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China's Cities are on the Rise - Those Watching for the Rebalancing of the Chinese Economy Should Take Heed

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China finally became a predominantly urban country last year, but just barely - 51% of its population resided in urban areas in 2011. This may seem unimpressive, but the continued migration of China's population is fuelling the rise of massive cities that are transforming the country's still-developing urban landscape.

China's new consumer class will increasingly be concentrated in these megalopolises, defined as cities or city clusters with a population over 10 million, or more than half the population of Florida. The scale, and more importantly the number, of megalopolises that will emerge by 2020 is reshaping the context of China's urban growth story as the country's restless and ambitious are drawn to increasingly larger urban agglomerations. The short timeframe over which the population boom is taking place - in sharp contrast to stagnating population growth at the national level - is straining their capacity to accommodate the new residents. Their development should be the main stories to watch.

The rise of the Chinese megalopolis presents clear opportunities - each of the 13 that will emerge by 2020 represents a potential market the size of a small country. The bulk of China's new consuming class will be found in these areas, as most of them will see the majority of their populations attain middle-class status by the end of the decade, defined as Rmb30,000 (roughly US$5,000) a year by the Economist Intelligence Unit. At the same time, the cities themselves will require huge outlays into their healthcare, educational, and public service sectors like waste management to support their continued expansion. As the government signals increasing openness to private-sector involvement in these areas, investment is pouring in. At the same time, the spread of economic development to inland China offers labourers more employment opportunities, putting pressure on wages, which continue to grow at double-digit rates. Rising wages are pushing up overall income levels, which in turn underpins surging levels of private consumption.

But the successful development of these megalopolises hinges on progress in several key policy areas. First, reform of the restrictive household registration system (known as the hukou system) is needed to provide more residents in these urban areas with access to education and healthcare. Under the current system, most new migrants are denied access to public services in their new host cities, which reduces their spending power as they must save more for health and schooling needs. Second, tax reform is needed to wean local governments off land sales as a main source of revenue, as this is a driver of social unrest and a finite and non-recurring revenue source. And careful planning is needed to manage the energy, water, and transport needs of such large urban areas. The environmental costs of mismanagement will be great.

To be sure, most observers are weary of hearing stories about China's enormity and growth. And few can blame them. In recent weeks, speculation over its imminent hard landing has reached fever pitch. The second quarter GDP growth rate, scheduled for release later this week, will likely flame the fears that China's long-term growth is unsustainable. Such alarm is premature, however, as this quarter's growth figure will reflect more the delayed effectiveness of the government's latest policy loosening than inevitable economic decline. In the long term, the country's overall economic development relies on the transition from an investment-led economy to a consumption-led one. Such success is inextricably tied to the pace and shape of China's urban development.

More information on the rise of the Chinese megalopolises can be found in the EIU report 'Supersized cities: China's 13 megalopolises' available to download for free at www.eiu.com/megalopolis

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