By Andrew Nelson

If China ever had an economic golden age, it was the 2000s. The poor moved to the cities, the cities sprung up like grass, the infrastructure reached many that were left in the hinterlands, millions were lifted out of virtual serfdom and per-capita GDP just about quadrupled. The main question from here is: further forwards or backwards?

China's magic potion has seemingly come off the boil, leaving the county at an economic crossroads. The more traditional growth engines like investments and exports have lost their mojo given inefficient domestic spending and subdued global demand. Consumption has been held up for a while now as being the potential saviour, but this still remains barley more than an idea.

To stem the decline in growth rates, economists at Singaporean Bank DBS see the urgent need to reignite the urbanization process. The bank sees this as being the only possible driver of China's longer term economic growth.

DBS estimates that between now and 2020, some 14 million migrants will pour into cities from the rural areas. Not in total, but every year. The urbanisation rate is set to rise from 51.5% to 60%. The goal is to ensure sustainable GDP growth, take some pressure off the environment and to provide higher standards of living.

Easier said than done!

Problem 1: China's population is an aging one, with old age dependency now about the highest in developing Asia. Old people don't like to move and when they do, it will do little to help overall productivity metrics. Thus were the country to kick its urbanisation 60% goal, the upside on medium-term GDP growth and longer-term economic sustainability would be muted.

Problem 2: Take the farmers out of the field and less crops are grown, less food to be had, while at the same time there are more hands held out for help in the cities given an ever increasing, untrained workforce. Thus ongoing rural re-development also remains a key.

As long as China remains cognisant of its keys, DBS thinks urbanization can and indeed must proceed, but with careful planning and coordination. The first step in said planning is the type of urbanisation that is desired. Either dispersed or concentrated.

"Dispersed" means lots and lots of big towns and small cities. The cities then take on their own administration, build their own social infrastructure, create their own jobs and set their own economic targets. "Concentrated" means megacities, with populations of 20 million plus. Greater Shanghai already houses some 23.5m people. Build a bunch of one million to two million people cities around it and have a population hub with integrated transport systems and joint economic targets. Like the Pearl River Delta right now.

The benefit of the latter is that it is far easier to increase efficiency and productivity. Centralisation also brings greater economies of scale, and far better economic synergy given no duplicated infrastructure systems and administrative systems etc.

DBS favours the latter.

Next comes picking the right cities; probably ones with already well functioning economies, good property, growing industrial production, competitive advantages and not too much pollution. In fact, the bank notes that the latest Five-year Plan has already suggested some targeted city circles as part of the urbanization strategy. That being said, new cities are also a possibility.

While this is all more about boosting medium- to long-run productivity, the sheer size of this undertaking will likely help fuel the country's investment markets in the years to come. Not like the urbanisation surge that occurred in 2008 and 2009, but a much slower and more gradual process as demand for housing, water, electricity and communications grow and require increasing amounts of infrastructure.

In fact, China has already picked 90 cities and counties to take part in a smart cities project, which involves a total investment of about US$80bn over the next 3-5 years. The aim is to see these cities to develop information and communication technologies systems, provide public services and promote environment-friendly development.

DBS sees these projects as crucial despite already high levels of investment to GDP ratio, as investment in the urbanization process is the most important driver of the country's future economic viability.


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