Urbanisation

inSight

01 Jul 2004

Urbanisation

Mainland China is urbanising at a rapid pace. Hong Kong stands to benefit from this over the longer term.

Since the Mainland of China embarked on its long-term programme of reform and liberalisation in the late seventies, there has been a clear and continuous trend of urbanisation. That trend has more recently shown significant acceleration. In 1978 the urban population of the Mainland of China, as a percentage of total population, was just below 18%. By 2003 - 25 years later - this rose to 40.5%, with about two-thirds of the increase occurring in the second half of the 25-year period.

The pace of urbanisation of the Mainland of China, when put against the experience of other economies, has been rapid. This is particularly so considering the size of the population of the Mainland of China - an increase of one per cent in the urban population involves 13 million people; and in the past eight years, the annual increase in the proportion of the urban population has averaged 1.4% a year.

At slightly over 40% of total population at the moment, the relative size of the urban population still has considerable room to increase further. In support of this contention and from a theoretical point of view, there is clear correlation between the relative size of the urban population and the income level across different economies. The average of the relative sizes of the urban population in low, middle and high income economies were 31%, 52% and 78% respectively in the year 2001. Even in economies with a relatively large agricultural sector, the relative size of the urban population in the high-income category can be as high as 80% to 90%. From an empirical point of view, we are all aware of the substantial migration of workers and their families from the inner provinces to the coastal cities in recent years, as the brisk pace of economic growth in those cities generated a strong pull for labour. The geographical mobility of labour has also been on the increase as restrictive policies inhibiting this have been gradually and pragmatically relaxed or ignored.

If urbanisation on the Mainland of China continues at its present pace, the demand that will continue to be placed on urban facilities, such as residential housing and the supporting economic infrastructure, will be huge. This explains why gross domestic capital formation on the Mainland has been growing so rapidly. I am not in a position to judge whether this has been adequate in meeting the demands arising from urbanisation. It obviously depends very much on what locations we are looking at. To the extent that the signals of the relevant markets are reliable, the rapid increase in residential property prices, particularly in the large cities, indicates considerable supply shortages. The many comments, on the contrary, about property bubbles notwithstanding, the existence of supply shortages is not inconceivable if one attempts to translate the requirements arising from the trend of urbanisation in quantitative terms that we can readily understand. The trend requires the building of at least one Shanghai every year on the Mainland.

To be sure, urbanisation does not necessarily involve the internal migration of the population from the rural areas to the urban areas, or indeed all to coastal cities like Shanghai. Urbanisation can take place locally, but in the circumstances of the Mainland internal migration to urban areas that as a consequence are being built up probably forms the bulk of it. Thus the longer-term outlook concerning the growth of demand for the economic infrastructure, in particular, residential housing, on the Mainland is clear. The macroeconomic adjustments to pre-empt further overheating in the economy, which are currently attracting much attention and concern, are unlikely to alter this. The last episode of macroeconomic adjustment in the early to mid-nineties did nothing to alter the trend of rapid urbanisation.

On the supply side, urbanisation helps increase the production capacity of the economy through facilitating a more efficient allocation of labour. Specifically, a reallocation of labour from rural to urban areas raises aggregate output because the marginal product of labour is lower in agriculture than in the other sectors. Indeed, urbanisation has been and will likely continue to be an important factor contributing to strong economic growth on Mainland China.

Hong Kong will be able to benefit from this trend, I hope more so in future than it has in the past. What we need, again, is greater mobility of people (the consumer, the investor and the migrant) and capital from the Mainland to Hong Kong. It may still take some time for such mobility to attain the degree of freedom that has always exist in the other direction, but I believe that this will gradually come, simply because liberalisation is a path that has been so firmly established as to be irreversible. In saying so, let me make it clear that I am not making any prediction about the property market or property prices in Hong Kong. I am merely pointing out the sheer magnitude and the implications of urbanisation on the Mainland of China.

 

Joseph Yam

1 July 2004

 

 

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Last revision date : 01 July 2004