China’s New Populist Urbanization

Nicholas Borst (Federal Reserve Bank of San Francisco) and Ryan Rutkowski (PIIE)



Since Li Keqiang was tipped to succeed Wen Jiabao as China’s premier, analysts have been trying to come to a better understanding of Li’s thoughts on urbanization. This is because Li has prominently identified urbanization as the growth engine of the Chinese economy and one of the main focuses on the new administration.

Li’s first press conference as premier this past weekend helped shed a bit of light on what urbanization (城镇化) might mean in terms of policy. Premier Li’s description of urbanization focused on the issue of inequality, both between poor and rich within cities and the urban and rural areas across China. The solution, according to Premier Li, is to better integrate migrant workers into cities and to spread urbanization out into the smaller cities and less developed regions of the country. This activity will generate significant new investment opportunities and raise domestic consumption levels helping to rebalance the Chinese economy.

This represents a profoundly populist spin on urbanization, which has historically been one of the primary drivers of inequality in China. Connected to the global economy through trade and financial networks, the first and second tier cities in China have developed quickly. The wealthiest cities, like Shanghai and Beijing, are now approaching OECD-levels of living standards. Quite naturally, many in the countryside have flocked to the cities to take advantage of increased job opportunities. Those left behind in the rural areas have seen their living standards improve, but still lag significantly behind urban dwellers.

The fault lines of inequality in China are the differences between three large groups, official urban residents, migrant workers, and rural residents. The crux of Premier Li’s urbanization drive is to focus on increasing the living standards, job opportunities, and access to social services of the people in the latter two categories.

Official Urban Residents

~460 million

Migrant Workers

~260 million

Rural Residents

~640 million

As with most Chinese policy initiatives, this is an evolution of existing policy rather something completely new. The previous administration had significant programs to develop the western and central regions of the country and the Three Rural Issues (三农) development program. What is interesting about Premier Li’s approach is that it takes the issue of urbanization, which has been the primary driver of regional disparity and income inequality, and repackages it in a way that addresses those exact issues.

This is all obviously much easier said than done. Urbanization is as much a byproduct of economic growth as it is a driver. If the new government is serious about bringing urbanization the less developed parts of the country, it will have to find a way to increase productivity and competitiveness in these areas. Only then will workers choose these areas over China’s wealthy coastal cities. Though China's official unemployment rate is low, there is widespread underemployment in the countryside.

At the same time the ongoing fiscal problems facing local governments must be resolved. The expenses of increasing social services and building new infrastructure fall primarily on local governments. Unable to directly issue debt without central government approval, local governments continue to invent new ways to borrow outside of normal channels. The result is a nontransparent local government financing system where a lot of short-term credit is financing long-term projects.

The scale of the fiscal challenge is enormous. In a draft urbanization report circulated last December, the National Development and Reform Commission (NDRC) estimated that each urban resident required 100,000 renminbi in additional government spending. The report sets a target of 400 million new urban residents over the next decade, implying new expenditures of 40 trillion renminbi.

If Premier Li’s new populist approach to urbanization is going to succeed, it must address these complex and politically sensitive issues.

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