Professor Ang shows how China's urbanisation process is creating an easier path for New Zealand companies to focus their marketing energies, avoiding being swallowed up in the mega-cities

By Siah Hwee Ang*

China’s ongoing urbanisation movement may seem like an intra-country reform that helps address some of China’s policy makers’ concerns about the country’s development.

But by virtue of it being the second largest economy in the world and one of the fastest growing economies for decades to come, this urbanisation movement needs to be keenly observed.

The rise of China’s urban cities

It is no secret that the rapid rise of China, as an economic powerhouse, comes with a few problems.

Of particular concern these days is the rising social inequality and the imbalanced development between cities in the East Coastal region of China and those in the West and Northeast.

By World Bank standards, many cities in the East Coastal region of China can be classified as ‘developed’ cities - I call them developed cities in a developing country (officially China is still classified as developing).

In 2013, urban disposable income in China was US$26,955 while rural net income was US$8,896. Average urban worker wage has risen by 3.39 times while cost of living has grown 2.56 times from 2003 to 2012. The wages of workers who migrate from rural areas to urban cities have risen by 3.78 times in the same 10-year period.

While urbanisation has been rapid (it took China only 30 years to climb from 20% urbanisation to 54% currently while the United States took 60 years and Britain took 100 years), further urbanisation is to be expected.

The number of urban households is expected to increase to 328 million in 2020, in comparison to 226 million in 2010. The percentage of households within the income bracket of US$16,000-US$34,000 will rise from 6% to 51% in the same period.

A significant portion of this growth will come from the smaller cities (relative) that are outside the 100 wealthiest ones.

The Hukou—Chinese household registration system

At a time that Chinese citizens have little confidence that the wealth gap will ever be narrowed, the Chinese government has announced that it will reform its hukou system.

The hukou system, introduced in 1958, is a dual registration system for restricting migration from rural areas to urban areas and between urban areas.

The system means that rural migrants into urban cities do not get equal benefits as those with locals within the cities. At least 33 types of public services and benefit payments disparities in the areas of education, housing and pension are believed to exist.

The relaxation of the policy on 30 July signifies China’s desire to move another step closer to be a market economy.

An influx of rural migrants into urban cities is expected to join the existing 200 million rural migrants.

The addition of another 4,300 miles equivalent of high-speed railway network in the next few years will hasten this process.

Where is the urbanisation movement heading?

All signs point to greater mobility across the country. Nonetheless, the caveat is that cities with more than 5 million in population will have their growth controlled. This list includes a dozen or so cities including Shanghai, Beijing, Tianjin, Guangzhou and Shenzhen.

The intention is also to route migrants into smaller cities that also have rising income levels.

However, the larger cities will continue to present the most and best opportunities for rural migrants.

This might lead to an immediate challenge of imbalance of supply and demand for urban residency, and if not addressed will cause further imbalance between the East Coastal cities and their counterparts in West and Northeast China. Being big can be beneficial, but it comes with burdens.

China as a better proposition from urbanisation

China is divided into 22 provinces and has 144 cities with urban population of at least one million people. Fourteen of these cities are larger than New Zealand.

It would make sense to view China as a region of 22 markets, or classify the cities by tiers in terms of their sizes. Yet, many would have come to the realisation that the country is host to 56 recognised ethnic groups and 292 living languages, and thus one China does not exist and will probably never materialise. Diversity has its virtue.

Urbanisation may break down some of the differences across the various cities, as cultures and practices co-exist and co-evolve. What this means is that competition in larger cities will become tougher, both for people and businesses that want to be there.

But more importantly, the focus on the smaller cities beyond the dozen largest ones in this exercise of reform and the relaxation of the hukou system will mean more potential markets for businesses interested in China.

In some ways, more markets have been created and many foreign organisations would not have their activities restricted to only a small group of mega cities.

A recent survey has also found that consumers in the smaller cities are also keen to spend more as compared to those in mega cities. Good news indeed.

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Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with China. You can contact him here