China's GDP have been about 10 percent on a value-added basis. In contrast, fixed asset investment was 55 percent of China's GDP in 2007. That year, annual growth in fixed asset investment amounted to 25 percent.

With economic development, families will upgrade to larger living space and spur demand for homes. Accordingly, housing investment as a percentage of GDP has more than doubled from 4 percent to 10 percent in just a decade.

Certainly, China's real economy has been hit hard by the global crisis, but it has also weathered the storm better than many other countries.

China does not have to rely on external financing. Chinese banks have been largely unscathed by the international financial turmoil. Most importantly, China has the fiscal ability to implement a forceful stimulus plan.

Government initiatives seek to stimulate consumption and improve living standards by expanding the government's role and spending on health, education and social security. These are the right policies at the right time.

The great global recession has moderated the pace of the transformation, but - and this is vital - the dynamic remains intact.

The suppressed prospects for global growth and thus for exports underscore the importance of boosting domestic demand and domestic consumption - the key for rebalancing China's economic growth in the medium-term.

That is the great modernization dynamic of China - industrialization, urbanization, investment - which has growth potential for years to come.

Today, advanced economies - as exemplified by the US, Western Europe, and Japan - are largely urbanized. In these G7 nations, urban populations are growing relatively slowly.

In 2010, the US population will reach 315 million. More than 82 percent of Americans will reside in urban areas. Urban annual growth rate is about 0.4 percent. In Western Europe, the population will be about 188 million. The share of urban population will be 77 percent and the growth rate about the same as in the US.

In 2010, Japan will have a population of 128 million (which is declining). Some 67 percent of the Japanese will live in urban areas, but the urban growth rate is only 0.24 percent.

The situation is very, very different in China in terms of population size, urban share of population and the annual urban growth rate.

By 2010, China will have a population of 1.35 billion. However, the percentage of urban population will still be only 44.9 percent, significantly lower than the US or Japanese share.

However, China's urban annual growth rate will be 2.7 percent, almost 7 times faster than in the US and 11 times faster than in Japan.

There are other intriguing historical parallels. In 2010 China's level of urbanization will be about the same as that of the US in 1910 and Japan in the late 1950s.

In the US, that benchmark year heralded America's economic dominance in the world economy. In Japan, the benchmark year heralded beginning of the Golden Era of the Japanese economy in the 1980s.

In 2010, China may be where urban America was in the early 1910s and urban Japan in the late 1950s - at the eve of a great growth curve.

The author is the Research Director of International Business at the India, China and America Institute.

(China Daily 04/07/2009 page9)